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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
                            ------------------------
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                         COMMISSION FILE NUMBER 0-28310
 
                           SIBIA NEUROSCIENCES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                                 <C>
                     DELAWARE                                           95-3616229
         (STATE OR OTHER JURISDICTION OF                             (I.R.S. EMPLOYER
          INCORPORATION OR ORGANIZATION)                           IDENTIFICATION NO.)
</TABLE>
 
            505 COAST BOULEVARD SOUTH, SUITE 300, LA JOLLA, CA 92037
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
 
                                 (619) 452-5892
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                         COMMON STOCK, $.001 PAR VALUE
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.  Yes [X]  No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K  [X]
 
     On January 29, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant totaled approximately $24,518,214 based on the
closing stock price as reported by The Nasdaq Stock Market. For purposes of
determining this number, shares of Common Stock held by officers and directors
and stockholders whose ownership exceeded ten percent (10%) of the total shares
of Common Stock outstanding at January 29, 1999 were excluded. Exclusion of such
shares should not be construed to indicate that any such person possesses the
power, direct or indirect, to direct or cause the direction of the management or
policies of the Registrant or that such person is controlled or under control
with the Registrant.
 
     The number of shares of Common Stock of the Registrant outstanding as of
January 29, 1999 was 9,517,947.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Portions of Registrant's Definitive Proxy Statement to be filed with the
Securities and Exchange Commission (the "Commission") pursuant to Regulation 14A
in connection with the 1999 Annual Meeting of Stockholders scheduled to be held
May 26, 1999 are incorporated herein by reference into Part III of this Report.
Such Proxy Statement will be filed with the Commission not later than 120 days
after Registrant's year end. Certain Exhibits filed with the Registrant's
Registration Statement on Form S-1 (Registration No. 333-2586), Form 10-K for
the year ended December 31, 1996, Form 8-K filed on March 31, 1997 and Forms
10-Q for the quarters ended June 30, 1997, March 31, 1998 and June 30, 1998 are
incorporated by reference into Parts III and IV of this Report.
 
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<PAGE>   2
 
                           SIBIA NEUROSCIENCES, INC.
 
                                   FORM 10-K
 
                                     INDEX
 
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<CAPTION>
                                                                            PAGE
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<S>           <C>                                                           <C>
PART I....................................................................    1
  ITEM 1.     BUSINESS....................................................    1
  ITEM 2.     PROPERTIES..................................................   26
  ITEM 3.     LEGAL PROCEEDINGS...........................................   26
  ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........   26
 
PART II...................................................................   27
  ITEM 5.     MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED
              STOCKHOLDER MATTERS.........................................   27
  ITEM 6.     SELECTED FINANCIAL DATA.....................................   27
  ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
              AND RESULTS OF OPERATIONS...................................   28
  ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
              RISK........................................................   31
  ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................   31
  ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
              AND FINANCIAL DISCLOSURE....................................   31
 
PART III..................................................................   31
  ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........   31
  ITEM 11.    EXECUTIVE COMPENSATION......................................   31
  ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT..................................................   31
  ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............   31
 
PART IV...................................................................   32
  ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
              8-K.........................................................   32
 
  SIGNATURES..............................................................   35
</TABLE>
 
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                                     PART I
 
ITEM 1. BUSINESS
 
     Except for historical information contained herein, the discussion in this
Form 10-K contains forward looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934 as amended ("Exchange Act") that involve
certain risks and uncertainties that could cause the Company's actual results to
differ materially from those anticipated. Factors that could cause or contribute
to such differences include, but are not limited to, uncertainties regarding the
ability to identify new drug leads or move drug leads into pre-clinical
development, the ability of the Company or its corporate partners to develop
safe and efficacious drugs in a timely and efficient manner, the ability to
enter into future collaborative and other agreements that will generate license,
royalty, contract and other revenue and cash flow, uncertainties regarding the
Company's patents and proprietary rights (including the risk that the Company
may be forced to engage in costly litigation to protect such patent rights and
the material adverse consequences to the Company if there were unfavorable
outcome of any such litigation), uncertainties regarding the availability of
additional financing on favorable terms, if at all, uncertainties regarding the
potential impact of Year 2000 issues, as well as other risks and uncertainties
discussed in the description of the Company's business below and the sections
entitled "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as those discussed in any document
incorporated herein by reference.
 
OVERVIEW
 
     SIBIA Neurosciences, Inc. ("SIBIA" or the "Company") is engaged in the
discovery and development of novel small molecule therapeutics for the treatment
of neurodegenerative, neuropsychiatric and neurological disorders, many of which
have large patient populations and represent critical unmet medical needs. SIBIA
is a leader in the development of proprietary drug discovery platforms that
combine key tools necessary for modern drug discovery, including genomics, high
throughput screening, advanced combinatorial chemistry techniques and
pharmacology. These platforms are based on two primary technologies in which the
Company has established a leading scientific and proprietary position: human
receptor/ion channel subtype technology and human protease technology.
 
     The Company's proprietary molecular targets and drug candidates, together
with its drug discovery technologies and research expertise, have enabled the
Company to establish several collaborative research and license agreements,
which include Bristol-Myers Squibb Company ("Bristol-Myers Squibb"), Eli Lilly
and Company ("Lilly"), Meiji Seika Kaisha, Ltd. ("Meiji"), and Novartis AG
("Novartis"), and multiple technology licensing and sublicensing arrangements,
which include Aurora Biosciences Corporation ("Aurora"), Lilly, Merck & Company,
Inc. ("Merck"), Neurocrine Biosciences, Inc. ("Neurocrine"), and The Salk
Institute for Biological Studies ("The Salk Institute"). In March, 1999, the
Company licensed to Bristol-Myers Squibb non-exclusive rights to practice its
patented transcription-based assay technology. SIBIA currently receives
collaborative research funding from only Bristol-Myers Squibb. SIBIA has
recently completed its collaborative research with Lilly and Novartis and is
entitled to receive, from Bristol-Myers Squibb, Lilly, Meiji, and Novartis,
milestone payments at certain stages of the development of product candidates,
if any are identified, and royalties on sales of products that are developed, if
any are developed. SIBIA believes its proprietary drug discovery technology
platform and drug candidates will lead to additional corporate collaborations
and licensing opportunities with pharmaceutical, biotechnology and drug
discovery service companies.
 
     The first compound to enter clinical trials from the Company's drug
discovery program was SIB-1508Y, currently in development for Parkinson's
disease. This compound was selected as a potential drug candidate on the basis
of its nicotinic acetylcholine receptor ("nAChR") subtype selectivity and
behavioral profile. In contrast to current therapies, which treat only motor
dysfunction, SIB-1508Y is being developed for the treatment of motor, affective
and cognitive dysfunctions of Parkinson's disease. SIB-1508Y is currently in
Phase 2 clinical trials that the Company expects to be completed in mid-1999.
The Company has a collaboration with Meiji for the development and
commercialization of SIB-1508Y in Japan and certain other Asian countries and
plans to establish additional corporate collaborations for advanced clinical
trials and commercialization of SIB-1508Y in other areas of the world.
 
                                        1
<PAGE>   4
 
     SIBIA's second compound to enter clinical trials from the Company's drug
discovery program was another nAChR subtype-selective compound, SIB-1553A, as a
development candidate for the treatment of Alzheimer's disease. This compound
was also selected as a potential drug candidate on the basis of its nAChR
subtype selectivity and behavioral profile. The Company's studies indicate that
this compound strongly stimulates acetylcholine release in specific brain
regions associated with memory and learning, the same regions which exhibit
deficits of this neurotransmitter in Alzheimer's disease. SIB-1553A is currently
in a Phase 2 clinical trial that the Company expects to be completed in
mid-1999. The Company does not currently have a collaborative partner for the
development and commercialization of SIB-1553A but plans to establish corporate
collaborations for advanced clinical trials and commercialization of SIB-1553A
throughout the world.
 
     SIBIA has been involved in patent litigation with Cadus Pharmaceutical
Corporation ("Cadus"). On December 18, 1998, a jury returned a verdict in favor
of the Company in this litigation, finding that certain of the Company's patents
are valid and enforceable and awarding the Company damages in the amount of $18
million to compensate the Company for Cadus' past direct and indirect
infringement of those patents. On January 29, 1999, the Court granted the
Company's request for a permanent injunction preventing Cadus, and all persons
acting in concert or otherwise participating with Cadus from practicing the
methods claimed in those patents. See "Item 3, Legal Proceedings."
 
     The Company is applying its drug discovery technologies to discover and
develop potential drug candidates independently and in collaboration with
established pharmaceutical companies. The Company currently expects that late
stage clinical development and commercialization of independently discovered
compounds will be accomplished in conjunction with corporate partners. The
Company believes, assuming successful pre-clinical studies, that additional
compounds discovered with its technologies by the Company and its corporate
partners will enter clinical trials within the next 12 to 18 months. There can
be no assurance, however, that pre-clinical studies relating to any of the
Company's compounds will be successful.
 
SIBIA'S DRUG DISCOVERY PLATFORMS
 
     SIBIA is pursuing a molecular target-based approach to drug discovery. The
Company believes that its proprietary drug discovery platform technologies will
enable the early identification of compounds that are selective for specific
receptor/ion channel subtypes and proteases, facilitating the discovery and
development of new classes of drugs, such as SIB-1508Y and SIB-1553A, that may
be more effective and have fewer side effects than existing drugs for the
treatment of nervous system disorders. SIBIA's drug discovery platforms are
based on two primary technologies that define the molecular targets on which the
Company has focused, and in which the Company has established a leading
scientific and proprietary position: human receptor/ion channel subtype
technology and human protease technology.
 
  The Role of Calcium in Nervous System Function and Disease
 
     The human nervous system is a complex network of interconnected neurons
that are responsible for coordination of virtually all bodily activities,
including movement, sensory perception, learning, memory and emotions. Neurons
receive, conduct and transmit signals; this communication between neurons and
with other cells is essential to the function of the nervous system. Neuronal
cell death or dysfunction that impairs the ability of neurons to communicate can
result in neurodegenerative disorders (e.g., Alzheimer's and Parkinson's
diseases), neurological disorders (e.g., epilepsy and chronic pain), and
psychiatric disorders (e.g., schizophrenia and depression).
 
     Communication between neurons occurs through complex electrical and
chemical processes. Neurons communicate with each other and with target cells
through the transmission and reception of molecules known as neurotransmitters.
Nerve impulses, in the form of voltage changes, cause the release of
neurotransmitters, activating specific receptors on the surface of an adjacent
neuron or target cell and cause a response in the receiving cell. This
interaction takes place at a synapse, which is the point at which a nerve
impulse is transmitted from one neuron to another. Each different
neurotransmitter interacts with a specific corresponding receptor or family of
receptors and transmits primary messages that control important processes within
those neurons and target cells. These processes include the regulation of
secondary messenger systems that, in turn, modulate a wide array of signal
transduction pathways involved in neuronal communication and survival.
 
                                        2
<PAGE>   5
 
     One of the most important messengers in the nervous system is calcium ions,
which facilitate the communication between neurons. Calcium ions regulate many
essential functions in neurons, such as the release of neurotransmitters,
electrical activity, activation of enzymes and transcription of genes. Calcium
ions perform this function by entering neurons through ion channels
("receptor/ion channels") which open and close (i.e., are gated) either through
neurotransmitter reception (more generally, ligand/receptor interactions) or
voltage changes such as nerve impulses.
 
     Because calcium is central to so many critical neuronal functions, the
Company believes that controlling calcium levels within neurons is a key
strategy for potential therapeutic intervention in a number of nervous system
disorders, including Parkinson's disease, Alzheimer's disease and other
dementias, Attention Deficit Hyperactivity Disorder ("ADHD"), depression,
schizophrenia, neuropathic and chronic pain, epilepsy, stroke, brain injury,
anxiety, bipolar disorder and migraine. Over the past 20 years, drugs blocking
calcium influx through certain receptor/ion channels (e.g., voltage-gated
calcium channels ("VGCCs")) have been successfully developed and commercialized
for the treatment of cardiovascular diseases such as angina and hypertension.
However, these existing calcium channel blockers are either generally
ineffective or have significant side effects when evaluated for nervous system
disorders. The Company believes this is due to their lack of selectivity or
activity on specific neuronal VGCC subtypes and that the Company's drug
discovery technologies will enable it to identify lead compounds that are highly
selective for brain receptor/ion channel subtypes.
 
     Calcium ions enter neurons primarily through: (i) two receptor classes that
function as ligand-gated ion channels -- nAChRs and excitatory amino acid
receptors ("EAARs"); and (ii) VGCCs. These three classes are the major
receptor/ion channel classes involved in regulating neuronal calcium. Each class
is comprised of numerous structurally and pharmacologically distinct subtypes.
In addition, subtypes within these receptor/ion channel classes are anatomically
distinct, located not only in different organs of the body (such as the heart
and brain), but also localized within specific substructures of organs (such as
the hippocampus and cerebellum of the brain). The large number and diversity of
nAChR, EAAR and VGCC subtypes has only recently been identified through modern
gene cloning techniques.
 
     SIBIA was a pioneer in the discovery and functional expression of cloned
genes encoding important human subtypes in these three receptor/ion channel
classes. This has enabled SIBIA to characterize a large number of previously
unrecognized receptor/ion channel subtypes and establish them as targets for
drug discovery. SIBIA has further incorporated these molecular targets into
functional cell-based assays for drug screening.
 
  SIBIA's Human Receptor/Ion Channel Subtype Technology
 
     SIBIA's human receptor/ion channel subtype technology is based on (i) the
identification and cloning of the genes encoding nAChRs, EAARs and VGCCs from
human brain tissue, (ii) the expression of these genes in mammalian cells to
afford fully functional receptor/ion channels of defined subtype and (iii) the
use of these cells in in vitro high throughput functional drug screening assays.
Each cell line or assay contains only a single human receptor/ion channel
subtype representing a pure molecular target for drug screening. In contrast to
traditional binding assays, these proprietary assays can quantify the functional
effect of test compounds and characterize them as agonists, antagonists or
modulators, at any functional site, known or unknown, on a specific receptor/ion
channel subtype, all in a primary screen.
 
     SIBIA has established a leading proprietary position in drug discovery
based on human receptor/ion channel subtypes. Each of the following scientific
and technological developments by SIBIA was critical in building this position
and has represented a significant advance:
 
     - The Company has discovered, isolated and developed an extensive library
       of more than 63 complete genes cloned from human brain tissue which code
       for multiple, distinct subtypes of nAChRs, EAARs and VGCCs.
 
     - SIBIA has expressed more than 32 functional receptor/ion channel subtypes
       in the nAChR, EAAR and VGCC classes in stable cell lines. Each subtype
       potentially represents a novel molecular target for developing
       therapeutic compounds for nervous system disorders. This was a difficult
       and significant technical challenge, since most receptor/ion channel
       subtypes are multimeric (i.e., molecular com-
 
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<PAGE>   6
 
plexes of two or more proteins) and require the expression of multiple complex
genes to form a functional subtype.
 
     - SIBIA has developed proprietary functional cell-based assays encompassing
       these molecular targets and uses these assays with its proprietary high
       throughput screening technology, which includes novel assay methods and
       instrumentation, to rapidly identify and select compounds for further
       development.
 
  Human Protease Technology
 
     Proteases are a class of enzymes which play an important role in the
processing of proteins. The body uses this mechanism to control many critical
pathways or biochemical cascades. In neurons, specific proteases control
pathways critical to neuronal communication and survival. Abnormal neuronal
protease activity can lead to degenerative processes, as occurs during
progressive disorders such as Alzheimer's disease and in phases of acute
neuronal cell death resulting from head trauma and ischemia due to stroke. For
example, these proteases can generate products that are neurotoxic, such as the
amyloid beta protein ("A(BETA)") which forms the senile plaques seen in
Alzheimer's disease patients, or initiate degradative cascades that are involved
in breaking down the neuronal cytoskeleton, leading to nerve cell death. The
Company believes that modulating the activity of selected proteases may control
these degenerative processes and have therapeutic benefit leading to
neuroprotection and reduced neuronal cell loss.
 
     SIBIA believes there are significant new opportunities for protease-based
therapeutics for nervous system disorders, particularly neurodegenerative
conditions. To pursue this class of molecular targets the Company has
established its human protease technology platform, which includes the
identification and characterization of specific proteases and their functional
activity, the development of proprietary assays to measure specific protease
activity and the use of novel combinatorial chemistry techniques to design
proprietary and selective protease inhibitors. The Company has established a
panel of more than 15 protease targets to be able to evaluate the selectivity of
its compounds. These targets have been incorporated into assays that include
isolated enzymes and cell-based approaches. This has facilitated the discovery
of specific small molecule inhibitors that have demonstrated effectiveness in
animal models of human neurodegenerative diseases.
 
DRUG DISCOVERY TECHNOLOGIES
 
     SIBIA is a leader in the development of proprietary drug discovery
platforms which combine key tools necessary for modern drug discovery, including
genomics, high throughput screening, advanced combinatorial chemistry techniques
and pharmacology.
 
     The Company's proprietary molecular targets and drug candidates, together
with its drug discovery technologies and research expertise, have enabled the
Company to establish several corporate collaborations and resulted in a number
of compounds being evaluated for, or developed in, clinical trials. The Company
believes its technology platform, including its human receptor/ion channel
subtype and human protease technologies, and product candidates will lead to
additional corporate collaborations and licensing opportunities with
pharmaceutical and biotechnology companies.
 
  Molecular Targets
 
     Genomics. For over ten years, SIBIA has been involved in the cloning of
complete genes encoding selected receptor/ion channel subtypes from human brain
tissue. This has been critical for the Company's target based approach to drug
discovery. Receptor/ion channel subunit genes have been cloned through molecular
biological, biochemical, immunological and functional approaches, and by using
molecular hybridization techniques and homology screening, related subunits and
splice variants of those genes have been identified. SIBIA is now incorporating
expression cloning and more sophisticated bioinformatics-based approaches to its
target identification efforts and has developed a collection of more than 63
complete receptor/ion channel genes encompassing all known subtypes of the
targeted nAChR, EAAR and VGCC classes. This has provided SIBIA with a strong
proprietary position with respect to those particular drug targets.
 
     Functional Genomics. In an effort to establish functions for specific
isolated receptor/ion channel subtypes and proteases, SIBIA has pursued various
functional genomic approaches either internally or in conjunction with leading
academic collaborators. These include anatomical (mapping studies in normal and
diseased tissue using clones and antibodies to expressed proteins),
pharmacological (utilizing molecular
 
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<PAGE>   7
 
target-specific compounds in cell, tissue or animal models), genetic
(chromosomal mapping, linkage studies, knockouts and transgenic animals) and
expression array (gene chip or gene filter) approaches.
 
  Functional Assay Technology and High Throughput Screening
 
     High throughput screening utilizing functional assays is a key component of
SIBIA's target-based approach to drug discovery. SIBIA utilizes its human
receptor/ion channel subtype technology and human protease technology with high
throughput screening in two modes: first, for the testing of large random
compound libraries to discover novel structures that are selective and potent
substrates for more in-depth research and evaluation; and second, for the rapid
identification, characterization, profiling and optimization of selected
compounds through an interactive process with chemistry and pharmacology for
further in vitro and in vivo study of lead candidates.
 
     SIBIA's proprietary high throughput functional cell-based assays are
applicable to all of SIBIA's drug discovery programs -- nAChRs, EAARs, VGCCs and
proteases. SIBIA's proprietary assays are based on the receptor/ion
channel-induced changes in cellular calcium levels, or protease-mediated changes
in fluorescent substrates. In contrast to traditional binding assays, these
assays also allow for simultaneous analysis of the selectivity, potency,
efficacy and pharmacological nature (e.g., agonist, antagonist or modulator) of
test compounds with respect to specific molecular targets.
 
     Fluorescence-Based Ion Assay. SIBIA's proprietary fluorescence-based ion
assay technology measures changes in intracellular events (e.g., calcium
concentrations) through the use of ion-sensitive and other fluorescent dyes.
SIBIA, in collaboration with a third party, has developed a microtiter
plate-imaging fluorimeter to perform functional high throughput screening. The
equipment is fully automated with robotics and analyzes the fluorescent signals
of all 96 wells in a standard microtiter plate simultaneously, rather than
sequentially in a time-delayed manner. This system can also be adapted to a 384
well plate format. This equipment incorporates a sophisticated computer control
and data capture system which allows SIBIA to perform more than 25,000
functional receptor/ion channel assays per day. SIBIA is in the process of
expanding its capacity in this area and expects to significantly increase high
throughput screening.
 
     Transcription-Based Assay. SIBIA's proprietary transcription-based assay
technology measures the functional activity of test compounds on cell-surface
proteins using a wide array of specifically responsive promoter-reporter gene
constructs and products. SIBIA believes its proprietary transcription-based
assay technology is broadly applicable to virtually any cell-surface protein,
such as receptors and ion channels, that control signal transduction processes
affecting gene transcription. In addition, the Company believes that
transcription-based assays have applications beyond SIBIA's current receptor/ion
channel subtype targets and could support the expansion of SIBIA's drug
discovery efforts to other human molecular targets involved in nervous system
disorders or to other therapeutic categories.
 
  Chemistry
 
     Medicinal Chemistry. SIBIA has established in-house a state-of-the-art
medicinal chemistry capability which incorporates structure-based drug design,
computer assisted molecular modeling, pharmacophore development based on
structure-activity relationships and organic synthesis. These activities are
closely integrated with combinatorial chemistry.
 
     Combinatorial Chemistry. SIBIA has developed a combinatorial chemistry
capability referred to as high throughput organic synthesis ("HTOS"). HTOS is
currently focused on the rapid generation of analogues of "hits" from high
throughput screening. The Company's HTOS laboratory is automated and is able to
produce milligram amounts of up to 1,000 individual compounds per week. Novel
synthetic approaches and strategies have also been developed and are being
utilized in SIBIA's drug discovery programs. SIBIA has integrated its high
throughput screening capabilities with its proprietary HTOS technologies to
rapidly convert hits identified through screening to potential lead compounds.
 
  Pharmacology
 
     Neuropharmacology. SIBIA has established in-house a number of in vitro and
in vivo assays for evaluating properties of specific test compounds such as
second messenger modulation, neurotransmitter release from tissue slices, and in
vivo microdialysis.
 
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<PAGE>   8
 
     Neurodegeneration. SIBIA has established in-house a number of in vitro and
in vivo assays to measure neuroprotective and neurodegenerative potential of
test compounds in acute neurodegenerative diseases such as stroke and head
trauma and chronic neurodegenerative diseases such as Parkinson's disease and
Alzheimer's disease.
 
     Behavioral Pharmacology. SIBIA has developed in-house a panel of more than
30 different animal models that permit the evaluation and optimization in vivo
of compound activity in a range of potential therapeutic indications.
 
     Developmental Pharmacology. SIBIA has established an in-house group capable
of performing safety, pharmacokinetic and ADME (absorption, distribution,
metabolism and excretion) studies in rodents, which are a precursor to the
development of drug candidate compounds.
 
DISCOVERY AND DEVELOPMENT PROGRAMS
 
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<CAPTION>
                                                      DEVELOPMENT               COMMERCIAL
        PROGRAM           THERAPEUTIC TARGET           STATUS(1)                  RIGHTS
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<S>                      <C>                   <C>                         <C>
HUMAN RECEPTOR/ION CHANNEL SUBTYPE TECHNOLOGY
nAChR Agonists
SIB-1508Y                Parkinson's Disease   Phase 2 clinical trials     Meiji/SIBIA
SIB-1553A                Alzheimer's Disease,  Phase 2 clinical trial      SIBIA
                         Attention Deficit
                         and Hyperactivity
                         Disorder (ADHD),
                         Schizophrenia
SIB-3182                 Alzheimer's Disease,  Pre-clinical                SIBIA
                         Attention Deficit
                         and Hyperactivity
                         Disorder (ADHD),
                         Schizophrenia
Other Series             Pain, Schizophrenia,  Discovery/Leads identified  SIBIA
                         Depression
EAAR Ligands
CGP 79397                Epilepsy              Pre-clinical                Novartis/SIBIA
CGP 80887                Pain                  Pre-clinical                Novartis/SIBIA
Other Series             Pain, Anxiety,        Discovery/Leads identified  SIBIA
                         Schizophrenia,
                         Neurodegenerative
                         Diseases
VGCC Antagonists
Compound Series          Neuropathic and       Leads identified            SIBIA
                         Chronic Pain
HUMAN PROTEASE TECHNOLOGY
A(BETA) Inhibitors       Alzheimer's Disease   Pre-clinical                Bristol-Myers Squibb/
                                                                           SIBIA
Apoptosis Modulators     Stroke, Brain         Discovery/Leads identified  SIBIA
                         Injury,
                         Neurodegenerative
                         Diseases
</TABLE>
 
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<TABLE>
<CAPTION>
          DRUG DISCOVERY TECHNOLOGY                                            LICENSEES
          -------------------------                                            ---------
<S>                                                               <C>
Transcription-Based Assay                                         Novartis; Aurora; Neurocrine;
                                                                  Bristol-Myers Squibb
Fluorescence-Based Ion Assay                                      Novartis; Aurora; Lilly
Phage Display Technology                                          Affymax/Glaxo Wellcome
</TABLE>
 
---------------
(1) "Discovery" activities include initial research related to specific
    molecular targets and assay development for the identification of new lead
    compounds.
 
     "Leads identified" indicates that lead compounds have been discovered that
     meet certain criteria of the Company. Lead compounds may undergo structural
     modification and more extensive evaluation prior to selection of candidates
     for preclinical development.
 
     "Pre-clinical" indicates that SIBIA is conducting pharmacology testing,
     toxicology testing, formulation, process development and/or manufacturing
     scale-up prior to possible submission of an IND.
 
     "Phase 2 clinical trials" are those in which the drug is administered to
     patients to evaluate safety, tolerability and efficacy. This indicates that
     SIBIA has completed the initial introduction of the drug into healthy human
     subjects (Phase 1), where it has successfully been tested for safety,
     tolerability and pharmacokinetics over a range of doses. In some cases,
     aspects of the metabolism or the pharmacodynamics of compounds are also
     tested in Phase 1.
 
HUMAN RECEPTOR/ION CHANNEL SUBTYPE TECHNOLOGY
 
  nAChR Program
 
     In the late 1980s, SIBIA began exploring nAChR subtypes as targets for drug
discovery because of the growing awareness of the diversity and importance of
the nAChR system and its endogenous neurotransmitter, acetylcholine, in a
variety of behaviors, particularly cognition; the discovery of a number of
distinct nAChR subtypes located in the brain; and the complex pharmacology of
the exogenous ligand nicotine. The complexity of nicotine's activity was
believed to be due to its non-selective nature (acting at all nAChRs), and SIBIA
sought to separate the potential therapeutic benefits of nicotinic compounds
from less desirable effects with receptor subtype-selective compounds. Until
recently, the pharmaceutical industry has not focused on nAChRs as important
drug targets. Mapping and pharmacological studies have revealed that nAChR
subtypes are widely but discretely distributed in the brain and appear to be
associated with specific neuronal structures and functions. The Company's nAChR
drug discovery program is focused on the identification, optimization and
early-stage development of nAChR subtype-selective compounds as novel drug
candidates.
 
     There is strong evidence that nAChRs are important in a number of nervous
system disorders. In particular, deficits of nAChRs have been demonstrated in
Parkinson's and Alzheimer's patients. Studies by the Company indicate that
nAChRs are involved in modulating the release of dopamine, acetylcholine and
other important neurotransmitters in different brain regions. The Company
believes that it may be able to develop subtype-selective nAChR drugs, such as
SIB-1508Y and SIB-1553A, to ameliorate the disease symptoms that result from
reduced concentrations of dopamine and acetylcholine in Parkinson's and
Alzheimer's patients, respectively. In addition, SIBIA believes that nAChR
compounds with different subtype selectivities may be useful for the treatment
of other nervous system disorders such as schizophrenia, ADHD, depression and
pain.
 
     SIB-1508Y. The first compound discovered by SIBIA to enter clinical trials
was SIB-1508Y, currently in development for Parkinson's disease. In contrast to
current Parkinson's disease therapies which treat only motor dysfunction,
SIB-1508Y is being developed for the treatment of motor, affective and cognitive
dysfunctions of this disease. SIB-1508Y exhibits subtype-selective nAChR agonist
activity and releases dopamine, acetylcholine and norepinephrine from selected
brain regions. SIB-1508Y has been tested in a number of animal models, and
demonstrated activity in rodent and primate models of Parkinson's disease, in
rodent models of depression and in primate models of cognitive function.
Pre-clinical data suggests that SIB-1508Y may be useful both as a stand-alone
therapeutic agent and as an adjunctive therapy with L-dopa. SIB-1508Y is
currently in two Phase 2 clinical trials for Parkinson's disease. The first
trial, ongoing since
 
                                        7
<PAGE>   10
 
January 1998, is assessing the safety, motor and cognitive effects of SIB-1508Y
in early stage Parkinson's patients requiring but not receiving dopamine
replacement therapy. The second trial, initiated in early 1999, is studying the
compound in later-stage patients in combination with a half dose of their
current dopamine replacement therapy. SIBIA plans to complete both Phase 2
studies in mid-year 1999.
 
     In March 1997, the Company announced a collaboration with Meiji for the
development and commercialization of SIB-1508Y in Japan and certain other Asian
countries. SIBIA has retained worldwide rights to manufacture the clinical
supplies and bulk drug material required for the commercial production of
SIB-1508Y. The Company plans to establish additional corporate collaborations
for advanced clinical trials and commercialization of SIB-1508Y in other areas
of the world.
 
     SIB-1553A. Another compound discovered by SIBIA's proprietary drug
discovery platforms is SIB-1553A, currently in development for Alzheimer's
disease. The Company's studies indicate that this compound strongly stimulates
acetylcholine release in specific brain regions associated with memory and
learning, the same regions which exhibit deficits of this neurotransmitter in
Alzheimer's disease. In the first half of 1997, the Company reported
pre-clinical data demonstrating that in animals, SIB-1553A significantly
stimulates the release of acetylcholine. In addition, SIB-1553A was demonstrated
to improve working (short-term) and reference (long-term) memory deficits due to
injury, drugs or aging in studies in rodents and monkeys. SIB-1553A is currently
in a Phase 2 clinical trial, commenced in early 1999, to study the effect of the
compound on cognitive performance in early to mid-stage Alzheimer's patients.
SIBIA expects to complete this study mid-year 1999.
 
  EAAR Program
 
     The excitatory amino acid system is the major excitatory system in the
brain. EAARs are divided into three categories based on the names of compounds
selective for each category: NMDA-type receptor/ion channels, AMPA-type
receptor/ion channels, kainate-type receptor/ion channels and metabotropic
receptors, a category of G protein-coupled receptors which do not directly flux
calcium but rather function via other cellular second messenger molecules. Each
category is comprised of multiple subtypes that are activated by excitatory
amino acid neurotransmitters such as glutamate and each subtype has unique
anatomical distributions.
 
     The NMDA-, AMPA-, and kainate-type receptor/ion channel categories are
ligand-gated ion channels, and these subtypes directly flux calcium into
neurons. These receptor/ion channel subtypes are important for diverse brain
functions, including memory and learning, and are also implicated in a variety
of central nervous system disorders, including stroke and brain trauma,
epilepsy, pain, schizophrenia, depression and others. Stable cell lines
expressing NMDA-, AMPA-, and kainate-type EAARs have been established and are
being used in SIBIA's functional high throughput screening assays. Potent and
selective compounds are being identified and are being evaluated in various
animal models of nervous system disorders.
 
     Metabotropic receptors also appear to be involved in certain nervous system
disorders. Clones for genes encoding a number of different and novel
metabotropic EAARs have been isolated by SIBIA from human brain tissue and have
been demonstrated to be functional in several types of assays. Stable cell lines
expressing metabotropic EAARs have been established and are being used in
SIBIA's functional high throughput screening assays. Potent and selective
compounds have been identified and are being evaluated in various animal models.
 
     The Company believes drugs acting at different and specific EAAR subtypes
may have application to certain disorders of the central nervous system as
stated above. To date, developing therapeutically useful EAAR drugs has been
difficult. Traditional drug discovery approaches have produced non-selective
EAAR antagonists which generally have intolerable side effects. SIBIA has
discovered a number of novel and distinct human EAAR subtypes, each with
different pharmacological properties. By identifying receptor subtype-selective
EAAR agonists and antagonists, the Company believes it should be possible to
effectively treat certain nervous system disorders without the side effects
caused by non-selectively blocking multiple EAAR subtypes.
 
                                        8
<PAGE>   11
 
     The first EAAR gene was cloned at The Salk Institute, and SIBIA has an
exclusive license to broad patents relating to this research. The Company has
subsequently filed its own patents on additional EAAR subtypes. SIBIA and
Novartis have identified a series of subtype-specific human metabotropic
receptor antagonists. Under the terms of their agreement, SIBIA and Novartis
both worked to design and optimize potential lead compounds which are selective
for EAARs. Such compounds will be further developed by Novartis and SIBIA will
receive milestone payments based on their success. Subsequent to the completion
of the collaborative research with Novartis in October 1998, SIBIA has been
independently pursuing drug discovery on EAAR targets.
 
  VGCC Program
 
     VGCCs are a major receptor/ion channel family involved in regulating
neuronal calcium flux and cell excitability. VGCCs have traditionally been
classified as L-, T-, N- and P-type calcium channels based on their biophysical
and pharmacological properties. SIBIA's pioneering research in the
characterization of VGCCs by molecular structure has led to the identification
of other classes of calcium channels as well as channel subtypes within these
classes, resulting in a new structure-based understanding of VGCCs. The critical
role of VGCC subtypes in the function and potential dysfunction of nerve cells
indicates that they may be important targets for therapeutic intervention in a
number of nervous system disorders.
 
     Calcium entry into neurons through distinct VGCC subtypes is essential for
several fundamental activities of neurons, e.g., regulation of neurotransmitter
release, activation of enzymes and regulation of gene transcription. This gives
rise to several possible therapeutic applications of modulation of VGCC
function. Currently, SIBIA is focusing on small molecule VGCC antagonists for
the treatment of pain. This derives from the observation that a synthetic
version of a VGCC subtype-selective peptide, (OMEGA)-conotoxin MVIIA, is
currently in late stage clinical development by a third party for chronic pain.
This molecule has demonstrated efficacy, but its widespread use may be limited
by its peptidic nature and by the fact that it must be administered into the
spinal fluid by a pump. The Company believes that this validates a particular
VGCC subtype as a molecular target for pain, and that small molecule drugs of
the type SIBIA is identifying will offer significant advantages over peptides or
their derivatives in creating a useful drug for chronic pain, where great unmet
need exists. In addition, recent studies have identified specific mutations in
one of the Company's proprietary human VGCC genes associated with an inherited
form of migraine. The Company believes this provides insight as to a novel
therapeutic approach for the treatment of migraine. The Company further believes
modulation of synaptic activity by controlling neurotransmitter release,
neuronal calcium levels and neuronal excitability with VGCC subtype-selective
drugs may prove to be a more effective approach with broader applicability than
current drug therapy for many nervous system disorders.
 
     The Company believes it was the first to clone and functionally express a
human neuronal N-type VGCC. SIBIA has generated a number of stable mammalian
cell lines which functionally express additional distinct VGCC subtypes and has
developed these cell lines into assays that currently are being employed in
efforts to discover selective drugs using high throughput screening technology.
SIBIA has an extensive patent portfolio in this area. Potent and selective
compounds have been identified by the Company and are being evaluated in various
animal models. SIBIA is currently free to develop compounds and other technology
it discovers in this area on its own or with partners.
 
HUMAN PROTEASE TECHNOLOGY
 
  APP Modulators
 
     SIBIA's Amyloid Precursor Protein (APP) Modulator program is currently
focused on controlling proteases that generate A(BETA), the neurotoxic
fragment of APP. A(BETA), which is derived from APP, is generally understood to
be a key molecule in the development of Alzheimer's disease. A(BETA) is found at
autopsy in senile plaques and in deposits surrounding the small blood vessels in
brain tissue, both of which are diagnostic for Alzheimer's disease. A number of
studies indicate that mutations in the APP gene are associated with early-onset
familial Alzheimer's disease. The clinical presentation and histopathology of
early-onset Alzheimer's disease are indistinguishable from that seen in the more
prevalent late-onset Alzheimer's disease.
 
                                        9
<PAGE>   12
 
The Company therefore believes the inhibition of A(BETA) formation may be
broadly applicable to early- and late-onset Alzheimer's disease.
 
     SIBIA has conducted extensive research concerning the role of APP in
Alzheimer's disease. It has developed technology related to the metabolism of
APP in Alzheimer's disease and methods for controlling the formation of A(BETA).
The other important APP metabolic product, secreted APP(s(ALPHA)), has been
shown in in vitro and in vivo studies to have neuroprotective properties and has
been shown by SIBIA to be significantly decreased in the cerebrospinal fluid of
Alzheimer's disease patients. SIBIA is seeking to develop compounds which
selectively modulate the enzymatic processing of APP, such that the formation of
A(BETA) is inhibited and that of APP(s(ALPHA)) is maintained or enhanced. SIBIA
believes such compounds could slow disease progression or possibly modify the
underlying disease process. In the A(BETA) inhibitor program, SIBIA has
developed neuronal-type cell lines able to process human APP and produce
APP(s(ALPHA)), A(BETA) and other processing fragments which can be detected with
the use of various antibodies, and which have been established as functional
assays for compound screening and drug development. SIBIA's biochemical assays
allow quantification of A(BETA) and APP(s(ALPHA)) in cultured cells, tissues and
biological fluids (for example, cerebrospinal fluid) from animals (normal and
transgenic mice) and sporadic and familial Alzheimer's patients. The Company
believes its assays, and the ability to biochemically evaluate the effect of
test compounds on APP processing in biological systems, and potentially in
patients in clinical trials, provide it a significant competitive advantage.
 
     SIBIA, in collaboration with its partner in the APP Modulator program,
Bristol-Myers Squibb, has identified several series of small molecules that
inhibit A(BETA) production in vitro and in vivo. The most advanced compounds
from this collaboration are in pre-clinical development.
 
  Other Protease Targets
 
     SIBIA has built an integrated drug discovery platform able to address a
broad range of human proteases as molecular targets. The Company has developed a
novel cell-based screening assay using protease activity as a "reporter" for
utilizing proprietary technology licensed from Aurora for monitoring the effects
of test compounds. SIBIA is currently utilizing this assay to discover
inhibitors of programmed cell death (apoptosis), which occurs in stroke, head
trauma and neurodegenerative disease.
 
STRATEGIC ALLIANCES
 
     Strategic alliances with major pharmaceutical and biotechnology companies
are an integral part of SIBIA's business strategy. Currently, SIBIA has a
collaborative research and license agreement with Bristol-Myers Squibb and
development and license agreement with Meiji. Only the collaborative research
agreement with Bristol-Myers Squibb currently provides research funding
payments. SIBIA is entitled to receive, from Bristol-Myers Squibb, Lilly, Meiji,
and Novartis, milestone payments at certain stages of the development of product
candidates, if any are identified, and royalties on sales of products that are
developed, if any are developed.
 
  Bristol-Myers Squibb Company
 
     In August 1995, SIBIA entered into a collaborative research and license
agreement with Bristol-Myers Squibb under which Bristol-Myers Squibb agreed to
fund research for a minimum of four years to discover and develop compounds able
to selectively modulate the processing of APP for the treatment of Alzheimer's
disease and related neurodegenerative disorders. During the joint research
effort, neither SIBIA nor Bristol-Myers Squibb may enter into any other
third-party agreements directed toward the discovery and development of products
for use in the area of APP metabolism. In addition, Bristol-Myers Squibb has the
sole discretion to determine which compounds, if any, it will pursue to develop.
Under the terms of the agreement, all pre-clinical and clinical development of
lead compounds will be undertaken by Bristol-Myers Squibb. SIBIA has a right of
first negotiation to obtain a license to certain compounds discovered during the
research collaboration in the event Bristol-Myers Squibb elects not to pursue
the development of such compounds. Pursuant to the collaborative research and
license agreement, except with regard to SIBIA's assay technology, SIBIA has
granted to Bristol-Myers Squibb an exclusive, worldwide, royalty-bearing license
 
                                       10
<PAGE>   13
 
to commercialize products arising out of the collaboration. Furthermore, upon
the termination of the research collaboration, SIBIA and Bristol-Myers Squibb
have granted to one another non-exclusive licenses to the other's assay
technology for the discovery and development of new compounds. The collaborative
research funding may not be terminated prior to August 1999 without the parties'
mutual consent.
 
     Coincident with the collaborative research and license agreement,
Bristol-Myers Squibb made an equity investment in the amount of $7,000,000 and
paid a non-refundable license fee of $3,000,000. Bristol-Myers Squibb is also
obligated to make a further equity investment of $6,000,000 upon the initiation
of clinical trials relating to any product developed from the collaboration. In
addition to research funding, SIBIA is entitled to receive certain milestone
payments at certain stages during the development of product candidates, if any
are identified. The agreement also provides that Bristol-Myers Squibb will pay
SIBIA royalties on net sales of products resulting from the joint research, if
any are developed.
 
  Meiji Seika Kaisha, Ltd.
 
     In February 1997, the Company entered into a development and license
agreement with Meiji for the development and commercialization of the Company's
proprietary nAChR agonist, SIB-1508Y, as a treatment for Parkinson's disease and
other nervous system disorders in Japan and other Asian countries. Under the
agreement, the Company received a one-time license fee of $3,000,000 for the
license of certain technology to Meiji. In addition, the Company may receive
development milestone payments and royalties on future product sales, if the
product is successfully commercialized in such countries. SIBIA has retained
rights to develop and commercialize SIB-1508Y outside of Japan and certain other
Asian countries, and has retained rights to manufacture clinical supplies and
commercial material worldwide.
 
  Completed Research Collaborations
 
     In October 1997, the Company and Lilly completed their collaborative
research in the area of VGCCs. The Company and Lilly will independently pursue
discovery and development of drug leads that act on VGCC drug targets identified
during the research collaboration. The Company is free to develop compounds it
discovers in this area on its own or with other partners. Lilly has exercised
its option to license the Company's fluorescence-based ion assay technology.
 
     In October 1992, SIBIA entered into a collaborative research and license
agreement (which included research funding and a $5,000,000 equity investment)
with Novartis to develop and utilize SIBIA's receptor/ion channel technology in
the area of EAARs for the discovery of drugs that interact with these molecular
targets. In March 1996, the initial term of the collaborative research funding
was extended through September 1998, at which time the parties' collaborative
research was concluded. Under the agreement, Novartis was granted exclusive
worldwide rights to manufacture and market products it or SIBIA discovered using
the EAAR technology during the research collaboration, and SIBIA is entitled to
receive milestone payments at certain stages of the development of product
candidates, if any are identified, and royalties on sales of products that are
developed, if any are developed. Novartis also received a non-exclusive license
to the Company's transcription-based assay technology and fluorescence-based ion
assay technology. SIBIA has retained the rights to use the program technology
for its own drug discovery efforts and may screen molecules from other sources
against EAARs and pursue development of these molecules.
 
     Pursuant to the extended agreement, Novartis paid SIBIA $500,000 to fund
certain capital expenditures and agreed to purchase $7,500,000 of the Company's
Common Stock, $5,000,000 of which was purchased in conjunction with the initial
public offering of the Company's Common Stock and the remaining $2,500,000 of
which is required to be purchased upon the achievement of certain research
milestones.
 
                                       11
<PAGE>   14
 
DRUG DISCOVERY TECHNOLOGY LICENSES
 
     Consistent with the Company's strategy of enhancing and leveraging its
proprietary drug discovery platform technologies, the Company has entered into
the following technology licensing arrangements with third parties:
 
  The Salk Institute for Biological Studies
 
     In 1988, SIBIA entered into a license agreement with The Salk Institute on
a number of nAChR subunit clones on which five U.S. patents have issued. This
agreement was amended in March 1996 such that the license to the issued U.S.
patents and related patent applications became an exclusive worldwide license.
Pursuant to the agreement, as amended, SIBIA is obligated to pay royalties to
The Salk Institute on sales of products resulting from The Salk Institute's
nAChR technology. In addition, the Company is required to make minimum annual
royalty payments to The Salk Institute beginning in 2002. Failure to pay such
royalties will result in the related license becoming non-exclusive.
 
     In 1990, SIBIA entered into a three-year agreement with The Salk Institute
in the area of EAARs. This agreement provided for the support of research at The
Salk Institute by SIBIA and the transfer of research materials and research
results in the EAAR area from The Salk Institute to SIBIA. SIBIA also received
an exclusive worldwide license to certain EAAR-related patents and patent
applications held by The Salk Institute. The agreement was amended in March
1996. Pursuant to the agreement, as amended, SIBIA began making certain annual
minimum royalty payments to The Salk Institute beginning in 1998. Failure to pay
such royalties will result in the related license agreement becoming
non-exclusive.
 
  Aurora Biosciences Corporation
 
     In January 1997, the Company entered into an agreement with Aurora. Under
the agreement, the Company licensed to Aurora non-exclusive rights to practice
its patented transcription-based assay technology, and certain aspects of its
fluorescence-based ion assay technology related to automated drug screening. In
return, in addition to other consideration, the Company received from Aurora
non-exclusive rights to several assay technologies, including novel reporter
molecules, that will facilitate the Company's high throughput screening and drug
discovery efforts directed to certain receptor, ion channel and enzyme targets
associated with nervous system disorders. Both parties have limited sublicensing
rights to each other's patents. In December 1997, Aurora entered into agreements
with Lilly and Merck to sublicense certain of SIBIA's patents when used in
conjunction with Aurora technologies.
 
  Bristol-Myers Squibb
 
     In March 1999, SIBIA entered into a license agreement with Bristol-Myers
Squibb. Under the agreement, the Company licensed to Bristol-Myers Squibb
non-exclusive rights to practice its patented transcription-based assay
technology. SIBIA will receive annual maintenance payments as well as royalties
on the sales of any products identified using the licensed technology.
 
  Neurocrine Biosciences, Inc.
 
     In October 1997, SIBIA entered into an agreement with Neurocrine. Under the
agreement, the Company licensed to Neurocrine non-exclusive rights to practice
its patented transcription-based assay technology for use with a specified
molecular target. In exchange, SIBIA has been granted access to a compound
library developed by Neurocrine's combinatorial chemistry group. SIBIA intends
to use the Neurocrine compound library in its drug discovery and high throughput
screening programs directed to certain receptor/ion channel and enzyme targets
associated with nervous system disorders.
 
  Affymax/Glaxo Wellcome
 
     In 1993, SIBIA entered into a semi-exclusive license with Affymax, which
was subsequently acquired by Glaxo Wellcome, regarding SIBIA patents covering
phage display technology for drug discovery. This
 
                                       12
<PAGE>   15
 
technology covers the display of random peptide epitopes on the surface of viral
coat proteins, which can then be screened for activity in various types of
assays. SIBIA retains exclusive rights to this technology for vaccine and other
applications.
 
SELECTED ACADEMIC RESEARCH COLLABORATIONS
 
  The Mayo Clinic, Jacksonville
 
     SIBIA is collaborating with and providing research support to Dr. Steven G.
Younkin, Director of Research at the Mayo Clinic, Jacksonville. Research is
focused on measuring the effects of lead compounds on A(BETA) levels in 
biological samples from in vitro and in vivo models of APP processing and
Alzheimer's disease.
 
  The Rockefeller University
 
     SIBIA is collaborating with Dr. Rong Wang, a researcher in the Mass
Spectrometry Laboratory at Rockefeller, on the detection and quantitation of
A(BETA) and related APP fragments in tissue culture, cerebrospinal fluid and
plasma samples.
 
  University of California, Los Angeles, School of Medicine
 
     SIBIA is collaborating with Robert Baloh, M.D., Professor, Department of
Neurology and Joanna Jen, M.D., Ph.D., Clinical Instructor, Department of
Neurology, in the area of genetic disorders involved with calcium channels.
 
  Thomas Jefferson University
 
     SIBIA is collaborating with Jay S. Schneider, Ph.D., Professor, Department
of Pathology, Anatomy and Cell Biology, and Department of Neurology, in the
evaluation of various compounds on cognitive deficits in motor asymptomatic
macaques treated with MPTP.
 
  Medical College of Georgia
 
     SIBIA is collaborating with Jerry J. Buccafusco, Ph.D., Professor,
Director, ARC Animal Behavior Center, in the evaluation of various compounds in
aged rhesus monkeys.
 
  University of Chicago
 
     SIBIA is collaborating with Dr. Richard J. Miller, Professor, Department of
Pharmacology and Physiological Sciences, on the biophysical and pharmacological
characterization of certain VGCC subtypes.
 
  University of California, San Diego, School of Medicine
 
     SIBIA is collaborating with Dr. Tony Yaksh, Professor and Chair, Department
Anesthesiology, to map changes in calcium channels in neuropathic pain states.
 
  Parkinson's Institute
 
     SIBIA is collaborating with J. William Langston, M.D., President, and
Giselle M. Petzinger, M.D., Assistant Research Scientist, in the evaluation of
various compounds in the systemic MPTP parkinsonian monkey model (squirrel
monkeys).
 
PATENTS AND PROPRIETARY RIGHTS
 
     SIBIA files patent applications to protect molecular targets, technologies,
compounds, processes, assay methods and therapeutic treatment methods that are
important to the development of its business. The
 
                                       13
<PAGE>   16
 
Company also relies upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop and maintain its competitive
position.
 
     SIBIA has established an extensive patent portfolio which it intends to
protect on behalf of its shareholders. The Company has been engaged in
litigation with Cadus Pharmaceutical Corporation ("Cadus") regarding the
Company's U.S. Patent No. 5,401,629 (the "'629 patent"), entitled "Assay Methods
and Compositions Useful for Measuring the Intracellular Transduction of an
Intracellular Signal." See "Item 3. Legal Proceedings."
 
     SIBIA directly holds, or has exclusive licenses to, 48 issued U.S. and 26
foreign patents relating to molecular targets, technologies, compounds and assay
methods for various nervous system diseases and disorders. In addition, SIBIA
has 58 U.S. and 71 foreign applications relating to these enabling technologies,
thirteen of which have been allowed.
 
     SIBIA has eight issued patents and three allowed which include claims to
DNAs encoding key structural components of VGCCs, one of which, the
(ALPHA)(2)(DELTA) component, is thought to be essential for all VGCC subtypes.
Four additional patents cover VGCCs which can be utilized in assays to identify
compounds that modulate VGCC function. SIBIA has been granted a European patent
covering DNA encoding VGCC (ALPHA)(2)(DELTA) subunits, cells expressing the same
and a method to identify compounds that modulate VGCC function and Australian
and British patents covering a number of subtypes and assay methods. Eleven of
the pending U.S. patent applications cover the composition or use of VGCC genes
and the encoded subtypes and assay methods; two of these have been allowed.
 
     SIBIA has been issued five U.S. patents which claim DNAs encoding and
assays for key structural components of nAChRs and has an exclusive license from
the Salk Institute to five issued U.S. patents and three pending applications
(of which 2 stand allowed), all of which claim DNAs encoding various nAChR
subunits and assay methods. SIBIA also has been granted four patents in Great
Britain covering nAChR subtypes and assay methods. Seven of SIBIA's pending U.S.
applications cover the composition or use of human nAChR genes and encoded
subtypes and assay methods; four of these have been allowed.
 
     SIBIA has two issued U.S. patent with claims to DNAs encoding human
metabotropic receptors and cells containing the same and a corresponding patent
has been granted in Australia and Great Britain. SIBIA also has one issued U.S.
patent with claims to NMDA receptors and an exclusive license from the Salk
Institute to four additional issued U.S. patents with broad claims to DNAs
encoding various NMDA- and non-NMDA-type ligand gated EAA receptor/ion channel
subtypes, and corresponding Australian and British patents have issued. SIBIA
has five pending U.S. applications covering human NMDA receptor genes and
encoded subtypes and seven pending U.S. applications covering human metabotropic
glutamate receptor ("mGLuR") genes and assay methods, two of which have been
allowed.
 
     Several of SIBIA's pending U.S. patent applications relate to functional
screening techniques that can be utilized in conjunction with receptor/ion
channel compositions for identifying drugs which have the potential for
treatment of disorders associated with the particular receptor or ion channel.
Two issued U.S. patents cover methods and compositions for identifying
receptor-modulating compounds based on detection of reporter gene transcription.
In addition, one issued U.S. patent, three granted foreign patents, five pending
U.S. patent applications and seven pending foreign applications cover
fluorescence-based automated systems and methods for high throughput functional
screening of receptor-modulating compounds.
 
     SIBIA has also filed a patent application disclosing proprietary methods
for solid phase synthesis of chemical series, termed resin activation/capture or
REACAP, to produce libraries of compounds that would be difficult, or
impossible, to obtain using solution phase syntheses. An additional advantage of
the methods is the production of compounds of increased purity. The libraries
produced by the methods will be useful for screening against SIBIA's molecular
targets.
 
     SIBIA has eleven issued U.S. patents covering the composition, use, or
methods or preparation of compounds which modulate the activity of nAChRs for
the treatment of diseases and disorders involving these receptors, including six
issued U.S. patents covering, inter alia, SIB-1508Y. Additionally, SIBIA has
four pending U.S. applications, fifteen foreign applications and one issued
Australian patent, covering different
                                       14
<PAGE>   17
 
series of nAChR compounds. Two additional applications covering EAA compounds
are jointly assigned to SIBIA and Novartis.
 
     SIBIA has three issued U.S. patents and six U.S. patent applications and
three foreign applications pending covering the composition or use of compounds
that modulate the processing of proteins implicated in Alzheimer's disease and
an issued U.S. patent covering assay methods for the detection of Alzheimer's
disease. Four additional applications covering compounds for treating
Alzheimer's disease are jointly assigned to SIBIA and Bristol-Myers Squibb.
 
     SIBIA has a non-exclusive worldwide license to various patents and patent
applications held by Aurora. The technology covered by these patents and patent
applications include several assay technologies.
 
     The Company intends to file additional applications as appropriate for
patents covering its technologies, compounds and processes. There can be no
assurance that the Company will develop additional technologies, compounds or
processes that are patentable, that patents will issue from any patent
application or that claims allowed will be sufficient to protect the Company's
technologies, compounds or processes. Competitors may have filed applications,
may have been issued patents or may obtain additional patents and proprietary
rights relating to technologies, compounds or processes competitive with those
of the Company. The failure by the Company to adequately protect its
technologies, compounds or processes covered by issued patents or to obtain
patents based on the applications referred to herein or any future applications
could have a material adverse effect on the Company's business.
 
     The patent positions of pharmaceutical and biotechnology firms, including
SIBIA, are uncertain and involve complex legal and factual questions. In
addition, the coverage claimed in a patent application can be significantly
reduced before the patent is issued or upon reexamination. Consequently, the
Company does not know whether any more of its applications will result in the
issuance of patents or, if any patents are issued, whether they will provide
significant proprietary protection or will be circumvented or invalidated. Since
patent applications in the United States are maintained in secrecy until a
patent issues, and since publication of discoveries in the scientific or patent
literature often lag behind actual discoveries, the Company cannot be certain
that it was the first creator of inventions covered by its pending patent
applications or that it was the first to file patent applications for such
inventions.
 
     The success of the Company will also depend in part on SIBIA not infringing
patents issued to competitors and not breaching the technology licenses upon
which any Company compounds or processes are based. It is uncertain whether any
third-party patents will require the Company to alter its technologies,
compounds or processes, obtain licenses or cease certain activities. A number of
pharmaceutical companies, biotechnology companies, universities and research
institutions have filed patent applications or received patents in the field in
which the Company is involved. Some of these applications or patents may be
competitive with the Company's applications or conflict in certain respects with
claims made under the Company's applications. Such conflict could result in a
significant reduction of the coverage of the Company's patents, if issued. In
addition, if patents issued to other companies contain competitive or
conflicting claims and such claims are ultimately determined to be valid, the
Company may be required to obtain licenses to these patents or to develop or
obtain alternative technology. If any licenses are required, there can be no
assurance that the Company will be able to obtain any such license on
commercially favorable or acceptable terms, if at all. The Company's breach of
an existing license or failure to obtain a license to any technology that it may
require to develop and commercialize its compounds would have a material adverse
effect on the Company's business.
 
     Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued to the Company or to determine
the scope and validity of third-party proprietary rights. See "Item 3. Legal
Proceedings." Moreover, if competitors of the Company prepare and file patent
applications in the United States that claim technology also claimed by the
Company, the Company may have to participate in interference proceedings
declared by the United States Patent and Trademark Office ("PTO") to determine
priority of invention, which could result in substantial cost to the Company,
even if the eventual outcome is favorable to the Company. Similarly, the Company
may have to participate in opposition proceedings with respect to granted
foreign patents. The Company is aware of a third-party patent application
                                       15
<PAGE>   18
 
that elicited an interference proceeding with one of the Company's patent
applications in the PTO. There can be no assurance that the Company will prevail
in these proceedings. Also, there can be no assurance that the validity of the
Company's patents, if issued, would be upheld by a court of competent
jurisdiction. An adverse outcome in patent prosecution or in litigation with
respect to the validity of any of the Company's patents could subject the
Company to significant liabilities to third parties, require disputed rights to
be licensed from third parties or require the Company to cease using such
technology, any of which could have a material adverse effect on the Company's
business.
 
     In addition, the recombinant Pichia pastoris yeast expression system
developed at SIBIA is protected by several patents that have issued to Phillips
Petroleum. These patents include claims to key Pichia gene regulatory elements,
marker genes and transformation methods that form the basis of the recombinant
expression system. SIBIA retains full rights to the general expression system
protected by these patents but does not have the right to sublicense this
technology. SIBIA has filed numerous applications and has been granted eight
U.S. patents and two foreign patents pertaining to Pichia-based recombinant
systems for the production of certain proteins including human epidermal growth
factor, human IGF-1 and aprotinin. SIBIA also has patents in vaccine-related
technology.
 
     In addition to patents, the Company relies on trade secret laws to protect
its technology, especially where patent protection is not believed to be
appropriate or obtainable. Thus, SIBIA relies on protecting its proprietary
technology and processes in part by confidentiality agreements with its
employees, consultants and certain contractors. There can be no assurance that
these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known or be independently discovered by competitors.
 
COMPETITION
 
     Competition to develop drugs to treat nervous system disorders is intense
and expected to increase as knowledge and interest in the disorders addressed by
the products the Company is seeking to develop increases. The Company's most
significant competitors are pharmaceutical companies and established
biotechnology companies. Smaller companies may also prove to be significant
competitors, particularly through collaborative arrangements with large
pharmaceutical companies. In addition, the Company faces competition from
academic institutions, governmental agencies and other public and private
research organizations which conduct research, seek patent protection, and
establish collaborative arrangements for product and clinical development and
marketing. Furthermore, these companies and institutions compete with the
Company in recruiting and retaining highly qualified scientific and management
personnel.
 
     Many of the Company's competitors have substantially greater financial,
technical and human resources than the Company and have significant products
approved or in development. In addition, many of these competitors have
significantly greater experience than the Company in undertaking preclinical
testing and clinical trials of new pharmaceutical products and in obtaining FDA
approval for products more rapidly than the Company. The Company has not sought
the approval of the FDA for any product based on any of its compounds under
development. Furthermore, if the Company is permitted to commence commercial
sales of products that it may develop, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it has no
experience.
 
     Any product that the Company may succeed in developing, and for which it
gains regulatory approval, must then compete for market acceptance and market
share. For certain of the Company's potential products, an important competitive
factor will be the timing of market introduction. Accordingly, the Company
expects that the relative speed with which companies can develop products,
complete the clinical testing and approval processes and supply commercial
quantities of the product to the market will be important competitive factors.
With respect to clinical testing, competition may delay progress by limiting the
number of clinical investigators and patients available to test the Company's
potential products.
 
     In addition to the above factors, competition is based on product efficacy
and safety, the timing and scope of regulatory approvals, availability of
supply, marketing and sales capability, price, patent position and reimbursement
coverage.
                                       16
<PAGE>   19
 
MANUFACTURING
 
     The Company currently has no manufacturing facilities for clinical or
commercial production of any compounds currently under development or the
manufacture and distribution of products that may be developed. The Company is
currently relying on third-party manufacturers to produce its compounds for pre-
clinical and clinical purposes. Furthermore, the compounds under development by
the Company have never been manufactured on a commercial scale and may not be
able to be manufactured at a cost or in quantities to make commercially viable
products.
 
     The Company intends to establish arrangements with third-party
manufacturers to supply compounds for preclinical and clinical trials and
commercial sales of products that may be developed, as well as for the
packaging, labeling and distribution of such products. If the Company is unable
to contract for a sufficient supply of its compounds on acceptable terms, the
Company's preclinical and clinical testing schedule would be delayed, resulting
in the delay of submission of products for regulatory approval and initiation of
new development programs, which would have a material adverse effect on the
Company's business. If the Company should encounter delays or difficulties in
establishing relationships with manufacturers to produce, package and distribute
products that it may develop, market introduction or penetration of such
products would be adversely affected.
 
SALES AND MARKETING
 
     The commercialization of products, such as those that may be developed by
the Company, is an expensive and time-consuming process. The Company has no
experience in sales, marketing or distribution. In order to market directly any
products that the Company may develop, the Company must develop a marketing and
sales force with technical expertise and supporting distribution capability.
Alternatively, the Company may seek to obtain the assistance of a pharmaceutical
or biotechnology company with a large distribution system and a large direct
sales force.
 
GOVERNMENT REGULATION
 
     The manufacturing and marketing of pharmaceutical products in the United
States requires the approval of the FDA under the federal Food, Drug and
Cosmetic Act. Similar approvals by the comparable agencies are required in most
foreign countries. The FDA has established mandatory procedures and safety
standards that apply to the pre-clinical and clinical testing, manufacture and
marketing of pharmaceutical products. Obtaining FDA approval for a new
therapeutic takes several years and involves substantial expenditures.
Pharmaceutical manufacturing facilities are also regulated by state, local and
other authorities.
 
     As an initial step in the FDA regulatory approval process, pre-clinical
studies are typically conducted in animal models to assess a drug's efficacy and
to identify potential safety problems. The results of these studies are
submitted to the FDA as part of an IND, which is filed to comply with FDA
regulations prior to beginning clinical trials.
 
     Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase 1, the initial introduction of the drug into
healthy human subjects, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical
pharmacology). Phase 2 involves studies in a limited patient population to (i)
assess the potential of the drug for specific, targeted indications; (ii)
evaluate dosage tolerance and optimal dosage; and (iii) identify possible
adverse effects and safety risks. When a compound is found to be effective and
to have an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are
undertaken to further evaluate clinical efficacy and to further test for safety
within an expanded patient population at geographically dispersed clinical study
sites. Data from clinical trials are submitted to the FDA in a New Drug
Application ("NDA") or Product License Application ("PLA"). Preparing an NDA or
PLA involves considerable data collection, verification, analysis and expense.
 
     The testing and approval process requires substantial time and effort and
there can be no assurance that any approval will be granted on a timely basis,
if at all. The time period required for NDA review and approval may be affected
by a number of factors, including the severity of the disease, the availability
of alternative
 
                                       17
<PAGE>   20
 
treatments and the risks and benefits demonstrated in clinical trials.
Additional animal studies or clinical trials may be requested during the FDA
review period. The FDA may ask one of its advisory committees to aid in its
assessment of the drug. All of these factors may delay marketing approval. The
FDA may also require post-marketing testing to monitor for adverse effects,
which can involve significant expense. FDA approval is limited to specified
indications. Moreover, the product label and promotional labeling and
prescription drug advertising are highly regulated by the FDA under the federal
Food, Drug and Cosmetic Act. In order to permit promotion of the approved
product for indications not included in the scope of the original approval,
further clinical trials and FDA approval may be necessary.
 
     NDA approval requires, among other things, that the prospective
manufacturer's quality control and manufacturing procedures conform to Good
Manufacturing Practices ("GMP") regulations. All manufacturing facilities,
whether foreign or domestic, may be subjected to a pre-NDA approval inspection.
Additionally, domestic manufacturing facilities are subject to biennial FDA
inspections and foreign manufacturing facilities are subject to periodic
inspection by foreign regulatory authorities as well as by the FDA where the FDA
has a reciprocal inspection agreement with the foreign regulatory authorities.
 
     For clinical investigation and marketing outside the United States, the
Company also is subject to foreign regulatory requirements governing clinical
trials and marketing approval for drugs. The requirements governing the conduct
of clinical trials, product licensing, pricing and reimbursement vary widely
from country to country. The Company's approach to the European regulatory
process involves the identification of respected clinical investigators in the
member states of the European Union ("EU") to conduct clinical studies. The
Company intends to design these studies to meet both FDA and EU standards.
Provided regulatory harmonization is finalized in the EU, these studies are
designed to develop a regulatory package sufficient for multi-country approval
in the Company's European target markets without the need to duplicate studies
for individual country approvals. This approach also takes advantage of
regulatory requirements in some countries, such as in the United Kingdom, which
allow Phase 1 studies to commence after appropriate toxicology and preclinical
pharmacology studies but prior to formal regulatory approval.
 
HUMAN RESOURCES
 
     As of December 31, 1998, the Company had 122 employees, 39 of whom hold
Ph.D. degrees. 109 employees are engaged in, or directly support, research and
development. The Company's employees are not covered by a collective bargaining
agreement and the Company considers its relations with its employees to be
excellent.
 
RISK FACTORS
 
     Absence of Developed Products; Early Stage of Development. SIBIA is an
early stage biotechnology company. The Company has no products available for
sale and does not expect to have any products resulting from its research
efforts, including its collaborations with others, commercially available for at
least several years, if at all. SIBIA has commenced clinical trials on two of
its compounds (SIB-1508Y and SIB-1553A) currently under research and
development, but no clinical trials have commenced by the Company's
collaborative partners for any compound in connection with their collaborations
with the Company. Even though Phase 2 clinical trials with respect to SIB-1508Y
and SIB-1553A have commenced, both may prove to be ineffective in the treatment
of neural disorders, or have undesirable or unintended side effects or other
characteristics that prevent or limit their commercial use, either of which
could have a material adverse effect on the Company's business. Furthermore,
there can be no assurance that any products will be successfully discovered or
developed by the Company or its collaborative partners, be approved for clinical
trials, prove to be safe and efficacious in clinical trials, meet applicable
regulatory standards, be capable of being produced in commercial quantities at
acceptable costs or be marketed successfully. The failure of the Company or its
collaborative partners to discover or develop commercially viable products or
successfully market such products would have a material adverse effect on the
Company's business.
 
     The Company's area of therapeutic focus, disorders of the nervous system,
is not thoroughly understood and there can be no assurance that the compounds
the Company is seeking to develop will prove to be safe and
 
                                       18
<PAGE>   21
 
effective in treating nervous system disorders. The development of such
compounds will require the commitment of substantial resources to continue
research and to conduct the pre-clinical development and clinical trials
necessary to bring such compounds to market and to establish production and
marketing capabilities. Drug research, discovery and development by nature are
uncertain. There is a risk of delay or failure at any stage, and the time
required and cost involved in successfully accomplishing the Company's
objectives cannot be predicted. Actual drug research, discovery and development
costs could exceed budgeted amounts, which could have a material adverse effect
on the Company's business.
 
     Dependence on Collaborative Relationships. The Company's strategy for the
development, clinical testing, manufacturing and commercialization of certain of
its compounds includes entering into various collaborations with corporate
partners, licensors, licensees and others.
 
     The Company's collaborators have received from SIBIA certain exclusive
rights to commercialize any products developed under their respective
agreements. These collaborators have generally agreed to fund the research and
development of compounds discovered under their respective agreements, conduct
clinical testing of lead compounds, prepare and file submissions for regulatory
approval, make milestone payments to SIBIA upon the achievement of certain goals
and pay royalties on any resulting products. Under its agreements with these
collaborators, the Company is restricted in its ability to conduct research with
third parties with respect to the technology subject to the respective agreement
until its collaborative research is complete. The amount and timing of resources
dedicated by these collaborators under their respective agreements also is not
within the control of the Company. There can be no assurance that the Company
will ever receive any milestone or royalty payments under these agreements. In
addition, if products that may be developed under such agreements are approved
for marketing, any revenues to the Company from such products will be dependent
on the marketing and sales efforts of these collaborators.
 
     Each of the collaborative parties has the right to terminate its respective
collaboration under certain circumstances, including upon the occurrence of a
material breach and, in certain cases, upon a change in control. There can be no
assurance that the Company's relationships with its collaborative partners will
not be terminated or that the Company will be able to enter into additional
collaborations in the future. In addition, there can be no assurance that
collaborators will not pursue alternative technologies to develop treatments for
the diseases targeted by the respective collaborative programs. If any of the
Company's collaborative partners terminates or breaches its agreement with the
Company or fails to devote adequate resources to or to conduct in a timely
manner its collaborative activities, the research program under the applicable
collaborative agreement or the development and commercialization of drug
candidates subject to such collaboration would be materially adversely affected,
which would have a material adverse effect on the Company's business. In
addition, because the Company's collaborative agreements have accounted for 93%,
95%, 97% of total revenues for the years ended December 31, 1998, 1997 and 1996,
respectively, such a termination or breach could materially adversely affect the
Company's results of operations and financial condition. Also, there can be no
assurance that a research program covered by a particular collaborative
agreement does not or will not conflict with any research programs covered by
the Company's other collaborations. The occurrence of any such conflict could
have a material adverse effect on the Company's business.
 
     A key element of the Company's strategy is to enter into additional
collaborative arrangements with pharmaceutical and biotechnology companies to
develop and commercialize its drug candidates. There can be no assurance that
the Company will be able to negotiate collaborative arrangements in the future
on acceptable terms, if at all, or that such collaborative arrangements will be
successful. Most of the Company's competitors similarly are seeking to develop
or expand their collaborative relationships with pharmaceutical and
biotechnology companies, which could adversely impact the Company's ability to
enter into additional collaborative arrangements. To the extent that the Company
is not able to establish such arrangements or any of its existing arrangements
are terminated, it would require significant capital to undertake development,
regulatory, manufacturing and marketing activities at its own expense and may be
required to curtail significantly or eliminate one or more of its research,
discovery or development programs, either of which could have a material adverse
effect on the Company's business. In addition, the Company may encounter
significant delays in introducing products that it may develop into certain
markets or may find that the
 
                                       19
<PAGE>   22
 
development, manufacture or sale of such products in such markets is adversely
affected by the absence of such collaborative arrangements.
 
     New and Uncertain Technology. The Company's proprietary nervous system
discovery technologies, which comprise the human receptor/ion channel subtype
technology and human protease technology, are unproven and relatively new
compared to traditional methods of drug discovery. The Company uses its
technologies to isolate and identify molecular targets that it believes play an
important role in nervous system function and nervous system disorders. The
ability of the Company to screen potential compounds, select product candidates
and develop products is dependent in large part upon the number of such targets
available for screening and whether the expected functionality of such targets
plays an important role in nervous system function and nervous system disorders.
There can be no assurance that the use of such technologies will lead to the
discovery or development of commercial pharmaceutical products that are safe and
efficacious in treating any nervous system disorder. Failure to develop any such
product would have a material adverse effect on the Company's business.
 
     History of Operating Losses. The Company is at an early stage of
development with respect to its nervous system technologies and its compounds.
Except for 1995, the Company has incurred net losses every year since it shifted
its area of therapeutic focus to the central nervous system in 1991. As of
December 31, 1998, the Company had an accumulated deficit of approximately $45.1
million. The Company's revenue for the short term will be limited to payments
under its existing or future strategic alliance agreements. There can be no
assurance that the Company will ever achieve or sustain significant revenues or
profitable operations. To achieve significant revenues or profitable operations,
the Company, alone or with its collaborators, must successfully develop,
manufacture and market safe and efficacious products and obtain the regulatory
approvals required for their testing, manufacture and sale. Failure to achieve
significant revenues or profitable operations could impair the Company's ability
to sustain operations. There can be no assurance that the Company will be
successful in entering into additional collaborative arrangements or that any
such arrangements will result in revenues or that the Company will receive
additional revenues under existing collaborative arrangements. The Company has
not yet received any revenues from the achievement of milestones from the
discovery or development of, or royalties from the sale of, commercial drugs by
Lilly, Novartis, Bristol-Myers Squibb or Meiji, and such revenues, if any, are
not expected to represent a material amount of the Company's total revenues for
several years, if at all.
 
     Future Capital Needs; Uncertainty of Additional Funding. The Company will
require substantial additional funds to conduct the research and development and
pre-clinical and clinical testing of its compounds and to manufacture and market
any products that may be developed. Although the Company plans to contract with
third parties to manufacture and market any products that may be developed, to
the extent the Company is unsuccessful and is required to establish its own
manufacturing capacity or marketing program, it will require substantial
additional capital. The Company's future capital needs will be dependent upon
many factors, including progress in its research and development activities, the
magnitude and scope of these activities, progress with pre-clinical and clinical
trials, the cost of preparing, filing, prosecuting, maintaining, defending and
enforcing patent claims and other intellectual property rights, competing
technological and market developments, changes in or terminations of existing
collaborative arrangements, the establishment of additional collaborative
arrangements and the cost of manufacturing scale-up and development of marketing
activities, if undertaken by the Company. The Company expects to expend
substantial funds in connection with research and development and in the
prosecution and enforcement of its intellectual property rights. Payments under
existing collaborative agreements and the Company's current cash reserves will
be insufficient to fund the Company's operations through the completion of any
clinical trials and commercialization of its first product, if developed.
Although the Company will seek to obtain additional funds through public or
private equity or debt financings, collaborative or other arrangements with
corporate partners or from other sources, there can be no assurance that
additional financing will be available or, if available, that it will be
available on acceptable terms. If additional funds are raised by issuing equity
securities, further dilution to then existing stockholders would result. If
adequate funds are not available, the Company may be required to curtail
significantly or eliminate one or more of its research, discovery or development
programs or obtain funds through additional arrangements with corporate partners
or others which may require the
 
                                       20
<PAGE>   23
 
Company to relinquish rights to certain of its technologies or product
candidates that the Company would not otherwise relinquish, any of which could
have a material adverse effect on the Company's business.
 
     Intense Competition; Rapid Technological Change. The field in which the
Company is involved is characterized by extensive research efforts, rapid
technological change and intense competition from numerous organizations
including pharmaceutical companies, biotechnology companies, drug discovery
service companies, universities and other research organizations. Technologies,
products and therapies currently exist on the market that would compete directly
with those that the Company is seeking to develop and market. In addition, new
developments occur and are expected to continue to occur at a rapid pace.
Competition from pharmaceutical, biotechnology and drug discovery service
companies is intense and is expected to increase. Many of these companies have
significantly greater financial resources and expertise in research and
development, manufacturing, pre-clinical and clinical testing, obtaining
regulatory approvals and marketing than the Company. Smaller companies may also
prove to be significant competitors, particularly through collaborative
arrangements with large pharmaceutical companies. Many of these competitors have
significant nervous system products approved or in development and operate
large, well-funded nervous system research and development programs. Academic
institutions, governmental agencies and other public and private research
organizations also conduct research, and establish collaborative arrangements
for the clinical development of compounds and marketing of products aimed at
treating nervous system disorders. The Company's competitors may succeed in
discovering and developing products more rapidly or products that are more
effective or more affordable than any that may be developed by the Company and
its collaborative partners, and such competitors may also prove to be more
successful than the Company and its collaborative partners in production and
marketing of such products. There can be no assurance that research, discoveries
or commercial developments by others will not render any of the Company's or its
collaborative partners' programs or potential products obsolete or
noncompetitive, any of which would have a material adverse effect on the
Company's business. Moreover, there can be no assurance that the Company's
competitors will not obtain patent protection or other intellectual property
rights that would limit the Company's or its collaborative partners' ability to
use the Company's technology or commercialize products that may be developed.
 
     Uncertainty Regarding Patents and Proprietary Rights. The Company's success
will depend in part on its ability to obtain patents, maintain trade secrets and
operate without infringing on the proprietary rights of others, both in the
United States and other countries. The patent positions of biotechnology and
pharmaceutical companies can be highly uncertain and involve complex legal and
factual questions, and therefore, the breadth of claims allowed in biotechnology
and pharmaceutical patents cannot be predicted. There can be no assurance that
patents issued to or licensed by the Company will not be infringed or will not
be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection to the Company's technology, to
products that the Company may develop, or to other competitive advantages that
the Company may possess.
 
     SIBIA has 58 pending applications for U.S. patents and 71 pending foreign
applications on its technology relating to drug discovery for various nervous
system disorders. To date, the Company has exclusively licensed twelve U.S.
patents from The Salk Institute related to SIBIA's human receptor/ion channel
subtype technology, including continuations-in-part and foreign counterparts of
these patents. The Company intends to file additional applications as
appropriate for patents covering its technologies, compounds and processes.
There can be no assurance that the Company will develop additional technologies,
compounds or processes that are patentable, that patents will issue from any
patent application, that issued patents will prevail in reexamination or that
claims allowed will be sufficient to protect the Company's technologies,
compounds or processes. Competitors may have filed applications, may have been
issued patents or may obtain additional patents and proprietary rights relating
to technologies, compounds or processes competitive with those of the Company.
The failure by the Company to adequately protect its technologies, compounds or
processes covered by issued patents or to obtain patents based on the
applications referred to herein or any future applications could have a material
adverse effect on the Company's business.
 
     The success of the Company will also depend in part on SIBIA not infringing
patents issued to competitors and not breaching the technology licenses upon
which any Company compounds or processes are
                                       21
<PAGE>   24
 
based. It is uncertain whether any third-party patents will require the Company
to alter its technologies, compounds or processes, obtain licenses or cease
certain activities. A number of pharmaceutical companies, biotechnology
companies, universities and research institutions have filed patent applications
or received patents in the field in which the Company is involved. Some of these
applications or patents may be competitive with the Company's applications or
conflict in certain respects with claims made under the Company's applications.
Such conflict could result in a significant reduction of the coverage of the
Company's patents, if issued. In addition, if patents issued to other companies
contain competitive or conflicting claims and such claims are ultimately
determined to be valid, the Company may be required to obtain licenses to these
patents or to develop or obtain alternative technology. If any licenses are
required, there can be no assurance that the Company will be able to obtain any
such license on commercially favorable or acceptable terms, if at all. The
Company's breach of an existing license or failure to obtain a license to any
technology that it may require to develop and commercialize its compounds would
have a material adverse effect on the Company's business.
 
     Litigation, which could result in substantial economic costs to the Company
and diversion of management and other resources, may also be necessary to
enforce any patents issued to the Company or to determine the scope and validity
of third-party proprietary rights. See "Item 3. Legal Proceedings." Moreover, if
competitors of the Company prepare and file patent applications in the United
States that claim technology also claimed by the Company, the Company may have
to participate in interference proceedings declared by the United States Patent
and Trademark Office ("PTO") to determine priority of invention, which could
result in substantial cost to the Company, even if the eventual outcome is
favorable to the Company. Similarly, the Company may have to participate in
opposition proceedings with respect to granted foreign patents. The Company is
aware of third-party patent applications that may elicit an interference
proceeding with two of the Company's patent applications in the PTO. There can
be no assurance that the Company will prevail in these proceedings. Also, there
can be no assurance that the validity of the Company's patents, if issued, would
be upheld by a court of competent jurisdiction. An adverse outcome in patent
prosecution or in litigation with respect to the validity of any of the
Company's patents could subject the Company to significant liabilities to third
parties, require disputed rights to be licensed from third parties or require
the Company to cease using such technology, any of which could have a material
adverse effect on the Company's business.
 
     In addition to patents, the Company relies on trade secret laws to protect
its technology, especially where patent protection is not believed to be
appropriate or obtainable. Thus, SIBIA relies on protecting its proprietary
technology and processes in part by confidentiality agreements with its
employees, consultants and certain contractors. There can be no assurance that
these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known or be independently discovered by competitors. If the Company is
unable to sufficiently protect its trade secrets, such inability could have a
material adverse effect on the Company's business.
 
     No Assurance of Regulatory Approval; Government Regulation. The production
and marketing of products that the Company may develop and its ongoing research
and development activities are subject to extensive regulation by numerous
governmental authorities in the United States and other countries. Prior to
marketing in the United States, any drug developed by the Company must undergo
rigorous pre-clinical and clinical testing and an extensive regulatory approval
process implemented by the FDA under the federal Food, Drug and Cosmetic Act. To
market products abroad, the Company also would be subject to foreign regulatory
requirements, implemented by foreign health authorities, governing clinical
trials and marketing approval for drugs. Satisfaction of such regulatory
requirements, which includes demonstrating to the satisfaction of the FDA that
the product is both safe and effective, typically takes several years or more
depending upon the type, complexity and novelty of the product and requires the
expenditure of substantial resources. Pre-clinical studies must be conducted, as
appropriate, in conformance with the FDA's good laboratory practice regulations.
Clinical trials will be vigorously regulated and must meet requirements for
institutional review board oversight and informed consent as well as FDA review
and oversight and under good clinical practice regulations. The Company has no
experience in developing a product through the clinical trial process, which is
necessary to obtain regulatory approval. The Company intends to establish
collaborative relationships to conduct clinical trials and seek regulatory
approvals to market products that it may develop, although there
 
                                       22
<PAGE>   25
 
can be no assurance that such approvals will be received on a timely basis, if
at all. Clinical trials require the recruitment of large numbers of test
subjects, particularly for products that are intended to treat nervous system
disorders. There can be no assurance that those conducting clinical trials for
the Company will be able to initiate such trials at preferred clinical test
sites or recruit sufficient test subjects, or that such trials will be started
or completed successfully within any specified time period, if at all, with
respect to any of the products that the Company may develop. Furthermore, the
Company or the FDA may suspend clinical trials at any time if it is determined
that the subjects participating in such trials are being exposed to unacceptable
health risks. There can be no assurance that the Company will not encounter
problems in clinical trials which would cause the Company or the FDA to delay or
suspend clinical trials. Any such delay or suspension could have a material
adverse effect on the Company's business. There can be no assurance that any
compound that may be developed by the Company alone or in conjunction with
others will prove to be safe and efficacious in clinical trials and meet all of
the applicable regulatory requirements needed to receive marketing approval. If
regulatory approval of a product is granted, such approval will be limited to
those disease states and conditions for which the product is useful, as
demonstrated through clinical studies. The failure to obtain marketing approval
for any drug candidate could have a material adverse effect on the Company's
business.
 
     There can be no assurance that delays or rejections will not be encountered
based upon additional government regulation from future legislation or
administrative action or that changes will not be made in FDA policy during the
period of product development and FDA regulatory review of each submitted new
drug application. Similar delays may also be encountered in foreign countries.
Furthermore, product approval may entail ongoing requirements for post-marketing
studies. Even if such regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections, and the regulatory standards for manufacturing are
currently being applied stringently by the FDA. Later discovery of previously
unknown problems with a product, a manufacturer or its facility may result in
restrictions on such product or manufacturer, including withdrawal of the
product from the market, which would have a material adverse effect on the
Company's business.
 
     Reliance on Third-Party Manufacturers. The Company currently has no
manufacturing facilities for clinical or commercial production of any compounds
currently under development or marketing capability for the distribution of any
products that may be developed. The Company is currently relying on third-party
manufacturers to produce its compounds for pre-clinical and clinical purposes.
The Company's only compounds in human clinical trials, SIB-1508Y and SIB-1553A,
have never been manufactured on a commercial scale and there can be no assurance
that such compounds, or any other compounds the Company or its collaborators may
develop, can be manufactured at a cost or in quantities to make commercially
viable products.
 
     The Company intends to establish additional arrangements with third-party
manufacturers to supply compounds for pre-clinical and clinical trials and
commercial sales of products that may be developed, as well as for the
packaging, labeling and distribution of such products. If the Company is unable
to contract for a sufficient supply of its compounds on acceptable terms, the
Company's pre-clinical and clinical testing schedule would be delayed, resulting
in the delay of submission of compounds for regulatory approval and initiation
of new development programs, which would have a material adverse effect on the
Company's business. If the Company should encounter delays or difficulties in
establishing relationships with manufacturers to produce, package and distribute
products that the Company may develop, market introduction or penetration of
such products would be adversely affected. Moreover, third-party manufacturers
that the Company may use must adhere to good manufacturing practice regulations
enforced by the FDA through its facilities inspection program. If facilities of
third-party manufacturers cannot pass a pre-approval plant inspection, the FDA
approval of products that may be developed by the Company will be adversely
affected.
 
  Year 2000. As many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, they may be unable to
process accurately certain data before, during or after the year 2000. As a
result, internal systems of the Company and its suppliers and vendors are at
risk for possible miscalculations or systems failures causing disruptions in
their business operations. This is commonly known as the Year 2000 ("Y2K")
issue. The Company's efforts to address the Y2K issue are described in
 
                                       23
<PAGE>   26
 
more detail in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 
     Management of Growth; Dependence on Key Personnel; Need to Attract and
Retain Key Employees and Consultants. To expand its research and development
programs and pursue its product development plans, the Company will be required
to hire additional qualified scientific personnel to perform research and
development, as well as personnel with expertise in clinical testing and
government regulation. These requirements are also expected to necessitate the
addition of management personnel and the development of additional expertise by
existing management personnel. The failure to attract such personnel or to
develop or acquire such expertise would have a material adverse effect on the
Company's business. As part of this growth, the Company will be required to
enter into additional collaborative arrangements and successfully manage these,
along with its current, collaborative arrangements. To the extent the Company
does not enter into collaborative agreements with third parties, it will also be
required to hire manufacturing and marketing personnel. If the Company is unable
to manage its growth effectively, the Company's business would be materially
adversely affected.
 
     The Company is highly dependent on the principal members of its scientific
and management staff, and the loss of any of these members might significantly
delay the achievement of the Company's development objectives. The Company does
not maintain "key man" insurance on any of its employees, nor does the Company
intend to secure such insurance. In addition, the Company relies on consultants
and advisors, including its scientific advisors, to assist the Company in
formulating its research and development strategy. Retaining and attracting
qualified personnel, consultants and advisors will be critical to the Company's
success. The Company faces competition for qualified individuals from numerous
pharmaceutical and biotechnology companies, universities and other research
institutions. There can be no assurance that the Company will be able to attract
and retain such individuals on acceptable terms or at all. The failure to
attract or retain such personnel would have a material adverse effect on the
Company's business.
 
     Control by Principal Stockholders; Anti-Takeover Provisions. The Salk
Institute and its affiliates beneficially owned approximately 19.6% of the
outstanding shares of Common Stock of SIBIA as of January 31, 1999. In addition,
as of January 31, 1999, the present directors and executive officers of the
Company beneficially owned approximately 8.2% of the outstanding shares of
Common Stock. Accordingly, together with The Salk Institute, the present
directors and executive officers of the Company have the ability to exercise
substantial influence over the outcome of most stockholders' actions. Moreover,
the Company's Certificate of Incorporation does not provide for cumulative
voting with respect to the election of directors. Consequently, the present
directors and executive officers, together with The Salk Institute, are able to
exercise substantial influence over the election of the members of the Board of
Directors. Such concentration of ownership could have an adverse effect on the
price of SIBIA's Common Stock. In addition, the Company's Certificate of
Incorporation provides that any action required or permitted to be taken by
stockholders of the Company must be effected at a duly called annual or special
meeting of stockholders and may not be effected by any consent in writing.
Special meetings of the stockholders of the Company may be called only by the
Chairman of the Board of Directors, the President of the Company, by the Board
of Directors pursuant to a resolution adopted by a majority of the total number
of authorized directors, or by the holders of 10% of the outstanding voting
stock of the Company. Moreover, the Company's Certificate of Incorporation and
Bylaws provide for a classified Board of Directors and eliminate the ability of
stockholders to remove a director without cause. The Company's Certificate of
Incorporation and Bylaws also require that the holders of at least 66 2/3% of
the voting stock of the Company must approve any amendment to either the
Certificate of Incorporation or Bylaws affecting certain provisions, including
the provisions described above. These provisions may have the effect of making
hostile takeovers of the Company more difficult, but may also render more
difficult the accomplishment of mergers or the assumption of control by a
principal stockholder because they make it more difficult to remove the
Company's management. In addition, the Board of Directors has the authority,
without action by stockholders, to issue additional shares of Common Stock and
to fix the rights and preferences of and issue shares of Preferred Stock, either
of which may have the effect of delaying or preventing a change in control of
the Company.
 
                                       24
<PAGE>   27
 
     Further, the Company has issued rights (the "Rights") to the holders of its
Common Stock to purchase a specified class of Preferred Stock of the Company
pursuant to a Preferred Share Purchase Rights Plan (the "Rights Plan"). Although
the Rights Plan will not prevent a takeover of the Company, it may discourage
abusive and coercive takeover tactics that result in a rapid, forced sale of the
Company at a lower price than might otherwise be obtainable. The existence of a
Rights Plan may confront the Board of Directors with difficult decisions with
respect to redemption or amendment of the outstanding Rights. In addition, once
a hostile bidder crosses a certain threshold, the Rights become non-redeemable
and the Board of Directors' ability to enter into a negotiated acquisition would
be impaired. There can be no assurance that the Rights Plan will maximize
shareholder value. Furthermore, there can be no assurance that the Rights Plan
will not discourage potential bidders from attempting to gain control of the
Company. The foregoing charter provisions as well as other charter provisions,
the rights of first refusal in favor of the Company, the Rights Plan and certain
provisions of Delaware law may discourage certain types of transactions
involving an actual or potential change in control of the Company or its
management (including transactions in which stockholders might otherwise receive
a premium for their shares over then current prices) and may limit the ability
of stockholders to remove current management of the Company or approve
transactions that stockholders may deem to be in their best interests.
 
     In addition, certain of the Company's collaborative partners have the right
to terminate their respective agreements with the Company upon certain changes
in control of the Company, which may discourage acquisitions or other changes in
control (including those in which stockholders of the Company might otherwise
receive a premium for their shares over then current market prices).
 
     Product Liability Exposure and Uninsured Risks. The testing of compounds
and the marketing and sale of commercial pharmaceutical products involves
unavoidable risks. The use of any of the Company's compounds or its
collaborative partners' compounds in clinical trials and the sale of any
products that may be developed may expose the Company to potential liability
resulting from the use of such compounds or products. Such liability might
result from claims made directly by consumers or by regulatory agencies,
pharmaceutical companies or others using or selling such compounds or products.
The Company has obtained insurance coverage for its current clinical trials. The
Company intends to seek additional insurance coverage if and when it develops
products that are ready to be commercialized. There can be no assurance that the
Company will be able to obtain or maintain product liability insurance in the
future on acceptable terms or that, if obtained, the insurance coverage will be
sufficient to cover any potential claims or liabilities. The inability of the
Company to obtain product liability coverage in amounts sufficient to cover any
damages resulting from a product liability claim could have a material adverse
effect on the Company's business.
 
     Hazardous Materials. The Company's research and development involves the
controlled use of hazardous materials, chemicals and various radioactive
compounds. Although the Company believes that its safety procedures for storing,
handling and disposing of such materials comply with the standards prescribed by
state and federal regulations, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any resulting damages, which
could have a material adverse effect on the Company's business.
 
     Possible Volatility of Stock Price. The market prices for securities of
biopharmaceutical and biotechnology companies, including that of SIBIA,
historically have been highly volatile, and the market from time to time has
experienced significant price and volume fluctuations that are unrelated to the
operating performance of such companies. Factors that may have a significant
impact on the market price and marketability of the Company's Common Stock
include: announcements of technological innovations or new commercial
therapeutic products by the Company, its collaborative partners or the Company's
present or potential competitors; announcements by the Company or others of
results of preclinical testing and clinical trials; developments or disputes
concerning patent or other proprietary rights; developments in the Company's
relationships with its existing or future collaborative partners; acquisitions;
litigation; adverse legislation; changes in governmental regulation, third party
reimbursement policies, or the status of the Company's regulatory approvals or
applications; changes in earnings; changes in securities analysts'
recommendations; changes in health care policies and practices; economic and
other external factors; and period-to-period fluctuations in financial results
of the Company and general market conditions. Fluctuations in the trading
                                       25
<PAGE>   28
 
price or liquidity of the Company's Common Stock may adversely affect the
Company's ability to raise capital through future equity financing, which could
have a material adverse effect on the Company's business.
 
ITEM 2. PROPERTIES
 
     The Company's facilities are located in La Jolla, California. The Company
leases approximately 53,526 square feet of space used for laboratory and
administrative purposes of which approximately 10,792 square feet is sublet.
SIBIA believes that its present facility will be adequate to conduct its
research activities through December 2006, when its current lease, including
available option terms, expires. Management believes that it will be able to
secure additional space at commercially reasonable rates during the terms of
such lease, if necessary.
 
ITEM 3. LEGAL PROCEEDINGS
 
     On July 9, 1996, the Company filed an action for patent infringement
against Cadus Pharmaceutical Corporation ("Cadus") in the United States District
Court for the Southern District of California. The complaint asserted that
Cadus' assay technology infringes the Company's United States Patent No.
5,401,629 (the "'629 Patent"), entitled "Assay Methods and Compositions Useful
for Measuring the Transduction of an Intercellular Signal." The Company sought
damages in an unspecified amount and injunctive relief in the complaint.
 
     Cadus responded by asserting that the '629 Patent and the Company's United
States Patent No. 5,436,128 (the "'128 Patent"), entitled "Assay Methods and
Compositions for Detecting and Evaluating the Intercellular Transduction of an
Extracellular Signal," are invalid, unenforceable and not infringed, and further
asserting claims for intentional interference with prospective economic
advantage and unfair competition. Cadus sought declaratory relief and
compensatory and punitive damages against the Company. On August 3, 1998, the
Court granted summary judgment for the Company on Cadus' counterclaims. Cadus
subsequently dismissed its counterclaim alleging invalidity and unenforceability
of the '128 Patent.
 
     On December 18, 1998, the jury returned a verdict in favor of the Company,
finding that the '629 Patent is valid and enforceable and awarding the Company
damages in the amount of $18 million to compensate the Company for Cadus' past
direct and indirect infringement of the '629 Patent. On January 29, 1999, the
Court granted the Company's request for a permanent injunction preventing Cadus,
and all persons acting in concert or otherwise participating with Cadus from
practicing the methods claimed in the '629 Patent.
 
     On February 26, 1999, the Court denied Cadus' request to decrease the
amount of damages awarded by the jury and to order a new trial.
 
     On March 10, 1999, the Court confirmed the jury's verdict in all respects
and entered judgment in favor of the Company. On March 23, 1999, Cadus posted
security for the judgment in the amount of $18,500,000. On March 25, 1999, Cadus
filed a notice of appeal from the judgment.
 
     The Company has recently been notified that the Patent & Trademark Office
has granted a request for reexamination of the '629 Patent. The Company's
management intends to vigorously defend the '629 Patent in that proceeding.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters were submitted to a vote of the Company's Security holders
during the fourth quarter of the year ended December 31, 1998.
 
                                       26
<PAGE>   29
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
 
     The Company's Common Stock commenced trading on the Nasdaq National Market
under the symbol "SIBI" on May 9, 1996. The following table sets forth, for the
periods indicated, the high and low sales prices per share of the Common Stock
as reported on the Nasdaq National Market:
 
<TABLE>
<CAPTION>
                                                              HIGH      LOW
                                                              ----      ---
<S>                                                           <C>       <C>
1998
Fourth Quarter..............................................   $6 3/4   $3
Third Quarter...............................................    5 1/4    2 1/2
Second Quarter..............................................    7 3/4    4 7/8
First Quarter...............................................    7 1/4    5
 
1997
Fourth Quarter..............................................   $9       $5 5/8
Third Quarter...............................................    9 1/8    6
Second Quarter..............................................    9        5 1/4
First Quarter...............................................    9 1/2    7 1/2
</TABLE>
 
     The last reported sale price of the Common Stock on the Nasdaq National
Market on January 29, 1999 was $5.50. As of January 29, 1999, there were
approximately 900 stockholders of record of the Company's Common Stock. To date,
the Company has not paid any dividends on its Common Stock.
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The following table summarizes certain selected financial data for each of
the five years in the period ended December 31, 1998. The information should be
read in conjunction with the financial statements included elsewhere in this
report.
 
<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                      --------------------------------------------------------
                                        1998        1997        1996        1995        1994
                                      --------    --------    --------    --------    --------
                                              (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                   <C>         <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.....................    $  7,043    $ 11,197    $  8,481    $ 10,448    $  4,852
Research and development
  expenses........................    $ 18,247    $ 15,819    $ 12,268    $  8,949    $  8,663
Net income (loss).................    $(15,807)   $ (7,593)   $ (5,564)   $  2,926    $    (27)
Basic net income (loss) per common
  share...........................    $  (1.68)   $  (0.82)   $  (0.73)   $   0.60
Diluted net income (loss) per
  common share....................    $  (1.68)   $  (0.82)   $  (0.73)   $   0.47
Shares used in computing basic net
  income (loss) per common
  share...........................       9,421       9,248       7,596       4,893
Shares used in computing diluted
  net income (loss) per common
  share...........................       9,421       9,248       7,596       6,164
 
BALANCE SHEET DATA:
Cash, cash equivalents and
  investment securities...........    $ 17,187    $ 33,347    $ 37,464    $ 16,488    $  5,944
Working capital...................    $ 13,662    $ 31,214    $ 35,324    $ 14,338    $  4,523
Total assets......................    $ 21,199    $ 36,180    $ 39,983    $ 18,251    $  8,005
Long-term debt, less current
  portion.........................    $  1,350    $    695    $    519    $    721    $    860
Accumulated deficit...............    $(45,093)   $(29,286)   $(21,693)   $(16,129)   $(19,055)
  Total stockholders' equity......    $ 21,199    $ 32,214    $ 36,572    $ 15,107    $  5,166
</TABLE>
 
                                       27
<PAGE>   30
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
OVERVIEW
 
     SIBIA, incorporated in Delaware in 1981, was established by The Salk
Institute. Through 1990, SIBIA successfully developed several proprietary
life-sciences technologies in collaboration with corporate partners. In 1987,
SIBIA initiated research in the neuroscience field and in 1991 shifted its focus
completely to the development of novel therapeutics to treat nervous system
disorders.
 
     The Company receives contract revenue and license and royalty revenue.
Contract revenue includes payments for research to support a specified number of
the Company's scientists and payments upon the achievement of specified research
and drug development milestones. Research contracts are generally conducted on a
best efforts basis. Contract revenue is recognized as the research is performed
using the percentage-of-completion method of accounting, primarily based on
contract costs incurred to date compared with total estimated costs at
completion. Revenue related to milestones is recognized upon the achievement of
the related milestone and when collection is probable. License revenue is
recognized when earned as generally evidenced by certain factors including:
receipt of such fees, satisfaction of any performance obligations and the
non-refundable nature of such fees. Royalty revenue is recognized when earned
and collection is probable.
 
     Research and development costs are expensed as incurred and include costs
associated with collaborative agreements. These costs consist of direct and
indirect costs related to specific projects as well as fees paid to other
entities which conduct certain research activities on behalf of the Company.
 
     The Company has no products available for sale and does not expect to have
any products resulting from its research efforts, including its collaborations
with others, commercially available for at least several years, if at all.
Except for 1995, the Company has incurred net losses every year since shifting
its area of therapeutic focus to the central nervous system in 1991. The Company
expects that its revenue and other income for the next several years will
fluctuate significantly on a quarterly and annual basis and will be limited to
payments under its collaborative relationships, license fees, interest income
and other miscellaneous income.
 
     During the years ended December 31, 1998, 1997, and 1996, the Company had
three, four and three collaborative research agreements that accounted for 93%,
95% and 97%, respectively, of total revenue.
 
     As of December 31, 1998, the Company had an accumulated deficit of
approximately $45,093,000. To date, the Company's operations have been funded
primarily through equity financings, research contracts, option and license and
royalty revenues. In addition, SIBIA received funds from the sale of its
interest in a corporate joint venture in 1994 and from the settlement of certain
litigation in 1995, with which it has purchased investment securities and which
it has used to finance its operations.
 
RESULTS OF OPERATIONS
 
  Years Ended December 31, 1998 and 1997
 
     Total revenue decreased by 37%, to $7,043,000 in 1998 from $11,197,000 in
1997. The decrease was due primarily to one-time license fees of $3,000,000
recognized in 1997 related to the Company's agreement with Meiji for the
development of SIB-1508Y, SIBIA's lead compound for Parkinson's disease, and the
completion of the Company's research programs under its collaborations with Eli
Lilly and Novartis in October 1997 and September 1998, respectively.
 
     Total expenses increased by 22%, to $25,587,000 in 1998 from $20,965,000 in
1997. The increase in total expenses was primarily attributable to increases in
both research and development and general and administrative expenses. Research
and development expenses increased 15%, to $18,247,000 in 1998 from $15,819,000
in 1997. This was primarily the result of expanded programs in drug discovery
including psychiatric disorders, chronic pain, neuroprotection and apoptosis and
for expenses associated with clinical trials. The Company's two compounds under
development are SIB-1508Y, currently in Phase 2 clinical studies for Parkinson's
disease, and SIB-1553A, currently in Phase 2 clinical studies for Alzheimer's
disease. General and administrative expenses increased 43%, to $7,340,000 in
1998 from $5,146,000 in 1997. The
 
                                       28
<PAGE>   31
 
increase in general and administrative expenses was primarily due to increased
legal fees related to the Company's ongoing patent litigation with Cadus
Pharmaceutical Corporation. In December 1998, SIBIA was awarded an $18.0 million
jury verdict that has been appealed by Cadus.
 
     Other income increased by 26%, to $2,737,000 in 1998 from $2,175,000 in
1997. The increase in other income was due primarily to the net effect of gains
on the sale of equity securities which were partially offset by decreased
interest income as a result of lower average cash and investment balances
carried in 1998.
 
  Years Ended December 31, 1997 and 1996
 
     Total revenue increased by 32%, to $11,197,000 in 1997 from $8,481,000 in
1996. The increase was due primarily to one-time license fees of $3,000,000
recognized in 1997 related to the Company's agreement with Meiji for the
development of SIB-1508Y, SIBIA's lead compound for Parkinson's disease.
 
     Total expenses increased by 32%, to $20,965,000 in 1997 from $15,829,000 in
1996. The increase in total expenses was primarily attributable to an increase
in research and development expenses of 29%, to $15,819,000 in 1997 from
$12,268,000 in 1996. This was primarily the result of expanded programs in drug
discovery and for expenses associated with clinical trials of SIB-1508Y. General
and administrative expenses increased 45%, to $5,146,000 in 1997 from $3,561,000
in 1996. The increase in general and administrative expenses was primarily due
to increased legal fees related to various patent and litigation matters, the
payment, in 1997, of foreign taxes related to payments received under the Meiji
agreement and costs associated with a proposed secondary offering of the
Company's common stock, which offering was withdrawn by the Company in February
1998 due to market conditions.
 
     Other income increased by 22%, to $2,175,000 in 1997 from $1,784,000 in
1996. The increase in other income was due primarily to an increase in interest
income earned on proceeds from the Company's initial public offering of Common
Stock in May 1996.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     SIBIA has financed its operations primarily through equity financings,
research contracts (generally conducted on a best efforts basis) and option,
license and royalty revenues. Since 1991, the Company has received approximately
$41,775,000 in net proceeds from the sale of Convertible Preferred Stock and
Common Stock to investors and collaborative partners and approximately
$54,979,000 in contract, license and royalty revenue. The Company is entitled to
receive additional payments under the collaborative agreements in the form of
contract revenue, milestone payments, if milestones are achieved, and royalties,
if products are commercialized. As of December 31, 1998, the Company had an
accumulated deficit of $45,093,000.
 
     The Company believes its proprietary drug discovery platform will lead to
corporate collaboration and licensing opportunities which may generate future
revenues in the form of license fees, milestone payments and/or royalties.
 
     The Company anticipates that the cash, cash equivalents and investment
securities balance of $17,187,000 as of December 31, 1998 will be sufficient to
support continued research and development of its technologies and fund other
general and administrative expenditures through 1999.
 
     The Company leases laboratory and office facilities under an agreement
expiring on December 31, 2001. The average minimum annual payment under the
lease is approximately $1,518,000, before consideration of sublease income. The
Company believes that its present facility will be adequate to conduct its
research activities through December 2001. Management believes that it should be
able to secure additional space at commercially reasonable rates, if necessary.
The Company has an option to extend its lease for an additional five years.
Since 1991, the Company has invested $5,735,000 in property and equipment.
Included within this amount is $4,651,000 of equipment under capital leases and
equipment notes payable. The net present value of obligations under such capital
leases as of December 31, 1998 was $2,075,000.
 
     The Company's future capital needs will be dependent upon many factors,
including progress in its research and development activities, the magnitude and
scope of these activities, progress with pre-clinical and
 
                                       29
<PAGE>   32
 
clinical trials, the cost of preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims and other intellectual property rights,
competing technological and market developments, changes in or terminations of
existing collaborative arrangements, the establishment of additional licensing
and/or collaborative arrangements, and the cost of manufacturing scale-up and
development of marketing activities, if undertaken by the Company. The Company
intends to seek additional funding through research and development
relationships with suitable corporate collaborators or through public or private
financing. There can be no assurance that the Company will be successful in its
efforts to collaborate with additional partners or that additional financing
from other sources will be available on favorable terms, if at all.
 
     Payments under existing collaborative agreements and the Company's current
cash reserves will be insufficient to fund the Company's operations through the
completion of any clinical trials and commercialization of its first product, if
developed. Although the Company will seek to obtain additional funds through
public or private equity or debt financings, collaborative or other arrangements
with corporate partners or from other sources, there can be no assurance that
additional financing will be available or, if available, that it will be
available on acceptable terms. If additional funds are raised by issuing equity
securities, further dilution to then existing stockholders would result. If
adequate funds are not available, the Company may be required to curtail
significantly or eliminate one or more of its research, discovery or development
programs or to obtain funds through additional arrangements with corporate
partners or others which may require the Company to relinquish rights to certain
of its technologies or product candidates that the Company would not otherwise
relinquish, which could have a material adverse effect on the Company's
business.
 
NET OPERATING LOSSES
 
     As of December 31, 1998, the Company had available net operating loss
carryforwards for federal and state income tax purposes of approximately
$44,335,000 and $18,972,000, respectively, which expire beginning in 2006 and
2002, respectively. As of December 31, 1998, the Company had federal and state
tax credits for research activities totaling approximately $2,210,000 and
$814,000, respectively, which are available to offset future income taxes and
expire beginning in 2004 and 2000, respectively. The Company's ability to
utilize net operating loss carryforwards and tax credits is subject to
limitations as set forth in applicable federal and state tax laws. As specified
in the Internal Revenue Code, an ownership change of more than 50% by a
combination of the Company's significant stockholders during any three-year
period would result in certain limitations on the Company's ability to utilize
its net operating loss and tax credit carryforwards.
 
YEAR 2000
 
     As many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, they may be unable to
process accurately certain data before, during or after the year 2000. As a
result, internal systems of the Company and its suppliers and vendors are at
risk for possible miscalculations or systems failures causing disruptions in
their business operations. This is commonly known as the Year 2000 ("Y2K")
issue.
 
     The Company has formed a Y2K Compliance Committee ("Y2K Committee"), with
representation from each major functional area within the organization that has
been charged with implementing the Company's Y2K Compliance Program ("Y2K
Program"). The Y2K Program has been designed to identify those issues (both
internal and external) that would cause material interruption to the Company's
"business as usual" and consists of the following phases: (1) identification of
all Y2K issues; (2) assigning priorities to identified items; (3) assessing the
Y2K compliance of items determined to be material to the Company; (4) repairing
or replacing items that are determined to be material to the Company; (5)
testing material items; and (6) designing contingency and business continuation
plans.
 
     Currently, the Company has completed the identification, assignment and
assessment phases for all material Y2K issues. The repair or replacement,
testing and contingency planning phases are currently underway with various
expected completion dates through mid-1999.
 
     No material costs have been incurred to date in the Company's effort to
address its Y2K issues and the Company does not anticipate the amounts to become
material in the future.
                                       30
<PAGE>   33
 
     The failure to correct a material Y2K issue could result in an interruption
in, or a failure of the Company's business as usual. Due to the general
uncertainty inherent in the Y2K issue, resulting in part from the uncertainty of
the Y2K readiness of third-party suppliers and service providers, the Company is
unable to determine at this time whether the consequences of Y2K failures will
have a material impact on the Company's results of operations, liquidity and
financial condition. The Company's Y2K program is expected to significantly
reduce the Company's level of uncertainty about the Y2K issue and, in
particular, about the Y2K readiness of its suppliers and service providers. The
Company believes that with the completion of the Y2K program as scheduled, the
possibility of significant interruptions of normal operations will be greatly
reduced.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     The Company's exposure to market-rate risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company employs
established policies and procedures to manage its exposure to fluctuations in
interest rates. The Company places its investments with high quality issuers
and, by policy, limits the amount of credit exposure to any one issuer and does
not use derivative financial instruments in its investment portfolio. The
Company maintains an investment portfolio of various issuers, types and
maturities, which consist mainly of fixed rate financial instruments. These
securities are classified as available-for-sale and, consequently, are recorded
on the balance sheet at fair value with unrealized gains or losses reported as a
separate component in stockholders' equity. At any time, sharp changes in
interest rates can affect the fair value of the investment portfolio and its
interest earnings. Currently, the Company does not hedge these interest rate
exposures.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The financial statements and supplementary data of the Company required by
this item are filed as exhibits hereto, are listed under Item 14, and are
incorporated herein by reference.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information required by this item is incorporated by reference to the
information under the caption "Election of Directors" contained in the Company's
definitive Proxy Statement to be filed with the Commission pursuant to
Regulation 14A in connection with the Company's 1999 Annual Meeting of
Stockholders to be held on May 26, 1999 (the "Proxy Statement").
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The information required by this item is incorporated by reference to the
information under the caption "Compensation of Executive Officers" contained in
the Proxy Statement.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" contained in the Proxy
Statement.
 
                                       31
<PAGE>   34
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a) (1)FINANCIAL STATEMENTS
 
       Index to financial statements appears on page F-1.
 
    (2)FINANCIAL STATEMENT SCHEDULES
 
       None required.
 
    (3)EXHIBITS
 
       See paragraph (c) below.
 
(b)     REPORTS ON FORM 8-K
 
        Not applicable
 
(c)     EXHIBITS
 
<TABLE>
<CAPTION>
        EXHIBIT
        NUMBER                      DESCRIPTION OF DOCUMENT
        -------                     -----------------------
        <S>       <C>
         3.1      Amended and Restated Certificate of Incorporation of the
                  Registrant.(4)
         3.2      Amended and Restated Bylaws of the Registrant.(4)
         3.3      Registrant's Certificate of Designation of Series A Junior
                  Participating Preferred Stock.(2)
         4.1      Reference is made to Exhibits 3.1, 3.2 and 3.3.
         4.2      Specimen stock certificate.(1)
        10.1      Form of Indemnification Agreement entered into between
                  Registrant and its directors and officers.(1)(5)
        10.2      Registrant's 1992 Stock Option and Restricted Stock Plan, as
                  amended (the "1992 Option Plan").(4)(5)
        10.3      Form of Incentive Stock Option Agreement under the 1992
                  Option Plan.(1)(5)
        10.4      Form of Nonstatutory Stock Option Agreement under the 1992
                  Option Plan.(1)(5)
        10.5      Registrant's 1996 Equity Incentive Plan, as amended (the
                  "1996 Equity Plan").(4)(5)
        10.6      Form of Incentive Stock Option Agreement under the 1996
                  Equity Plan.(1)(5)
        10.7      Form of Nonstatutory Stock Option Agreement under the 1996
                  Equity Plan.(1)(5)
        10.8      Registrant's 1996 Non-Employee Directors' Stock Option Plan,
                  as amended (the "Non-Employee Directors' Option
                  Plan").(4)(5)
        10.9      Form of Nonstatutory Stock Option Agreement under the
                  Non-Employee Directors' Option Plan.(1)(5)
        10.10     Registrant's Employee Stock Purchase Plan.(1)(5)
        10.11     Registrant's Management Change of Control Plan, as amended
                  (the "Change of Control Plan").(5)
        10.12     Form of Nonqualified Stock Option Agreement under the Change
                  of Control Plan.(1)(5)
        10.13     Lease Agreement dated April 7, 1989 between Registrant and
                  Regency Associates Limited, as subsequently amended on March
                  1, 1993, and July 1, 1995.(1)
        10.14     Equipment Lease Line Agreement dated June 30, 1992 between
                  Registrant and GE Capital, as amended.(1)
</TABLE>
 
                                       32
<PAGE>   35
 
<TABLE>
<CAPTION>
        EXHIBIT
        NUMBER                      DESCRIPTION OF DOCUMENT
        -------                     -----------------------
        <S>       <C>
        10.15     Investment Agreement dated August 10, 1995 between
                  Registrant and Bristol-Myers Squibb Company.(1)
        10.16     Collaborative Research and License Agreement dated August
                  10, 1995 between Registrant and Bristol-Myers Squibb
                  Company.(1)
        10.17     Stockholders Agreement dated as of October 1, 1991, by and
                  among Registrant, Phillips Petroleum Company, The Salk
                  Institute for Biological Studies, Skandigen AB and the
                  Stockholders of Protease Corporation.(1)
        10.18     License Agreement dated March 8, 1988 between Registrant and
                  The Salk Institute for Biological Studies, as amended by
                  that certain First Amendment to License Agreement dated
                  March 10, 1996.(1)
        10.19     License Agreement dated December 15, 1990 between Registrant
                  and The Salk Institute for Biological Studies, as amended by
                  that certain First Amendment to License Agreement dated
                  March 10, 1996.(1)
        10.20     Stock Purchase and Stockholders Agreement dated April 11,
                  1988 among Registrant, Phillips Petroleum Company, The Salk
                  Institute for Biological Studies and Skandigen AB, as
                  amended by that certain Amendment to Stock Purchase and
                  Shareholders Agreement dated April 12, 1990.(1)
        10.21     Agreement dated December 20, 1991 between Registrant,
                  Phillips Petroleum Company, The Salk Institute for
                  Biological Studies and Skandigen AB.(1)
        10.22     License Agreement dated December 20, 1991 between Registrant
                  and Phillips Petroleum Company.(1)
        10.23     Amended and Restated Research and Development and License
                  Agreement dated March 20, 1996 between Registrant and
                  CIBA-GEIGY Limited.(1)
        10.24     Stock Purchase Agreement dated September 15, 1992 between
                  Registrant and CIBA-GEIGY Limited.(1)
        10.25     Subscription Agreement dated April 11, 1994 between
                  Registrant and CIBA-GEIGY Limited.(1)
        10.26     Stock Purchase Agreement dated March 20, 1996 between
                  Registrant and CIBA-GEIGY Limited.(1)
        10.27     Agreement dated May 1, 1992 between Registrant and Eli Lilly
                  and Company, as amended and extended by that certain
                  Extension Agreement dated May 1, 1995.(1)
        10.28     Stock Purchase Agreement dated May 7, 1992 between
                  Registrant and Eli Lilly and Company.(1)
        10.29     Option and License Agreement dated April 30, 1995 between
                  Registrant and Eli Lilly and Company.(1)
        10.30     License Agreement dated March 5, 1992 between Registrant and
                  Cephalon, Inc., as amended by that certain Letter dated
                  March 22, 1995.(1)
        10.31     Patent License Agreement dated June 21, 1993 between
                  Registrant and Affymax Technologies, N.V., as amended by
                  that certain Letter dated July 15, 1993.(1)
        10.32     Agreement dated October 1, 1993 between Registrant and
                  Hafslund Nycomed Pharma AG.(1)
        10.33     Development and License Agreement dated February 28, 1997
                  between Registrant and Meiji Seika Kaisha, Ltd.(3)
        10.34     Further Extension Agreement dated November 1, 1996 between
                  Registrant and Eli Lilly and Company.(3)
</TABLE>
 
                                       33
<PAGE>   36
 
<TABLE>
<CAPTION>
        EXHIBIT
        NUMBER                      DESCRIPTION OF DOCUMENT
        -------                     -----------------------
        <S>       <C>
        10.35     Third Amendment to Lease dated December 31, 1996 between
                  Registrant and Regency Properties, L.P.(3)
        10.36     Equipment Lease Line Agreement dated March 4, 1997 between
                  Registrant and G.E. Capital.(3)
        10.37     Rights Agreement dated as of March 17, 1997 among Registrant
                  and ChaseMellon Shareholder Services, L.L.C.(2)
        10.38     Specimen Rights Certificate.(2)
        10.39     Employment Agreement dated February 23, 1998 between
                  Registrant and Jeffrey F. McKelvy, Ph.D.(5)(6)
        10.40     Employment Agreement dated June 4, 1998 between Registrant
                  and Michael M. Harpold, Ph.D.(5)(7)
        10.41     Employment Agreement dated October 27, 1998 between
                  Registrant and Stephen F. Keane.(5)
        23.1      Consent of PricewaterhouseCoopers LLP.
        24.1      Power of Attorney. Reference is made to page 35.
        27.1      Financial Data Schedule.
</TABLE>
 
---------------
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
    333-2586) or amendments thereto and incorporated herein by reference.
 
(2) Filed as an exhibit to Registrant's report on Form 8-K filed with the
    Commission on March 31, 1997 and incorporated herein by reference.
 
(3) Filed as an exhibit to Registrant's annual report on Form 10-K for the year
    ended December 31, 1996 and incorporated herein by reference.
 
(4) Filed as an exhibit to Registrant's quarterly report on Form 10-Q for the
    quarter ended June 30, 1997 and incorporated herein by reference.
 
(5) Constitutes a "management contract or compensatory plan or arrangement,"
    pursuant to Item 14(a)(3)
 
(6) Filed as an exhibit to Registrant's quarterly report on Form 10-Q for the
    quarter ended March 31, 1998 and incorporated herein by reference.
 
(7) Filed as an exhibit to Registrant's quarterly report on Form 10-Q for the
    quarter ended June 30, 1998 and incorporated herein by reference.
 
                                       34
<PAGE>   37
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                          SIBIA NEUROSCIENCES, INC.
 
                                          By:      /s/ THOMAS A. REED
                                            ------------------------------------
                                                      Thomas A. Reed,
                                                      Vice President,
                                                Finance/Administration, & CFO
 
Date: March 30, 1999
 
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William T. Comer and Thomas A. Reed, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming that all said
attorneys-in-fact and agents, or any of them or their or his substitute or
resubstitute, may lawfully do or cause to be done by virtue hereof.
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
<C>                                                    <C>                              <S>
                /s/ WILLIAM T. COMER                     President, Chief Executive     March 30, 1999
-----------------------------------------------------              Officer
               William T. Comer, Ph.D.                          and Director
                                                        (Principal Executive Officer)
 
                 /s/ THOMAS A. REED                            Vice President,          March 30, 1999
-----------------------------------------------------    Finance/Administration and
                   Thomas A. Reed                          Chief Financial Officer
                                                          (Principal Financial and
                                                             Accounting Officer)
 
                /s/ WILLIAM R. MILLER                       Chairman of the Board       March 30, 1999
-----------------------------------------------------
                  William R. Miller
 
                /s/ STANLEY T. CROOKE                             Director              March 30, 1999
-----------------------------------------------------
           Stanley T. Crooke, M.D., Ph.D.
 
                  /s/ GUNNAR EKDAHL                               Director              March 30, 1999
-----------------------------------------------------
                    Gunnar Ekdahl
 
               /s/ JEFFREY F. MCKELVY                             Director              March 30, 1999
-----------------------------------------------------
              Jeffrey F. McKelvy, Ph.D.
 
             /s/ FREDERICK B. RENTSCHLER                          Director              March 30, 1999
-----------------------------------------------------
               Frederick B. Rentschler
 
                 /s/ JAMES D. WATSON                              Director              March 30, 1999
-----------------------------------------------------
               James D. Watson, Ph.D.
</TABLE>
 
                                       35
<PAGE>   38
 
                           SIBIA NEUROSCIENCES, INC.
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Accountants...........................  F-2
Balance Sheet as of December 31, 1998 and 1997..............  F-3
Statement of Operations for the years ended December 31,
  1998, 1997 and 1996.......................................  F-4
Statement of Stockholders' Equity for the years ended
  December 31, 1998, 1997 and 1996..........................  F-5
Statement of Cash Flows for the years ended December 31,
  1998, 1997 and 1996.......................................  F-6
Notes to Financial Statements...............................  F-7
</TABLE>
 
                                       F-1
<PAGE>   39
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and
Stockholders of SIBIA Neurosciences, Inc.
 
     In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of SIBIA Neurosciences, Inc. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
 
  /s/ PRICEWATERHOUSECOOPERS LLP
--------------------------------------
      PRICEWATERHOUSECOOPERS LLP
 
San Diego, California
February 19, 1999
 
                                       F-2
<PAGE>   40
 
                           SIBIA NEUROSCIENCES, INC.
 
                                 BALANCE SHEET
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                              ----------------------------
                                                                  1998            1997
                                                              ------------    ------------
<S>                                                           <C>             <C>
Current assets:
  Cash and cash equivalents.................................  $  4,595,000    $  4,972,000
  Investment securities.....................................    12,592,000      28,375,000
  Contracts and accounts receivable.........................       501,000         588,000
  Prepaid expenses and other current assets.................       683,000         550,000
                                                              ------------    ------------
          Total current assets..............................    18,371,000      34,485,000
Property and equipment, net.................................     2,638,000       1,599,000
Other assets................................................       190,000          96,000
                                                              ------------    ------------
                                                              $ 21,199,000    $ 36,180,000
                                                              ============    ============
 
                           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $  2,567,000    $  1,611,000
  Accrued liabilities.......................................     2,142,000       1,660,000
                                                              ------------    ------------
          Total current liabilities.........................     4,709,000       3,271,000
Long-term debt, less current portion........................     1,350,000         695,000
Commitments and contingencies (Note 9)
Stockholders' equity:
  Preferred Stock, $.001 par value; 5,000,000 shares
     authorized
  Common Stock, $.001 par value; 25,000,000 shares
     authorized; 9,515,588 and 9,338,744 shares issued and
     outstanding at December 31, 1998 and 1997,
     respectively...........................................        10,000           9,000
  Additional paid-in capital................................    60,206,000      59,946,000
  Deferred compensation.....................................      (273,000)       (580,000)
  Notes receivable from stockholders........................       (83,000)        (87,000)
  Net unrealized gain on investment securities
     available-for-sale.....................................       373,000       2,212,000
  Accumulated deficit.......................................   (45,093,000)    (29,286,000)
                                                              ------------    ------------
          Total stockholders' equity........................    15,140,000      32,214,000
                                                              ------------    ------------
                                                              $ 21,199,000    $ 36,180,000
                                                              ============    ============
</TABLE>
 
                See accompanying notes to financial statements.
 
                                       F-3
<PAGE>   41
 
                           SIBIA NEUROSCIENCES, INC.
 
                 STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
 
<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                     ------------------------------------------
                                                         1998           1997           1996
                                                     ------------    -----------    -----------
<S>                                                  <C>             <C>            <C>
Revenue:
  Contract.........................................  $  6,613,000    $ 7,537,000    $ 8,215,000
  License and royalty..............................       430,000      3,660,000        266,000
                                                     ------------    -----------    -----------
          Total revenue (Note 1)...................     7,043,000     11,197,000      8,481,000
                                                     ------------    -----------    -----------
Expenses:
  Research and development.........................    18,247,000     15,819,000     12,268,000
  General and administrative.......................     7,340,000      5,146,000      3,561,000
                                                     ------------    -----------    -----------
          Total expenses...........................    25,587,000     20,965,000     15,829,000
                                                     ------------    -----------    -----------
                                                      (18,544,000)    (9,768,000)    (7,348,000)
                                                     ------------    -----------    -----------
Other income (expense):
  Interest income..................................     1,523,000      2,231,000      1,834,000
  Interest expense.................................       (91,000)       (59,000)       (68,000)
  Gain on sale of investment (Note 5)..............     1,305,000
  Other............................................                        3,000         18,000
                                                     ------------    -----------    -----------
                                                        2,737,000      2,175,000      1,784,000
                                                     ------------    -----------    -----------
Net loss...........................................   (15,807,000)    (7,593,000)    (5,564,000)
Other comprehensive income -- unrealized holding
  gains (losses) arising during period.............      (534,000)     2,023,000        110,000
Less: reclassification adjustment for gains
  included in net loss.............................     1,305,000
                                                     ------------    -----------    -----------
Comprehensive loss.................................  $(15,036,000)   $(5,570,000)   $(5,454,000)
                                                     ============    ===========    ===========
Basic and diluted net loss per common share........  $      (1.68)   $     (0.82)   $     (0.73)
                                                     ============    ===========    ===========
Shares used in computing basic and diluted net loss
  per common share.................................     9,421,057      9,247,521      7,596,380
                                                     ============    ===========    ===========
</TABLE>
 
                See accompanying notes to financial statements.
 
                                       F-4
<PAGE>   42
 
                           SIBIA NEUROSCIENCES, INC.
 
                       STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
 
                                              SERIES A, B AND C
                                                 CONVERTIBLE                                                              NOTES
                                               PREFERRED STOCK          COMMON STOCK                                    RECEIVABLE
                                            ---------------------   ---------------------   ADDITIONAL     DEFERRED        FROM
                                              SHARES                  SHARES                  PAID-IN       COMPEN-       STOCK-
                                            OUTSTANDING   AMOUNT    OUTSTANDING   AMOUNT      CAPITAL       SATION       HOLDERS
                                            -----------   -------   -----------   -------   -----------   -----------   ----------
<S>                                         <C>           <C>       <C>           <C>       <C>           <C>           <C>
BALANCE AS OF DECEMBER 31, 1995...........    476,211                4,899,884    $ 5,000   $31,869,000   $  (635,000)  $ (82,000)
Issuance of Common Stock..................                           2,554,545      3,000    25,842,000
Stock option compensation expense.........                                                    1,167,000      (404,000)
Exercise of stock options.................    120,200                  288,765                  815,000                  (593,000)
Stock purchase plan.......................                               9,408                   54,000
Payments on notes receivable..............                                                                                 35,000
Conversion of Preferred Stock.............   (596,411)               1,401,566      1,000        (1,000)
Net increase in unrealized gain on
  investment securities
  available-for-sale......................
Cancellation of partial shares............                                 (11)
Net loss..................................
                                             --------     -------    ---------    -------   -----------   -----------   ---------
BALANCE AS OF DECEMBER 31, 1996...........                           9,154,157      9,000    59,746,000    (1,039,000)   (640,000)
Stock option compensation expense.........                                                     (109,000)      459,000
Exercise of stock options.................                             162,766                  174,000
Stock purchase plan.......................                              21,821                  135,000
Payments on notes receivable..............                                                                                553,000
Net increase in unrealized gain on
  investment securities
  available-for-sale......................
Net loss..................................
                                             --------     -------    ---------    -------   -----------   -----------   ---------
BALANCE AS OF DECEMBER 31, 1997...........                           9,338,744      9,000    59,946,000      (580,000)    (87,000)
Stock option compensation expense.........                                                      (60,000)      399,000
Issuance of stock options.................                                                       92,000       (92,000)
Exercise of stock options.................                             144,442      1,000        94,000
Stock purchase plan.......................                              32,402                  134,000
Payments on notes receivable..............                                                                                  4,000
Net increase (decrease) in unrealized gain
  on investment securities
  available-for-sale......................
Net loss..................................
                                             --------     -------    ---------    -------   -----------   -----------   ---------
BALANCE AS OF DECEMBER 31, 1998...........                           9,515,588    $10,000   $60,206,000   $  (273,000)  $ (83,000)
                                             ========     =======    =========    =======   ===========   ===========   =========
 
<CAPTION>
                                                 NET
                                             UNREALIZED
                                             GAIN (LOSS)
                                            ON INVESTMENT
                                             SECURITIES                        TOTAL
                                             AVAILABLE-     ACCUMULATED    STOCKHOLDERS'
                                              FOR-SALE        DEFICIT         EQUITY
                                            -------------   ------------   -------------
<S>                                         <C>             <C>            <C>
BALANCE AS OF DECEMBER 31, 1995...........   $    79,000    $(16,129,000)  $ 15,107,000
Issuance of Common Stock..................                                   25,845,000
Stock option compensation expense.........                                      763,000
Exercise of stock options.................                                      222,000
Stock purchase plan.......................                                       54,000
Payments on notes receivable..............                                       35,000
Conversion of Preferred Stock.............
Net increase in unrealized gain on
  investment securities
  available-for-sale......................       110,000                        110,000
Cancellation of partial shares............
Net loss..................................                   (5,564,000)     (5,564,000)
                                             -----------    ------------   ------------
BALANCE AS OF DECEMBER 31, 1996...........       189,000    (21,693,000)     36,572,000
Stock option compensation expense.........                                      350,000
Exercise of stock options.................                                      174,000
Stock purchase plan.......................                                      135,000
Payments on notes receivable..............                                      553,000
Net increase in unrealized gain on
  investment securities
  available-for-sale......................     2,023,000                      2,023,000
Net loss..................................                   (7,593,000)     (7,593,000)
                                             -----------    ------------   ------------
BALANCE AS OF DECEMBER 31, 1997...........     2,212,000    (29,286,000)     32,214,000
Stock option compensation expense.........                                      339,000
Issuance of stock options.................
Exercise of stock options.................                                       95,000
Stock purchase plan.......................                                      134,000
Payments on notes receivable..............                                        4,000
Net increase (decrease) in unrealized gain
  on investment securities
  available-for-sale......................    (1,839,000)                    (1,839,000)
Net loss..................................                  (15,807,000)    (15,807,000)
                                             -----------    ------------   ------------
BALANCE AS OF DECEMBER 31, 1998...........   $   373,000    $(45,093,000)  $ 15,140,000
                                             ===========    ============   ============
</TABLE>
 
                See accompanying notes to financial statements.
 
                                       F-5
<PAGE>   43
 
                           SIBIA NEUROSCIENCES, INC.
 
                            STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31,
                                                   --------------------------------------------
                                                       1998            1997            1996
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Cash flows from operating activities:
  Net loss.......................................  $(15,807,000)   $ (7,593,000)   $ (5,564,000)
  Adjustments to reconcile net loss to net cash
     used by operating activities:
     Depreciation and amortization...............       858,000         667,000         598,000
     Compensation from issuance of common stock
       options...................................       339,000         350,000         763,000
     Gain on disposal of property................                        (3,000)         (1,000)
     Gain on sale of investment..................    (1,305,000)
     Net amortization of premium and discount on
       investment securities.....................       (32,000)       (127,000)       (447,000)
  Increase (decrease) in cash resulting from
     changes in:
     Contracts and accounts receivable...........        87,000        (520,000)        (33,000)
     Prepaid expenses and other assets...........      (227,000)        488,000        (813,000)
     Accounts payable and accrued liabilities....     1,242,000         764,000         237,000
     Deferred revenue............................                      (431,000)        181,000
                                                   ------------    ------------    ------------
          Net cash used by operating
            activities...........................   (14,845,000)     (6,405,000)     (5,079,000)
                                                   ------------    ------------    ------------
Cash flows from investing activities:
  Maturities of investment securities
     held-to-maturity............................                                    13,992,000
  Purchase of investment securities
     available-for-sale..........................    (7,232,000)    (13,383,000)    (42,624,000)
  Maturities and sales of investment securities
     available-for-sale..........................    22,452,000      23,181,000       7,300,000
  Principal payments received on investment
     securities available-for-sale...............        61,000          29,000          51,000
  Proceeds from disposal of property and
     equipment...................................                         4,000           5,000
  Acquisition of property and equipment..........      (332,000)       (172,000)       (182,000)
                                                   ------------    ------------    ------------
          Net cash provided (used) by investing
            activities...........................    14,949,000       9,659,000     (21,458,000)
                                                   ------------    ------------    ------------
Cash flows from financing activities:
  Payments on notes receivable from
     stockholders................................         4,000         553,000          35,000
  Proceeds from issuance of stock................       229,000         309,000      26,121,000
  Principal payments on capital lease
     obligations.................................      (714,000)       (556,000)       (481,000)
                                                   ------------    ------------    ------------
          Net cash provided (used) by financing
            activities...........................      (481,000)        306,000      25,675,000
                                                   ------------    ------------    ------------
Net increase (decrease) in cash and cash
  equivalents....................................      (377,000)      3,560,000        (862,000)
Cash and cash equivalents at beginning of year...     4,972,000       1,412,000       2,274,000
                                                   ------------    ------------    ------------
Cash and cash equivalents at end of year.........  $  4,595,000    $  4,972,000    $  1,412,000
                                                   ============    ============    ============
Supplemental Information:
  Income taxes paid -- Note 6
  Interest paid -- Note 9
  Equipment under capital leases -- Note 9
</TABLE>
 
                See accompanying notes to financial statements.
                                       F-6
<PAGE>   44
 
                           SIBIA NEUROSCIENCES, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  The Company
 
     SIBIA Neurosciences, Inc. (the "Company" or "SIBIA") was founded by The
Salk Institute for Biological Studies ("The Salk Institute") and incorporated in
Delaware in 1981. SIBIA is engaged in the discovery and development of novel
small molecule therapeutics for the treatment of nervous system disorders. The
Company is pursuing a molecular target-based approach to drug discovery, and its
targets have been selected based on their known or postulated roles in molecular
processes critical to normal and pathologic neuronal function. The Company's
focus is on the development of therapeutics for the treatment of
neurodegenerative, neuropsychiatric and neurological disorders, many of which
have large patient populations and represent critical unmet medical needs. The
Company has been funded to date principally through equity financings, research
contracts (generally conducted on a best efforts basis), and option, license and
royalty revenues.
 
  Significant Ownership
 
     The Salk Institute owned 20%, 21% and 22% of the Company's outstanding
Common Stock as of December 31, 1998, 1997, and 1996, respectively. Skandigen AB
owned 10%, 11% and 11% of the Company's outstanding Common Stock as of December
31, 1998, 1997, and 1996, respectively. Novartis AG, formerly CIBA-GEIGY
Limited, owned 11% of the Company's outstanding Common Stock as of December 31,
1998, 1997 and 1996.
 
  Use of Estimates
 
     The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
  Fair Value of Financial Instruments
 
     It is management's belief that the carrying amounts shown for the Company's
financial instruments, including cash, investment securities, contracts and
accounts receivable, and accounts payable and accrued liabilities, are
reasonable estimates of their fair value (Notes 2 and 3).
 
  Concentration of Risk
 
     Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents and
investment securities. No significant losses have been incurred related to these
investments.
 
     During the years ended December 31, 1998, 1997, and 1996, the Company had
three, four and three collaborative research agreements that accounted for 93%,
95% and 97%, respectively, of total revenue (Note 4).
 
  Collaborative Agreements
 
     The Company enters into collaborative agreements from time to time with
third parties. Such agreements may call for an equity investment by the
collaborative partner as well as a commitment for current and future research
funding in exchange for best efforts research to be provided by the Company. The
collaborative agreements may also provide for license fees, milestone payments
and royalties. Such agreements define the
 
                                       F-7
<PAGE>   45
                           SIBIA NEUROSCIENCES, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
rights of each party related to the results of such research. Amounts related to
research funding and license and royalty rights are recognized in accordance
with the specific terms of each collaborative agreement to the extent the
Company determines that such recognition is consistent with the substance of the
agreement (Note 4).
 
  Revenue Recognition
 
     Contract revenue is recognized as the research is performed using the
percentage-of-completion method of accounting, primarily based on contract costs
incurred to date compared with total estimated costs at completion. Contract
revenue related to milestones is recognized upon the achievement of the related
milestone and when collection is probable. License revenue is recognized when
earned as generally evidenced by certain factors including: receipt of such
fees, satisfaction of any performance obligations and the non-refundable nature
of such fees. Royalty revenue is recognized when earned and collection is
probable.
 
     Total revenue for the years ended December 31, 1998, 1997, and 1996,
includes related party revenue of $2,381,000, $3,496,000 and $6,606,000,
respectively.
 
  Research and Development Costs
 
     Research and development costs are expensed as incurred and include costs
associated with collaborative agreements. These costs consist of direct and
indirect internal costs related to specific projects as well as fees paid to
other entities which conduct certain research activities on behalf of the
Company.
 
  Cash Equivalents
 
     Cash equivalents are liquid investments purchased with an original maturity
of three months or less. As of December 31, 1998, $4,562,000 of the $4,595,000
total cash and cash equivalents was invested in money market funds. As of
December 31, 1997, the cash and cash equivalents balance of $4,972,000 was
primarily made up of $2,317,000 in money market funds and $2,474,000 in
commercial paper.
 
  Investment Securities
 
     Management determines the appropriate classification of its investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. The Company has classified its investment securities as
"available-for-sale" or "held-to-maturity." Available-for-sale securities are
recorded at fair value with the corresponding unrealized gain or loss reflected
as a component of stockholders' equity. Held-to-maturity securities are recorded
at amortized cost. Actual gains or losses, if any, on investment securities are
reflected in the statement of operations when the underlying securities are
sold.
 
  Property and Equipment
 
     Property and equipment is recorded at cost and depreciated over estimated
useful lives of 4 to 8 years using the straight-line method. Property and
equipment acquired under capital leases is amortized over the shorter of the
useful life or the related lease terms using the straight-line method.
 
  Long-Lived Assets
 
     The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss would be recognized when
the sum of the expected future net cash flows is less than the carrying amount
of the asset. No such impairment losses have been recorded by the Company.
 
                                       F-8
<PAGE>   46
                           SIBIA NEUROSCIENCES, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
  Income Taxes
 
     Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
established for the expected future consequences resulting from the differences
in the financial reporting and tax bases of assets and liabilities. The Company
establishes a valuation allowance, if necessary, to reflect the likelihood of
realization of net deferred tax assets. Deferred income tax expense is the
change during the year in the deferred income tax asset or liability.
 
  Net Loss Per Share
 
     The Company applies Statement of Financial Accounting Standards No. 128 and
related Interpretations in computing its net loss per share. Basic net loss per
common share is computed by dividing net loss by the weighted average number of
shares of Common Stock outstanding. Diluted EPS is computed similarly to basic
EPS, except that the weighted average number of shares of Common Stock
outstanding are increased to include the number of additional shares of Common
Stock that would have been outstanding if dilutive potential common shares had
been issued.
 
  Accounting for Stock-Based Compensation
 
     The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation. Compensation
expense, as appropriate, has been recorded related to option grants and is being
amortized to operations over the related vesting period. No compensation expense
has been recognized for its stock purchase plan.
 
  Adoption of New Accounting Standard
 
     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
pronouncement, which was adopted by the Company effective January 1, 1998,
requires the presentation of a statement of comprehensive income. Comprehensive
income is defined as the change in equity of a business enterprise during a
period resulting from transactions and other events and circumstances from
nonowner sources. Comprehensive loss for the Company, in addition to net loss,
includes unrealized gains and losses on marketable securities available for
sale, currently recorded in stockholders' equity.
 
  Reclassifications
 
     Certain reclassifications have been made to the 1997 amounts to conform to
the presentation used in 1998.
 
                                       F-9
<PAGE>   47
                           SIBIA NEUROSCIENCES, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2. INVESTMENT SECURITIES
 
     The following is a summary of all of the Company's investment securities.
All of the Company's securities are classified as available-for-sale.
Determination of estimated fair value is based on quoted market prices:
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31, 1998
                                           ------------------------------------------------------
                                                                           GROSS         GROSS
                                                           ESTIMATED     UNREALIZED    UNREALIZED
                                              COST        FAIR VALUE       GAINS         LOSSES
                                           -----------    -----------    ----------    ----------
<S>                                        <C>            <C>            <C>           <C>
U.S. Treasury obligations and obligations
  of U.S. government agencies............  $ 5,004,000    $ 5,027,000    $   23,000     $
                                           ===========    ===========    ==========     =======
U.S. corporate debt securities...........  $ 7,002,000    $ 7,007,000    $    5,000     $
                                           ===========    ===========    ==========     =======
U.S. corporate equity securities.........  $              $   289,000    $  289,000     $
                                           ===========    ===========    ==========     =======
Mortgage-backed securities...............  $   214,000    $   269,000    $   61,000     $ 6,000
                                           ===========    ===========    ==========     =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31, 1997
                                           ------------------------------------------------------
                                                                           GROSS         GROSS
                                                           ESTIMATED     UNREALIZED    UNREALIZED
                                              COST        FAIR VALUE       GAINS         LOSSES
                                           -----------    -----------    ----------    ----------
<S>                                        <C>            <C>            <C>           <C>
U.S. Treasury obligations and obligations
  of U.S. government agencies............  $21,859,000    $21,923,000    $   67,000     $ 3,000
                                           ===========    ===========    ==========     =======
U.S. corporate debt securities...........  $ 4,033,000    $ 4,013,000    $              $20,000
                                           ===========    ===========    ==========     =======
U.S. corporate equity securities.........  $     1,000    $ 2,100,000    $2,099,000     $
                                           ===========    ===========    ==========     =======
Mortgage-backed securities...............  $   271,000    $   339,000    $   73,000     $ 5,000
                                           ===========    ===========    ==========     =======
</TABLE>
 
     The amortized cost and estimated fair value of the debt securities as of
December 31, 1998 by contractual maturity are shown below. Actual maturities may
differ from the contractual maturities as the issuers of the securities may have
the right to call the obligation.
 
<TABLE>
<CAPTION>
                                                                            ESTIMATED
                                                               COST        FAIR VALUE
                                                            -----------    -----------
<S>                                                         <C>            <C>
Due in one year or less...................................  $12,006,000    $12,034,000
                                                            ===========    ===========
Due after ten years.......................................  $   214,000    $   269,000
                                                            ===========    ===========
</TABLE>
 
                                      F-10
<PAGE>   48
                           SIBIA NEUROSCIENCES, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            --------------------------
                                                               1998           1997
                                                            -----------    -----------
<S>                                                         <C>            <C>
PROPERTY AND EQUIPMENT
  Lab equipment...........................................  $ 6,247,000    $ 4,463,000
  Computer equipment......................................      398,000        354,000
  Other...................................................      224,000        171,000
                                                            -----------    -----------
                                                              6,869,000      4,988,000
  Accumulated depreciation and amortization...............   (4,231,000)    (3,389,000)
                                                            -----------    -----------
                                                            $ 2,638,000    $ 1,599,000
                                                            ===========    ===========
ACCRUED LIABILITIES
  Current portion of long-term debt.......................  $   725,000    $   528,000
  Accrued vacation........................................      397,000        335,000
  Accrued bonuses.........................................      657,000        531,000
  Other...................................................      363,000        266,000
                                                            -----------    -----------
                                                            $ 2,142,000    $ 1,660,000
                                                            ===========    ===========
</TABLE>
 
NOTE 4. SIGNIFICANT COLLABORATIVE AGREEMENTS
 
  Novartis AG (Formerly CIBA-GEIGY Limited)
 
     In October 1992, the Company entered into a collaborative research and
license agreement (which included research funding and a $5,000,000 equity
investment) with Novartis AG ("Novartis") to develop and utilize SIBIA's
receptor/ion channel technology in the area of excitatory amino acid receptors
("EAARs") for the discovery of drugs that interact with these molecular targets.
In March 1996, the Company executed an agreement with Novartis to extend the
term of its collaborative research funding to September 1998. In exchange for
providing a certain level of scientific research under the agreement, the
Company received payments from Novartis; additional payments may be received by
the Company upon the achievement of certain development milestones and the
Company may receive royalties in the event there are sales of products
containing a compound developed under the agreement. Pursuant to the extended
agreement, Novartis paid SIBIA $500,000 to fund certain capital expenditures and
agreed to purchase $7,500,000 of the Company's Common Stock, $5,000,000 of which
was purchased in conjunction with the initial public offering of the Company's
Common Stock and the remaining $2,500,000 of which will be purchased upon the
achievement of certain research milestones. Subsequent to completion of the
collaborative research, SIBIA retained the rights to use the program technology
for its own drug discovery efforts and may screen molecules from other sources
against EAARs and pursue development of these molecules. The Company recognized
contract revenue related to this agreement of $2,381,000, $3,496,000 and
$3,383,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
 
  Bristol-Myers Squibb Company
 
     In August 1995, the Company entered into a collaborative research and
license agreement with Bristol-Myers Squibb Company ("Bristol-Myers Squibb")
relating to the discovery and development of compounds relating to amyloid
precursor protein. In exchange for providing a certain level of scientific
research under the agreement, the Company will receive research funding payments
from Bristol-Myers Squibb for a term of four years; additional payments may be
received by the Company upon the achievement of certain development milestones.
Bristol-Myers Squibb will also pay royalties based on the level of its net sales
of products, if any,
 
                                      F-11
<PAGE>   49
                           SIBIA NEUROSCIENCES, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
developed under the agreement. The Company recognized contract revenue related
to this agreement of $3,622,000, $3,262,000 and $3,223,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
 
     Concurrent with the execution of the agreement, Bristol-Myers Squibb paid a
non-refundable $3,000,000 license fee for an exclusive commercialization license
to use certain related existing proprietary technologies and purchased 280,000
shares of the Company's Series C Convertible Preferred Stock. Bristol-Myers
Squibb also agreed to make an additional equity investment of $6,000,000 in
shares of Common Stock upon the initiation of clinical trials relating to any
product developed from the collaboration.
 
  Meiji Seika Kaisha, Ltd
 
     In February 1997, the Company entered into a development and license
agreement with Meiji Seika Kaisha, Ltd ("Meiji") for the development and
commercialization of the Company's proprietary nicotinic acetylcholine receptor
agonist, SIB-1508Y, as a treatment for Parkinson's disease and other nervous
system disorders in Japan and other Asian countries. Under the agreement, the
Company received a one-time license fee of $3,000,000 for the license of certain
technology to Meiji. In addition, the Company recognizes contract revenue and
related development costs related to certain cost sharing provisions of the
agreement and may receive development milestone payments and royalties on future
product sales, if the product is successfully commercialized in such countries.
SIBIA has retained rights to develop and commercialize SIB-1508Y outside of
Japan and certain other Asian countries, and has retained rights to manufacture
clinical supplies and commercial material worldwide. The Company recognized
contract revenue related to this agreement of $611,000 and $114,000 for the
years ended December 31, 1998 and 1997, respectively.
 
  Eli Lilly & Company
 
     In May 1992, the Company entered into a collaborative research and license
agreement with Eli Lilly & Company ("Lilly") providing for the discovery and
development of drugs which specifically interact with human neuronal calcium
channels. As part of the agreement, Lilly purchased 276,470 shares of Common
Stock. The term of the collaborative research was revised, extended and
ultimately completed in October 1997. The Company is entitled to receive
milestone payments and royalties on sales of products identified by Lilly within
a certain period of time and commercialized, and is free to develop compounds
and other technology it discovers in this area on its own or with other
partners. The Company recognized contract revenue related to this agreement of
$665,000 and $1,609,000 for the years ended December 31, 1997, and 1996,
respectively.
 
     Total costs incurred under the Company's various collaborative agreements
for the years ended December 31, 1998, 1997 and 1996, including certain
administrative costs, aggregated $5,777,000, $7,313,000, and $5,671,000,
respectively.
 
NOTE 5. SIGNIFICANT OPTION AND LICENSE AGREEMENTS
 
  The Salk Institute
 
     In 1988, SIBIA entered into a license agreement with The Salk Institute
covering a number of nAChR subunit clones. This agreement was amended in March
1996 such that the license to the issued U.S. patents and related patent
applications became an exclusive worldwide license. Pursuant to the agreement,
as amended, SIBIA is obligated to pay royalties to The Salk Institute on sales
of products resulting from The Salk Institute's nAChR technology. In addition,
the Company is required to make certain minimum annual royalty payments to The
Salk Institute beginning in 2002. Failure to pay such royalties will result in
the related license becoming non-exclusive.
 
                                      F-12
<PAGE>   50
                           SIBIA NEUROSCIENCES, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     In 1990, SIBIA entered into a three-year agreement with The Salk Institute
in the area of EAARs. This agreement provided for the support of certain
research in 1992 and 1993 at The Salk Institute by SIBIA and the transfer of
research materials and research results in the EAAR area from The Salk Institute
to SIBIA. SIBIA also received an exclusive worldwide license to certain
EAAR-related patents and patent applications held by The Salk Institute. The
agreement was amended in March 1996. Pursuant to the agreement, as amended,
SIBIA began making certain annual minimum royalty payments to The Salk Institute
beginning in 1998. Failure to pay such royalties will result in the related
license agreement becoming non-exclusive.
 
  Cephalon, Inc.
 
     In October 1991, the Company entered into a development and
option-to-license agreement with Cephalon, Inc. ("Cephalon") for certain
proprietary technology related to the development and production of recombinant
insulin-like growth factor ("IGF-1"), known as Myotrophin, on a commercial basis
for certain applications. The option-to-license was subsequently expanded to
include additional applications. All options-to-license the IGF-1 technology
were exercised and the license agreements, as executed, include a provision for
the payment of licensing fees upon the occurrence of certain development
milestones and royalties on the sales of products using licensed technology. In
1995, the Company received a non-refundable payment of $1,750,000 from Cephalon
to reduce the royalty percentage on sales of an IGF-1 product within the
neurology field.
 
  Aurora Biosciences Corporation
 
     In January 1997, the Company entered into an agreement with Aurora
Biosciences Corporation ("Aurora"). Under the agreement, the Company gave Aurora
non-exclusive rights to practice under its patents for transcription-based
assays and certain other patents related to automated drug screening. In return,
the Company received 160,000 shares of Aurora's Common Stock and non-exclusive
rights to several assay technologies, including novel reporter molecules, that
will facilitate the Company's high throughput screening and drug discovery
efforts directed to certain receptor, ion channel and enzyme targets associated
with nervous system disorders. Both parties received limited sublicensing rights
to each other's patents. In December 1997, Aurora entered into agreements with
Lilly and Merck and Company to sublicense certain of SIBIA's patents when used
in conjunction with Aurora technologies. During 1998, the Company sold 115,000
shares of Aurora Common Stock resulting in a gain of $1,305,000.
 
NOTE 6. INCOME TAXES
 
     As of December 31, 1998, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $44,335,000 and
$18,972,000 respectively, which expire beginning in 2006 and 2002, respectively.
As of December 31, 1998, the Company had federal and state tax credits for
research activities totaling approximately $2,210,000 and $814,000,
respectively, which are available to offset future income taxes and expire
beginning in 2004 and 2000, respectively.
 
     The Company's ability to utilize net operating loss carryforwards and tax
credits is subject to limitations as set forth in applicable federal and state
tax laws. As specified in the Internal Revenue Code, an ownership change of more
than 50% by a combination of the Company's significant stockholders during any
three-year period would result in certain limitations on the Company's ability
to utilize its net operating loss and credit carryforwards.
 
                                      F-13
<PAGE>   51
                           SIBIA NEUROSCIENCES, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     Deferred tax liabilities and assets are summarized as follows:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                          ----------------------------
                                                              1998            1997
                                                          ------------    ------------
<S>                                                       <C>             <C>
Deferred tax liabilities:
  Depreciation..........................................  $   (667,000)   $   (517,000)
                                                          ------------    ------------
Deferred tax assets:
  Net operating loss carryforwards......................    16,181,000      10,228,000
  Research and development credits......................     3,025,000       1,774,000
  Research and development capitalized for state tax
     purposes...........................................       391,000         708,000
  Capital lease obligations.............................       637,000         487,000
  Other.................................................       530,000         449,000
                                                          ------------    ------------
          Total deferred tax assets.....................    20,764,000      13,646,000
                                                          ------------    ------------
Net deferred tax assets.................................    20,097,000      13,129,000
Valuation allowance.....................................   (20,097,000)    (13,129,000)
                                                          ------------    ------------
Deferred taxes..........................................  $         --    $         --
                                                          ============    ============
</TABLE>
 
     As of December 31, 1998, the Company has provided a deferred tax asset
valuation allowance for net deferred tax assets which more likely than not will
not be realized based on recent and expected trends in operating results.
 
     The Company paid state franchise taxes of $25,000, $25,000 and $31,000
during 1998, 1997 and 1996, respectively.
 
NOTE 7. STOCKHOLDERS' EQUITY
 
  Share Purchase Rights Plan
 
     In March 1997, the Board of Directors of the Company designated 150,000
shares of $.001 par value Preferred Stock as Series A Junior Participating
Preferred Stock and adopted a Share Purchase Rights Plan pursuant to which
preferred share purchase rights (the "Rights") were distributed for each share
of Common Stock of the Company held as of the close of business on April 2,
1997. Each Right, under certain circumstances, entitles the holder thereof to
purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock (each a "Preferred Share") at an exercise price of
$60.00 per one one-hundredth of a Preferred Share. Each one one-hundredth of a
share of Preferred Share has rights, preferences and privileges equal to the
value of a share of Common Stock. The Rights will expire on March 17, 2007,
unless the Rights are earlier redeemed or exchanged by the Company. The Rights
will cause substantial dilution to a person or group that attempts to acquire
the Company on terms not approved by the Company's Board of Directors.
 
NOTE 8. EMPLOYEE BENEFIT PLANS
 
  Stock-Based Compensation
 
     The Company has adopted the disclosure-only provision of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"). Accordingly, no
compensation expense has been recognized for the stock option plans. Had
compensation cost for the Company's stock-based compensation awards issued
during 1998, 1997 and 1996 been determined based on the fair value at the grant
dates of awards consistent with the method of
 
                                      F-14
<PAGE>   52
                           SIBIA NEUROSCIENCES, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
Statement of Financial Accounting Standards No. 123, the Company's actual net
loss and net loss per share would have been increased to the pro forma amounts
indicated below:
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                             ------------------------------------------
                                                 1998           1997           1996
                                             ------------    -----------    -----------
<S>                                          <C>             <C>            <C>
Net loss:
  As reported..............................  $(15,807,000)   $(7,593,000)   $(5,564,000)
  Pro forma................................   (16,605,000)    (8,215,000)    (5,856,000)
Basic and diluted net loss per common
  share:
  As reported..............................  $      (1.68)   $     (0.82)   $     (0.73)
  Pro forma................................         (1.76)         (0.89)         (0.77)
</TABLE>
 
     For purposes of determining the pro forma amounts, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants
during the years ended December 31, 1998, 1997 and 1996, respectively: dividend
yield of 0.0% for all years, risk-free interest rates of 4.76%, 5.70% and 6.16%,
expected volatility of 64.0%, 66.0% and 34.2%, and expected lives of 7.50, 7.50
and 5.81 years. The weighted average fair value of options granted during 1998,
1997 and 1996 for which the exercise price equals the market price on the grant
date was $3.34, $4.79 and $5.29, respectively. The weighted average fair value
of options granted during 1996 for which the exercise price was less than the
market price on the grant date was $6.21. The fair value of the employees'
purchase rights is estimated using the Black-Scholes model with the following
weighted average assumptions used for purchase rights granted during the years
ended December 31, 1998, 1997 and 1996, respectively: dividend yield of 0.0% for
all years, risk-free interest rate of 4.64%, 5.43% and 5.41%, expected
volatility of 64.1%, 66.6% and 66.8% and an expected life of 1.21, 1.47 and 1.26
years. The weighted average fair value of those purchase rights granted in 1998,
1997 and 1996 was $1.99, $5.22 and $4.91, respectively.
 
  Stock Option and Equity Incentive Plans
 
     The Company has various stock option plans and an equity incentive plan
whereby 2,694,306 shares of the Company's Common Stock have been reserved for
issuance to its officers, directors, employees and consultants. The plans are
administered by the Board of Directors or its designees and provide generally
that, for incentive stock options, the exercise price shall not be less than the
fair market value of the shares on the date of grant and, for non-qualified
stock options, the price shall not be less than 85% of the fair market value of
the shares on the date of grant as determined by the Board of Directors. The
options expire not later than ten years from the date of grant and are generally
subject to vesting over four years, as determined by the
 
                                      F-15
<PAGE>   53
                           SIBIA NEUROSCIENCES, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
Board of Directors. A summary of the changes in options outstanding under the
plans for the three years ended December 31, 1998 is as follows:
 
<TABLE>
<CAPTION>
                                                                                WEIGHTED
                                                                OPTIONS         AVERAGE
                                                              OUTSTANDING    EXERCISE PRICE
                                                              -----------    --------------
<S>                                                           <C>            <C>
Balance, December 31, 1995..................................   1,368,979         $1.31
  Options granted:
     Price equal to the market price of stock on grant
       date.................................................     173,975          7.32
     Price less than the market price of stock on grant
       date.................................................     186,282          2.01
  Options exercised.........................................    (570,706)         1.43
  Options forfeited.........................................     (36,910)         3.06
                                                               ---------
Balance, December 31, 1996..................................   1,121,620          2.24
  Options granted:
     Price equal to the market price of stock on grant
       date.................................................     257,892          6.82
  Options exercised.........................................    (151,545)         1.02
  Options forfeited.........................................     (40,400)         5.20
                                                               ---------
Balance, December 31, 1997..................................   1,187,567          3.29
  Options granted:
     Price equal to the market price of stock on grant
       date.................................................     535,788          4.87
  Options exercised.........................................    (144,442)         1.13
  Options forfeited.........................................    (102,110)         5.01
                                                               ---------
Balance, December 31, 1998..................................   1,476,803          3.96
                                                               =========
Exercisable, December 31, 1998..............................     674,537          3.24
                                                               =========
Available for future grant, December 31, 1998...............     869,794
                                                               =========
</TABLE>
 
     Included as options outstanding as of December 31, 1998, 1997 and 1996 in
the above table are options to purchase 264,237, 355,374 and 373,062 shares,
respectively, of Common Stock under the Management Change of Control Plan which,
in the event of a change of control, may have options for which vesting may
accelerate as determined by the value of the Company on the date of such a
change of control. Also included as options outstanding as of December 31, 1998,
1997 and 1996 in the above table are options to purchase 826,871, 385,186 and
155,455 shares, respectively, of Common Stock under the 1996 Equity Incentive
Plan. Shares of Common Stock issued under the 1996 Equity Incentive Plan may be
subject to a repurchase feature in favor of the Company in accordance with a
vesting schedule to be determined by the Board of Directors; however; the right
to repurchase at the original purchase price will lapse at a minimum rate of 20%
per year over the five-year period following the date that the award was
granted. The repurchase feature can be exercised by the Company within the
90-day period following the stockholder's termination of employment or the
relationship as a director or consultant.
 
                                      F-16
<PAGE>   54
                           SIBIA NEUROSCIENCES, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     The following table summarizes information concerning currently outstanding
and exercisable stock options:
 
<TABLE>
<CAPTION>
                                     WEIGHTED
                                      AVERAGE
                                     REMAINING        WEIGHTED                         WEIGHTED
     RANGE OF          NUMBER       CONTRACTUAL       AVERAGE          NUMBER          AVERAGE
  EXERCISE PRICES    OUTSTANDING       LIFE        EXERCISE PRICE    EXERCISABLE    EXERCISE PRICE
  ---------------    -----------    -----------    --------------    -----------    --------------
  <S>                <C>            <C>            <C>               <C>            <C>
  $0.85 - 1.23          298,312        5.42            $0.89           216,064          $0.91
   1.45 - 2.13          300,620        1.54             1.71           212,185           1.69
   3.75 - 5.00          447,732        9.44             4.72            47,985           4.87
   5.63 - 8.38          405,588        8.40             6.68           177,002           6.74
   9.75 - 9.88           24,551        7.41             9.78            21,301           9.77
                      ---------                                        -------
                      1,476,803        6.70             3.96           674,537           3.24
                      =========                                        =======
</TABLE>
 
  Employee Stock Purchase Plan
 
     In February 1996, the Company adopted the Employee Stock Purchase Plan
under Section 423 of the Internal Revenue Code in which eligible employees may
use funds from accumulated payroll deductions to purchase shares of Common Stock
at the end of each designated purchase period. Employees may contribute up to
15% of base salary toward such purchases, not to exceed $25,000 per calendar
year. The purchase price is 85% of the fair market value of Common Stock
determined at either the beginning or end of each purchase period, whichever is
lower. The Company has reserved 500,000 shares of Common Stock for issuance
under the plan. In 1998, 1997 and 1996 the Company issued 32,402, 21,821 and
9,408 shares of Common Stock, respectively, under the plan.
 
  Retirement Savings Plan
 
     The Company has a savings plan under Section 401(k) of the Internal Revenue
Code which covers all employees who meet minimum age requirements. Employees can
contribute up to 15% of their salaries, but not in excess of the amount
deductible for income tax purposes. The Company currently matches 50% of
employee contributions up to 6% of an employee's salary, limited to the maximum
contribution allowable for income tax purposes. Employer contributions are
vested proportionately over five years of service. The plan may be amended or
discontinued at anytime by the Company. During 1998, 1997 and 1996, the Company
contributed $184,000, $161,000, and $121,000, respectively, to the plan.
 
NOTE 9. COMMITMENTS AND CONTINGENCIES
 
  Leases and Equipment Notes Payable
 
     Certain scientific instrumentation, computer equipment and other equipment
have been acquired under capital lease and equipment note payable agreements.
These agreements mature at various dates through September 2002 and have
interest rates between 4.2% and 9.5%. As of December 31, 1998, $3,302,000
($2,109,000 net of accumulated amortization) of equipment under these agreements
is included in property and equipment. For the years ended December 31, 1998,
1997 and 1996, $721,000, $542,000 and $483,000 in amortization expense,
respectively, was recorded related to property acquired under such agreements.
 
     During 1998, 1997 and 1996, $90,000, $58,000 and $66,000, respectively, was
paid in imputed interest on capital leases.
 
     For the years ended December 31, 1998, 1997 and 1996, the Company had
non-cash financing activities in the form of capital leases and equipment loans
for $1,565,000, $778,000 and $330,000, respectively.
 
                                      F-17
<PAGE>   55
                           SIBIA NEUROSCIENCES, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
  Operating Leases
 
     The Company leases its principal facilities under a long-term operating
lease that expires December 31, 2001. The Company has the option to extend the
lease for a period of five years. Rent expense was $991,000, $967,000, and
$705,000 net of sub-lease income of $490,000, $400,000 and $586,000 for 1998,
1997 and 1996, respectively.
 
     Future minimum payments for capital leases, equipment notes and operating
leases as of December 31, 1998 are as follows (operating lease payments are net
of noncancellable sub-lease income of $441,000).
 
<TABLE>
<CAPTION>
                                                          CAPITAL LEASES AND    OPERATING
                                                           EQUIPMENT NOTES        LEASES
                                                          ------------------    ----------
<S>                                                       <C>                   <C>
1999....................................................      $  832,000        $1,032,000
2000....................................................         717,000         1,518,000
2001....................................................         648,000         1,563,000
2002....................................................          79,000
                                                              ----------        ----------
Total minimum lease payments............................       2,276,000        $4,113,000
                                                                                ==========
Amount representing interest............................         201,000
                                                              ----------
Obligations under capital leases........................       2,075,000
Less portion due within one year........................         725,000
                                                              ----------
Long-term capital lease obligations.....................      $1,350,000
                                                              ==========
</TABLE>
 
  Legal Proceedings
 
     On July 9, 1996, the Company filed an action for patent infringement
against Cadus Pharmaceutical Corporation ("Cadus") in the United States District
Court for the Southern District of California. The complaint asserted that
Cadus' assay technology infringes the Company's United States Patent No.
5,401,629 (the "'629 Patent"), entitled "Assay Methods and Compositions Useful
for Measuring the Transduction of an Intercellular Signal." The Company sought
damages in an unspecified amount and injunctive relief in the complaint.
 
     Cadus responded by asserting that the '629 Patent and the Company's United
States Patent No. 5,436,128 (the "'128 Patent"), entitled "Assay Methods and
Compositions for Detecting and Evaluating the Intercellular Transduction of an
Extracellular Signal," are invalid, unenforceable and not infringed, and further
asserting claims for intentional interference with prospective economic
advantage and unfair competition. Cadus sought declaratory relief and
compensatory and punitive damages against the Company. On August 3, 1998, the
Court granted summary judgment for the Company on Cadus' counterclaims. Cadus
subsequently dismissed its counterclaim alleging invalidity and unenforceability
of the '128 Patent.
 
     On December 18, 1998, the jury returned a verdict in favor of the Company,
finding that the '629 Patent is valid and enforceable and awarding the Company
damages in the amount of $18 million to compensate the Company for Cadus' past
direct and indirect infringement of the '629 Patent. On January 29, 1999, the
Court granted the Company's request for a permanent injunction preventing Cadus,
and all persons acting in concert or otherwise participating with Cadus from
practicing the methods claimed in the '629 Patent.
 
     Cadus has requested that the Court grant a new trial and/or reduce the
jury's damage award. The Court has not yet ruled on that request. Cadus has
indicated publicly that it intends to appeal the decision if that request is
denied.
 
     The Company has recently been notified that the Patent & Trademark Office
has granted a request for reexamination of the '629 Patent. The Company's
management intends to vigorously defend the '629 Patent in that proceeding.
 
                                      F-18