2
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K
(Mark One)
  X ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
    ACT OF 1934 For the fiscal year ended June 30, 1998
                                       OR
   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
    ACT OF 1934

Commission file number 0-15609

                          Agouron Pharmaceuticals, Inc.
             (Exact name of registrant as specified in its charter)


          California                                      33-0061928
(State or other jurisdiction of              (I.R.S. EmployerIdentification No.)
 incorporation or organization)

10350 North Torrey Pines Road, La Jolla, California                92037-1020
(Address of principal executive offices)                           (Zip Code)

Registrant's telephone number, including area code:              (619) 622-3000

Securities registered pursuant to Section 12(b) of the Act:                None

Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock, without par value
                                (Title of class)

     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  (or for such  shorter  period  that the
registrant  was required to file such  reports) 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. [ ]

     On July 28, 1998,  the  aggregate  market value of the common stock held by
nonaffiliates  totaled  approximately  $724,738,000  based on the closing  stock
price as reported by The Nasdaq Stock Market.

     On July 28,  1998,  there were  approximately  31,097,000  shares of common
stock, without par value, of the registrant issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         The registrant's  definitive proxy statement to be prepared pursuant to
Regulation  14A and filed in  connection  with  solicitation  of proxies for its
Annual Meeting of Stockholders,  to be held on October 28, 1998, is incorporated
by reference into Part III of this Form 10-K.

                                       1
<PAGE>


                                     PART I

Item 1.  BUSINESS

     Except for the  historical  information  contained  herein,  the  following
"Business"  section contains  forward-looking  statements that involve risks and
uncertainties  which could cause actual results to differ  materially from those
discussed  here.  Readers are  cautioned  not to place  undue  reliance on these
forward-looking statements, which speak only as of the date hereof. Factors that
could cause or contribute to such differences  include,  but are not limited to,
those discussed in the "Business"  section and Exhibit 99 to this Form 10-K. The
Company  undertakes  no  obligation  to  publicly  release  the  results  of any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.

General

     Agouron  Pharmaceuticals,  Inc.  ("Agouron" or the "Company") was organized
and  incorporated  in  California  in  June  1984.   Agouron  is  an  integrated
pharmaceutical  company committed to the discovery,  development,  manufacturing
and  marketing of  innovative  therapeutic  products  engineered  to  inactivate
proteins which play key roles in cancer,  AIDS and other serious  diseases.  The
Company,  through  its  own  sales  and  marketing  organization,  is  currently
marketing in the United States its first drug, VIRACEPT(r) (nelfinavir mesylate)
for treatment of HIV  infection.  The Company is also  conducting  pivotal phase
II/III clinical trials for AG3340 for treatment of lung and prostate cancer.  In
addition,  Agouron is expected to initiate a phase II/III pivotal clinical trial
of REMUN(tm)  (AG1661),  an immune-based  therapeutic agent for treatment of HIV
infection  and AIDS  being  co-developed  by  Agouron  and The  Immune  Response
Corporation  ("IRC").  Further, the Company has a number of programs in progress
for discovery or development  of other new drugs in the fields of cancer,  viral
disease and other serious  diseases.  The Company is also using the  proprietary
core drug discovery technology of Alanex Corporation ("Alanex"),  a wholly-owned
subsidiary  of the  Company,  to  accelerate  the steps  necessary  to  discover
small-molecule  drug candidates,  from the initial  identification  of compounds
that exhibit activity against selected  biological targets to the progression of
these compounds to drug candidates for human clinical trials.

Agouron's  long-term  goal is  increasing  profitability  from the sale of drugs
generated  from  its own  drug  discovery  and  development  efforts,  and  from
development and commercialization of drugs originated outside of the Company. To
augment its  technical  capabilities,  to enhance the  likelihood  of successful
commercialization of its products and to offset some of its operating costs, the
Company has entered into  collaborative  research and  development  arrangements
with other companies.  The Company has generally retained significant commercial
rights in drugs developed in its collaborative research and development programs
funded  in whole  or in part by  other  companies  and has  secured  significant
commercial  rights  in  those  products  that  it  has  in-licensed  from  other
companies. The Company anticipates that its successfully developed products will
be commercialized both through its own direct sales and marketing  activities in
certain   pharmaceutical   markets  and  through   manufacturing  and  marketing
relationships with other pharmaceutical companies.


                                       2
<PAGE>


     The Company's common stock  capitalization  has evolved through a series of
public  offerings  and  private  placements  of its  equity  securities  and the
exercise of various  warrants and employee stock options.  Five public offerings
have generated net proceeds of  approximately  $211,600,000  and the issuance of
approximately  19,788,000 shares. The most recent public offering in 1996 raised
approximately  $77,245,000  through the  issuance of 5,470,000  shares.  Private
placements  have  generated  approximately  $17,100,000  in net proceeds and the
issuance of  approximately  5,564,000  shares.  The  exercise  of  warrants  and
employee stock options  (including  employee  stock purchase plan  transactions)
have  generated  proceeds  of  approximately  $29,750,000  and the  issuance  of
approximately  4,250,000  shares.  In 1997,  the  Company  acquired  Alanex in a
purchase  transaction through the issuance of approximately  1,444,000 shares of
the Company's common stock valued at approximately $61,000,000.  The Company has
also recorded an aggregate increase to common stock of approximately $29,000,000
which  reflects  the tax benefit of stock  options that were  exercised  through
fiscal 1998.

Narrative Description of Business

     Agouron  is  developing  innovative  drugs for  treatment  of  cancer,  HIV
infection and other serious diseases and has expended approximately $449,000,000
on  research  and  development  since its  inception,  excluding  a  $57,500,000
write-off for  in-process  technology  purchased in 1997 in the  acquisition  of
Alanex.

VIRACEPT

     In  March  1997,  the  Company  received  clearance  from the Food and Drug
Administration ("FDA") to market its first drug, VIRACEPT, a potent HIV protease
inhibitor  that  substantially  decreases  viral load and  increases  CD4+T cell
counts  when  used  in  combination   antiretroviral  drug  therapy.  An  orally
administered product, VIRACEPT is available in adult and pediatric formulations.

     VIRACEPT  sales in the United States totaled  $358,321,000  in fiscal 1998.
The Company estimated that 85,000 patients in the United States (over 120,000 in
the world) were taking VIRACEPT at the end of June 1998. It is anticipated  that
continued increasing VIRACEPT sales will make a substantial  contribution toward
profitable financial results in the future.

     Agouron  developed   VIRACEPT  in  collaboration  with  the  pharmaceutical
division of Japan  Tobacco Inc.  ("JT").  Agouron and JT have granted  exclusive
royalty bearing  marketing rights outside of North America and parts of Japan to
F.  Hoffmann-La  Roche Ltd  ("Roche").  The Company and JT share profits  and/or
royalties equally from the world-wide commercialization of VIRACEPT.

     In January and March 1998,  VIRACEPT was  approved for  marketing in Europe
and Japan, respectively.  VIRACEPT license fees and royalties from Roche totaled
$17,852,000 in 1998.

Research and Development Programs

     Agouron's  research and development  programs focus on the areas of cancer,
AIDS and other serious  diseases.  Agouron's drug  discovery  programs apply the
Company's core technologies of

                                       3
<PAGE>


three-dimensional  structure based drug design and high-throughput  screening of
chemical libraries generated by computation-directed combinatorial chemistry.

     The  following  table  outlines  the  status  of  various  programs  in the
Company's research and development portfolio.  Agouron is pursuing some of these
programs independently,  while others are being undertaken in collaboration with
other companies.
<TABLE>
<CAPTION>

                                                                                         Research
                                                                                            and
                                                                                        Development
              Program                              Indication                              Stage
-------------------------------     --------------------------------------------        ------------
<S>                                 <C>                                                 <C>

Cancer

     AG3340                         Solid Tumors                                        Phase II/III
     AG3433                         Solid Tumors                                        Preclinical
     AG2034                         Solid Tumors                                        Phase I
     AG2037                         Solid Tumors                                        Preclinical
     cdk Inhibitors                 Solid Tumors                                        Research
     PARP(1)  Inhibitors            Solid Tumors                                        Research
     VEGF Inhibitors                Solid Tumors                                        Research
     GnRH Antagonist                Hormone-Dependent Solid Tumors                      Research


Viral Disease

     VIRACEPT(2)                    HIV Infection                                       Approved
     REMUNE (AG1661)(3)             HIV Infection                                       Phase II/III
     AG1549 (S-1153)(4)             HIV Infection                                       Phase I
     AG1776 (JE-2147)(5)            HIV Infection                                       Preclinical
     AG7088                         Common Cold                                         Preclinical
     Hepatitis C agents(6)          Viral Disease                                       Research
     HIV Integrase Inhibitors       HIV Infection                                       Research

Ophthalmology

     AG3340                         Macular Degeneration                                Phase II
     Other MMP Inhibitors           Macular Degeneration                                Preclinical
     VEGF Inhibitors                Macular Degeneration                                Research
</TABLE>


(1)  In collaboration with Cancer Research Campaign Technology Ltd.
(2)  In collaboration with Japan Tobacco Inc. and F. Hoffmann-La Roche Ltd.
(3)  In collaboration with The Immune Response Corporation.
(4)  In collaboration with Shionogi & Co., Ltd.
(5)  In collaboration with Japan Energy Corporation.
(6)  In collaboration with Japan Tobacco Inc.

                                       4
<PAGE>



Cancer

Overview

     The  development  of new drugs for treatment of cancer is a key  scientific
and commercial focus of the Company. Cancer is the second leading cause of death
in the United States and most  developed  nations.  While much progress has been
made in the  treatment of certain  forms of cancer,  most  existing  anti-cancer
drugs display limited  efficacy and  significant  toxicities that restrict their
clinical  usefulness.  As a  result,  there  remains  a  critical  need  for new
anti-cancer drugs which are less toxic and more efficacious than those currently
available    either   as    tumoricidal    (tumor-killing)    or    tumoristatic
(tumor-controlling) agents.

     The Company's  anti-cancer  drug discovery and development  programs pursue
inhibitors  of  the  following  enzymes:   matrix   metalloproteases   ("MMPs");
glycinamide ribonucleotide  formyltransferase ("GART"); cyclin dependent kinases
("cdk");  gonadotropin releasing hormone ("GnRH");  poly (ADP ribose) polymerase
("PARP"); and vascular endothelial growth factor ("VEGF") kinase.

MMP Inhibitors: AG3340 and AG3433

     AG3340 is an orally  delivered  anti-angiogenesis  drug designed to inhibit
the growth,  invasion and  metastasis  of solid tumors by  inactivating  certain
members of a family of enzymes known as MMPs. AG3340 selectively  inhibits those
MMPs believed to be involved in angiogenesis  and tumor  progression.  A primary
goal of clinical  studies of AG3340 is to  determine  whether  this  distinctive
selectivity results in a favorable clinical profile of safety and efficacy.

     In fiscal 1998,  Agouron  completed  two phase I studies of AG3340.  In one
phase I study, AG3340 was administered orally twice daily (BID) in patients with
advanced cancer,  including lung,  prostate,  kidney,  and colorectal cancers as
well as sarcoma and melanoma.

     A separate phase I study found that AG3340 in combination with chemotherapy
was generally well tolerated among patients with advanced  prostate cancer whose
disease was resistant to hormonal therapies.

     In  preclinical  studies,  AG3340 has been  shown to inhibit  angiogenesis.
AG3340   was  also   found  to  be  a  potent   inhibitor   of  the   growth  of
chemotherapy-resistant  human  non-small cell lung cancer tumors in mice.  Here,
administration  of AG3340 resulted in a dose-dependent  decrease in tumor growth
by up to 65% as compared to controls.

     In May 1998,  Agouron  initiated  phase II/III  clinical trials in patients
with advanced lung or prostate cancer.  The Company presently retains all rights
to AG3340 in the fields of cancer and ophthalmology.


                                       5
<PAGE>


     Agouron  is  also   conducting   preclinical   research   on  a  stable  of
third-generation  MMP  inhibitors,  including  AG3433,  which  has even  greater
selectivity than AG3340 for those MMPs related to cancer.

GART Inhibitors:  AG2034 and AG2037

     AG2034  is a  potent,  selective  inhibitor  of GART,  a key  enzyme in the
biochemical  pathway  through which tumor cells  synthesize  purines,  essential
components of DNA.  With the exception of liver cells,  all normal human tissues
obtain purines through an alternative pathway (the purine salvage pathway).  The
Company  believes that inhibitors of GART will show a high degree of selectivity
for  tumor  cells  and  less   significant   bone  marrow  toxicity  than  other
chemotherapeutic agents. The Company is completing dose-ranging phase I clinical
trials that will establish an appropriate dose for AG2034.

     AG2037 was designed to have markedly reduced binding to the membrane folate
binding  protein  ("mFBP")  because tight binding to this receptor is one likely
source of the toxicity  observed  with  lometrexol,  the first  molecule in this
class to be tested  clinically by Eli Lilly and Company  (assays of mFBP binding
have been routine for compounds generated in this program).  AG2037 shows potent
inhibition of GART as a monoglutamate  and can be  polyglutamylated.  Because of
its weaker binding to mFBP, AG2037 access is restricted to only those cells with
reduced folate carrier.  Preclinical studies have shown that GART inhibitors are
potentially  cytotoxic  (kills cells) to at least certain cancer cell types with
mutant p53 genes,  a common  genetic  abnormality  in human cancer.  The Company
retains all  commercial  rights to compounds  resulting  from its GART inhibitor
programs.

cdk Inhibitors

     Cdks are enzymes that play key roles in regulating the cell cycle.  Certain
members of this family of enzymes,  such as cdk4 and cdk2,  have been implicated
as drivers of cells from a normally  quiescent  state to a highly  proliferative
state  characteristic  of human cancer.  Agouron is engaged in a drug  discovery
program aimed at the design of selective small-molecule drugs with the potential
to inhibit  the  activity of such cdks and  therefore  block the  transition  of
cancer cells into their proliferative  phase. The Company retains all commercial
rights to compounds resulting from this program.

PARP Inhibitors

     PARP is an enzyme which is activated by DNA-strand  breaks and is important
in the  immediate  cellular  response  to DNA  damage.  The  activity of PARP is
involved  in  recruiting  repair  enzymes to the site of DNA damage so that cell
division can proceed faithfully.  Inhibition of PARP has profound effects on the
survival  of  cells  following  exposure  to  DNA-damaging  agents;  thus,  PARP
inhibitors may be useful in conjunction  with chemo- and  radio-therapy to treat
tumors.   PARP   inhibitors   discovered  at  Agouron  have  been  confirmed  as
chemopotentiating  agents in cells and preliminary  testing in tumors in animals
is underway.  The Company has exclusive commercial rights in compounds resulting
from this program, which are being pursued in collaboration with Cancer Research
Campaign Technology, Ltd.


                                       6
<PAGE>



VEGF Inhibitors

     The process known as angiogenesis (the formation of new blood vessels) is a
key  factor in the  maintenance  and  progression  of  several  disease  states,
including  the  metastasis of malignant  tumors.  The ability of cancer cells to
carry out  angiogenesis  depends in part upon the activity of a protein known as
VEGF,  which,  by  binding  to a  receptor  (known as kdr) on the cell  surface,
triggers the development of growth factor endothelial cells.  Agouron is engaged
in a  program  to  design  drugs  that  block  the kdr  receptor  for VEGF  and,
therefore,  compromise  the  ability  of tumors to carry  out a key  process  in
angiogenesis.  The Company retains all commercial rights to compounds  resulting
from this program.

GnRH Antagonist Program

     GnRH is a  decapeptide  that is  synthesized  in the brain and controls the
pituitary and gonadal hormones that regulate fertility and the growth of certain
hormone-dependent  tumors (in women,  this  peptide is required  for  successful
ovulation  and, in men,  it is  necessary  for  spermatogenesis).  The  Company,
through  its Alanex  subsidiary,  is  currently  pursuing a program to  discover
certain orally active  small-molecule  drugs to treat two areas of human disease
that depend on GnRH action:  endometriosis and sex-hormone dependent tumors. The
Company retains all commercial rights to compounds resulting from this program.

Viral Disease

Overview

     The development of new drugs for the treatment of certain viral diseases is
another important scientific and commercial focus of the Company. The Company is
presently  conducting  programs aimed at discovery and/or development of several
classes of  anti-viral  drugs that block viral  proteases,  enzymes  required by
several  families of pathogenic  viruses to carry out replication and infection.
Agouron's anti-viral drug programs include HIV protease inhibitors (VIRACEPT and
AG1776),  an  immune-based   therapeutic  (REMUNE),  a  non-nucleoside   reverse
transcriptase  inhibitor  (AG1549),   rhinovirus  3C  protease  inhibitors,  and
hepatitis  C enzymes.  Agouron is  developing  certain of its  anti-viral  drugs
through  collaborations  with JT,  Roche,  IRC,  Shionogi & Co.,  Ltd. and Japan
Energy Corporation.

HIV Protease Inhibitor: VIRACEPT

     HIV protease is an enzyme that performs an essential role in the infectious
cycle of HIV, and clinical  research has  demonstrated  that  inhibition  of the
protease  enzyme renders HIV unable to form new infectious  virus.  Today,  five
FDA-approved  HIV  protease  inhibitors   (including   VIRACEPT)  are  making  a
significant contribution in the management of HIV disease.

     VIRACEPT was cleared by the FDA for marketing in the United States in March
1997  pursuant  to the  FDA's  guidelines  for  accelerated  approval.  VIRACEPT
development  activities now include certain  additional  phase II/III studies to
facilitate  the full approval of the drug and certain phase IV studies  designed
to expand the utilization of the product.

                                       7
<PAGE>



Immune-based therapeutic agent:  REMUNE(tm) (AG1661)

     An important  recent goal in treatment of HIV  infection is to combine such
highly active drugs as HIV protease  inhibitors,  capable of halting replication
of HIV, with agents capable of directly enhancing recovery of the immune system.
REMUNE is an immune-based  therapeutic agent, derived from HIV itself, which has
been  shown to  stimulate  the  immune  system to  respond  specifically  to HIV
infection and to produce the increases in substances such as chemokines that may
provide   protection  to  uninfected   cells.   Discovered  by  IRC,  REMUNE  is
administered  as an  intramuscular  injection  every three months,  and has been
well-tolerated in clinical trials to date.

     In May 1997,  enrollment  was  completed at 74 centers in the United States
for a pivotal phase III, clinical end-point trial in which  approximately  2,500
patients were randomized to receive  conventional  anti-retroviral  drug therapy
with or without  REMUNE.  This study is expected to be  completed in March 1999.
More than 250 patients  have been enrolled in two other  clinical  studies which
are evaluating the effect of REMUNE in combination with anti-retroviral drugs on
virologic  and  immunologic  markers  in adults.  A smaller  study of REMUNE for
treatment of HIV infection in children is in progress at the National Institutes
of Health.

     In  June  1998,  Agouron  and  IRC  began  a  collaboration  on  the  final
development and  commercialization  of REMUNE.  Agouron has exclusive  rights to
market REMUNE in North  America,  Europe and certain other  countries;  IRC will
manufacture  commercial  supplies of REMUNE.  Agouron and IRC will share equally
all profits from the commercialization of REMUNE in the licensed territory.

Non-nucleoside reverse transcriptase inhibitor (NNRTI):  AG1549 (S-1153)

     AG1549 is a  second-generation  NNRTI for the  treatment of HIV  infection.
Discovered by Shionogi & Co., Ltd. ("Shionogi"), AG1549 is currently the subject
of several  clinical  trials  evaluating its dose and its  concomitant  use with
other anti-retroviral treatments. AG1549 is of high clinical interest because it
is ten times more  potent in vitro than  currently  approved  NNRTIs and because
AG1549 is fully active in vitro against HIV  containing  the most common genetic
mutation (at position 103) associated with resistance to other NNRTIs.

     Agouron  has   exclusive   world-wide   rights  to  the   development   and
commercialization of AG1549, except in Japan, South Korea and Taiwan, subject to
the payment of royalties to Shionogi.

HIV Protease Inhibitor:  AG1776 (JE-2147)

     AG1776  is a  protease  inhibitor  for  the  treatment  of  HIV  infection.
Preclinical  data indicate that AG1776,  discovered by Japan Energy  Corporation
("JE"),  works  synergistically  in vitro with other  protease  inhibitors.  The
compound has also exhibited activity against HIV mutations  commonly  associated
with resistance to other protease inhibitors.


                                       8
<PAGE>


     Agouron  has   exclusive   world-wide   rights  to  the   development   and
commercialization  of AG1776  except  in Japan,  South  Korea,  North  Korea and
Taiwan,  subject to the payment of  royalties  to JE; JE will  manufacture  bulk
compound for use in final drug product.

Rhinovirus 3C Protease Inhibitor:  AG7088

     Rhinoviruses  are  believed  to be the single  most  frequent  cause of the
common  cold.  While  rhinovirus  infections  are a periodic  annoyance  to most
individuals,  they may produce more severe and prolonged symptoms in people with
chronic obstructive pulmonary disease,  such as asthma and emphysema.  All known
strains of rhinoviruses depend on a critical enzyme, the 3C protease, at several
stages of their life cycle for production of new infectious viruses. Agouron has
designed potent, selective rhinovirus 3C protease inhibitors,  including AG7088,
that are currently being evaluated in preclinical  pharmacological  studies. The
Company retains all commercial rights in compounds resulting from this program.

HIV Integrase Inhibitors

     The drugs  currently  approved in the United  States for  treatment  of HIV
infection consist of reverse  transcriptase  inhibitors and protease  inhibitors
(including  VIRACEPT).  Another  mechanism  of  action  is  inhibition  of HIV-1
integrase, a key enzyme in catalyzing the integration of HIV into human cells.

     Agouron  scientists  believe  that  blocking  HIV  integrase  is  a  viable
therapeutic  strategy  that  will  abort  completion  of the viral  life  cycle,
preventing  infection of new,  uninfected target cells.  Scientists also believe
that HIV integrase is an attractive target because it is extremely unlikely that
an  HIV   integrase-specific   inhibitor  will  nonspecifically   inhibit  other
eukaryotic enzymes.  This fact may possibly reduce the incidence of side effects
of an integrase  inhibitor used to treat HIV infection.  The Company retains all
commercial rights in compounds resulting from this program.

Anti-Hepatitis C Drugs

     The hepatitis C virus ("HCV") is a virus that causes illnesses ranging from
a mild flu-like  disease to  progressive  liver  disease,  cirrhosis and primary
liver  cancer.  The ability to treat  infection by HCV  represents a significant
unmet clinical need,  particularly in Asian countries.  HCV depends upon several
key enzymes for the production of new infectious virus.  Agouron scientists have
initiated  programs  to design new classes of  anti-viral  drugs that block such
enzymes and disrupt the HCV life cycle.  The Company is pursuing  this  research
program in collaboration with JT.

Ophthalmology

Overview

     A hallmark of many serious retinal disorders,  such as age-related  macular
degeneration,  macular edema,  retinopathy  of  prematurity,  and  proliferative
diabetic retinopathy,  is an extensive proliferation of new blood vessels in the
retina and underlying choroid. This process, known as

                                       9
<PAGE>


angiogenesis  or  neovascularization,  often  leads to  retinal  hemorrage  that
results in the loss of ganglion cells,  degeneration of the central optic nerve,
and  eventually  loss of  central  and/or  peripheral  vision.  The most  common
neovascular  retinal disorder,  namely  age-related  macular  degeneration,  has
recently  become a leading  cause of blindness in the elderly  population in the
industrialized world.

     In common with other  tissues,  the growth of new blood vessels is mediated
by many  factors  including  various  members  of the  family of MMPs,  VEGF and
Fibroblast  Growth  Factors  ("FGF")  and their  respective  receptors  and some
members  of  the  integrin  family  of  receptors   involved  in  cell-cell  and
cell-matrix  interactions.  In ocular tissues,  the production of these factors,
receptors  and MMPs is increased by local  hypoxia,  the most notable  condition
believed  to  stimulate   retinal  and   subretinal   neovascularization.   Most
significantly,  in the ocular tissue of patients with any of the above mentioned
diseases,  elevated levels of growth factors,  integrins and MMPs (in particular
MMP-2 and MT-MMP-1) were consistently identified.

     Key  mediators  of  angiogenesis   have  been  associated  with  ophthalmic
disorders.  VEGF and basic FGF are strongly  implicated as causative  angiogenic
agents in a variety of  studies.  In ocular  tissues,  the  production  of these
growth factors is increased by hypoxia,  the most notable condition  believed to
stimulate  retinal  angiogenesis.  Most  significantly,  in patients  undergoing
surgery,  high levels of VEGF in ocular fluid were found associated with macular
degeneration,  active  diabetic  retinopathy,  central vein  occlusion and other
disorders.

     Current studies in the area of  ophthalmology  involve an assessment of the
impact that inhibitors of MMPs might have on therapeutic practice and in meeting
medical needs in these areas. Agouron is conducting in animal models a series of
proof-of-principle preclinical studies of ocular diseases with the MMP inhibitor
AG3340 in preparation for the  commencement of human clinical  studies.  Agouron
has recently  demonstrated  significant  accumulation  of AG3340 in the vitreous
humor of rats and monkeys following oral dosing.

     Likewise,  it is anticipated  that when suitable  inhibitors of VEGF become
available,  they will be tested in the existing ocular angiogenesis models prior
to selection of a lead compound for clinical  development.  The Company  retains
all commercial rights in compounds resulting from this program.

Business Relationships/Research and Development Agreements

     The Company has funded its research and development  primarily from working
capital  generated  from  both  private  and  public  sales of  Agouron  equity,
collaborative arrangements and the financial contribution resulting from product
sales.  The Company has an ongoing  program of business  development  which may,
from time to time,  lead to the  establishment  of corporate  collaborations  in
addition to those noted below.

Japan Tobacco Inc.

     In February 1994, the Company entered into a strategic  alliance with JT in
the  field of  anti-viral  drugs  for the  treatment  of  infections  caused  by
hepatitis C and the herpes  family of viruses.  In  December  1994,  the Company
added its anti-HIV drug, VIRACEPT, to the JT collaboration

                                       10
<PAGE>


with the execution of a world-wide development and licensing agreement.  Agouron
and JT share equally the costs of further development of VIRACEPT.

     Currently,  Agouron has exclusive  commercial  rights to VIRACEPT (with the
right to sublicense) in North America and JT has exclusive  commercial rights to
VIRACEPT (with the right to  sublicense) in certain parts of Japan.  The Company
and  JT  share   profits   and/or   royalties   equally   from  the   world-wide
commercialization of VIRACEPT.

Roche

     The Company and JT have granted Roche  certain  exclusive  royalty  bearing
marketing  rights  to  VIRACEPT  outside  of North  America  and parts of Japan.
Further,  the  Company  receives  royalties  based  either on  Roche's  sales of
VIRACEPT   or,  in   certain   circumstances,   Invirase(r)   and   Fortavase(r)
(saquinavir),   Roche's  HIV  protease  inhibitors.   Roche  has  the  right  to
manufacture  VIRACEPT  for  its  own  use  and  is  expected  to  commence  such
manufacturing in calendar 1999.

The Immune Response Corporation

     In June 1998, the Company  entered into a binding letter of intent with IRC
to  collaborate  on  final  development  and  commercialization  of  REMUNE,  an
immune-based  therapeutic  agent  discovered by IRC and currently the subject of
several  clinical  studies  including a large phase III clinical trial.  The two
companies intend to enter promptly into a definitive agreement and will endeavor
to complete development and registration of REMUNE in 1999. IRC will manufacture
commercial  supplies of REMUNE, and Agouron will have exclusive rights to market
REMUNE in North America,  Europe and certain other countries.  The two companies
will share  equally  all  profits  from the  commercialization  of REMUNE in the
licensed  territory.  Agouron paid an initial  $10,000,000 license fee to IRC in
June 1998 and also  purchased  118,256  newly  issued  common  shares of IRC for
$2,000,000.   Agouron  may  pay,   assuming  ongoing   successful   development,
registration  and approval of REMUNE,  to IRC up to  $53,000,000  in  additional
development  and milestone  payments and  $12,000,000 in purchases of additional
IRC common stock.

Shionogi & Co., Ltd.

     In June 1998,  the  Company  entered  into a binding  letter of intent with
Shionogi to develop and commercialize AG1549, a second-generation  NNRTI for the
treatment of HIV  infection.  Discovered  by Shionogi,  AG1549 is currently  the
subject of several  clinical trials  evaluating its dose and its concomitant use
with  other  antiretroviral  treatments.  AG1549  is of high  clinical  interest
because  it is ten  times  more  potent  in vitro  than  such  other  NNRTIs  as
nevirapine  (Viramune(r)  and delavirdine  (Rescriptor(r)  and because AG1549 is
fully active in vitro against HIV containing  the most common  genetic  mutation
(at  position  103)  associated  with  resistance  to  other  NNRTIs,  including
efavirenz (Sustiva(tm)).

     Agouron  has   exclusive   world-wide   rights  to  the   development   and
commercialization  of AG1549  except in Japan,  South Korea and Taiwan.  Agouron
paid an initial  $10,000,000  license fee to Shionogi in June 1998.  Agouron may
pay,  assuming  ongoing  successful  development,  registration  and approval of
AG1549, additional license fees of up to $30,000,000.  In addition, Agouron will
pay Shionogi royalties based on sales, if any, of AG1549.

                                       11
<PAGE>



Japan Energy Corporation

     In June 1998, the Company  entered into an agreement with JE to develop and
commercialize  AG1776,  a novel  protease  inhibitor  for the  treatment  of HIV
infection.  Preclinical  data  indicate  that  AG1776,  discovered  by JE, works
synergistically in vitro with other protease  inhibitors.  The compound has also
exhibited  activity  against  mutations  commonly  associated with resistance to
other protease inhibitors.

     Agouron  has   exclusive   world-wide   rights  to  the   development   and
commercialization  of AG1776  except  in Japan,  South  Korea,  North  Korea and
Taiwan; JE will manufacture bulk compound for use in final drug product. Agouron
incurred  an initial  $6,000,000  license  fee in June 1998.  Agouron may incur,
assuming ongoing  successful  development,  registration and approval of AG1776,
additional license fees of up to $20,000,000.  In addition,  Agouron will pay JE
royalties based on sales, if any, of AG1776.

Competition

     The  pharmaceutical  and  biotechnology  industries  are subject to intense
competition and rapid and significant  technological  change. Many companies and
organizations,  including  major  pharmaceutical,   biotechnology  and  chemical
companies,  universities,  and other  research  organizations,  are  engaged  in
discovery and  development  of drugs for diseases  targeted by the Company.  For
example, the Company is aware of several pharmaceutical  companies that have HIV
protease inhibitors, some of which are currently being marketed, including those
of Abbott Laboratories,  Inc. ("Abbott"), Merck & Co., Inc. ("Merck") and Roche.
Certain companies and  organizations  have  substantially  greater financial and
other  resources,  larger  research and  development  staffs and more  extensive
production and marketing  organizations,  experience and  capabilities  than the
Company. In addition, many companies have significantly more experience than the
Company in  preclinical  testing  and in  conducting  human  clinical  trials of
potential  pharmaceutical  products  and in obtaining  FDA and other  regulatory
approvals. Furthermore, many such companies and organizations maintain or pursue
extensive  patent  portfolios that could now or in the future pose a risk to the
Company's ability to obtain patent protection for, or practice,  its proprietary
technology. All of these companies and other research organizations compete with
the Company in recruiting  and retaining  highly  qualified  scientific,  sales,
marketing, manufacturing, administrative and management personnel.

     Agouron  was the first  company  to devote  itself to the  development  and
application  of  protein  structure-based  drug  design.  As such,  the  Company
believes  that  it  has  achieved  certain  competitive  advantages,   including
developmental  lead-time,   level  of  commitment  to  the  technology  and  the
development  of certain  practical or technical  capabilities.  In recent years,
however,   several   pharmaceutical   companies  have  undertaken  to  establish
capabilities  in protein  structure-based  drug  design,  either  internally  or
through academic collaborations, and can be presumed to be engaged in the use of
such technology for the same purposes as is the Company.  Certain  biotechnology
companies  and other  companies  have  also  entered  into the field of  protein
structure-based drug design. For example,  Abbott,  Novartis, Glaxo Wellcome plc
("Glaxo"),   Merck  and  Roche  have  developed   programs  focused  on  protein
structure-based drug design. The Company expects that the technology for protein
structure-based drug design will become more

                                       12
<PAGE>


widely  implemented  over time and will  ultimately  become  more  common in the
pharmaceutical industry.

     The Company believes that its ability to compete successfully will be based
on its  ability  to create  and  maintain  scientifically  advanced  technology,
attract and retain scientific personnel with a broad range of expertise,  obtain
patent  protection  or  otherwise  develop  proprietary  products or  processes,
conduct  clinical  trials and obtain required  government  approvals on a timely
basis,  select and pursue  drug design  projects  in areas in which  significant
market  opportunities  exist or are  likely  to  develop,  manufacture  (or have
manufactured) its products on a cost-effective basis and successfully market its
products  either  alone or in  conjunction  with others.  Many of the  Company's
competitors  have  substantially  greater  financial  resources,   clinical  and
regulatory  experience,  manufacturing  capabilities  and  sales  and  marketing
organizations  than Agouron.  Moreover,  the Company's  competitors could obtain
patents  relating  to  Agouron's  products  or  technology,  which could have an
adverse impact on the Company.

     Currently, five HIV protease inhibitors are available in the United States.
FDA approval dates and estimated prescription market shares at June 30, 1998 are
noted in the following table:
<TABLE>
<CAPTION>

  
         Company           Product Name          Generic Name            Approval              Market Share
         <S>               <C>                   <C>                     <C>                   <C>
         Agouron           VIRACEPT(r)           nelfinavir              March, 1997                 32%
         Roche             INVIRASE(r)           saquinavir              December, 1995               8%
         Roche             FORTOVASE(r)          saquinavir              October, 1997               13%
         Abbott            NORVIR(r)             ritonavir               March, 1996                 14%
         Merck             CRIXIVAN(r)           indinavir               March, 1996                 33%
</TABLE>

     Future competition from new HIV protease  inhibitors is expected from Glaxo
and other  pharmaceutical  companies.  Additional  competition  may  arise  from
non-protease inhibitor products as such products enter the market.  Furthermore,
competition may arise from generic manufacturers of nelfinavir,  notwithstanding
Agouron's patent protection discussed below.

Patents and Trade Secrets

     The Company seeks patent  protection  for its  proprietary  technology  and
potential  products in the United States and in foreign  countries.  Most of the
Company's  products are expected to be synthetic chemical compounds which may be
afforded patent  protection  under principles and procedures well established by
the governmental patent offices under the patent law of the particular country.

     The Company's  strategy is to pursue a strong patent  portfolio and Agouron
holds several  patents,  including a United States patent  covering the chemical
composition  of  VIRACEPT  and other  United  States  patents  covering  certain
compounds in development, such as AG3340. The Company is currently prosecuting a
number  of  patent  applications  in the  United  States  and in  various  other
countries  seeking   protection  for  certain  series  of  compounds  and  other
proprietary technology. The Company will continue to file patent applications on
its evolving technology, processes and products.

     The  Company's  and/or its  collaborators'  failure to obtain and  maintain
patent  protection for its products could have an adverse impact on the Company.
Moreover, since there can be no

                                       13
<PAGE>


assurance  that Agouron's  patents will be upheld as valid and  enforceable in a
court of law, a holding of invalidity or  unenforceability of an Agouron (or its
collaborators')  patent(s)  asserted against an alleged  infringer could have an
adverse impact on the Company.

     Many  of the  processes  and  much of the  know-how  of  importance  to the
Company's  technology  depend upon the skills,  knowledge and  experience of its
scientific and technical personnel,  which skills,  knowledge and experience are
not  patentable  per se. To  protect  its  rights in these  areas,  the  Company
requires all employees,  significant consultants and advisors, and collaborators
to  enter  into  confidentiality  agreements  with  Agouron.  There  can  be  no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets,  know-how or other  proprietary  information in the
event of any unauthorized  use or disclosure of such trade secrets,  know-how or
proprietary  information.  Further,  in the  absence of patent  protection,  the
Company may be exposed to competitors who  independently  develop  substantially
equivalent  technology or otherwise gain access to the Company's  trade secrets,
knowledge or other proprietary information.

     Moreover,  since there can be no assurance that another  company has not or
will not obtain any patent relevant to an Agouron product or technology;  such a
patent by another company could have an adverse impact on Agouron.

Government Regulation

     The  production  and  marketing of the  Company's  products and its ongoing
research  and  development  activities  are  subject to  regulation  for safety,
efficacy and quality by numerous  governmental  authorities in the United States
and other  countries.  Pharmaceutical  products  intended for therapeutic use in
humans are principally  governed by the FDA regulations in the United States and
by comparable  government  regulations in foreign  countries.  Various  federal,
state and local statutes and  regulations  also govern or influence the research
and  development,  manufacturing,  safety,  labeling,  storage,  record keeping,
distribution  and  marketing  of  such  products.   The  process  of  completing
preclinical  and  clinical  testing and  obtaining  the  approval of the FDA and
similar  health  authorities  in foreign  countries to market a new drug product
requires  a  significant  number of years  and the  expenditure  of  substantial
resources and may subject the Company to product liability exposure. Failures or
delays by the Company or its collaborators or licensees in obtaining  regulatory
approvals  would  adversely  affect the marketing of products being developed by
the Company and the Company's ability to receive product revenues or royalties.

     The  steps  required  by the  FDA  before  a new  human  pharmaceutical  or
biological product may be marketed in the United States include: (a) preclinical
laboratory tests, in vivo preclinical studies and formulation  studies;  (b) the
submission to the FDA of a request for  authorization to conduct clinical trials
on an Investigational New Drug application ("IND"),  which must become effective
before human  clinical  trials may  commence;  (c) adequate and  well-controlled
human  clinical  trials to establish the safety and efficacy of the drug for its
intended  use; (d)  submission to the FDA of a New Drug  Application  ("NDA") or
Product License  Application ("PLA") and (e) review and approval of a NDA or PLA
by the FDA before the drug product may be shipped or sold commercially. Prior to
obtaining FDA approval for each product,  each  manufacturing  establishment for
new drugs must be registered with and receive appropriate approval by the

                                       14
<PAGE>


FDA. If, after  receiving  approval from the FDA, a material change is made
in the manufacturing  process or location,  additional  regulatory review may be
required.

     Preclinical  tests include  laboratory  evaluation of product chemistry and
formulation,  as well as animal studies to assess the safety and efficacy of the
product. Preclinical test results are submitted to the FDA as a part of the IND.
Clinical trials are typically conducted in three sequential phases, although the
phases may overlap. Phase I represents the initial administration of the drug to
a small group of humans,  either  healthy  volunteers  or patients,  to test for
safety, dosage tolerance,  absorption,  distribution,  metabolism, excretion and
clinical  pharmacology  and, if possible,  early  indications of  effectiveness.
Phase II  involves  studies  in a small  sample of the actual  intended  patient
population  to assess the  efficacy of the  investigational  drug for a specific
clinical indication,  to ascertain dose tolerance and the optimal dose range and
to collect  additional  clinical  information  relating to safety and  potential
adverse effects. Once an investigational drug is found to have some efficacy and
an acceptable clinical safety profile in the targeted patient population,  phase
III studies are often initiated to further  establish safety and efficacy of the
investigational  drug in a broader sample of the target patient population.  The
results of the  clinical  trials  together  with the results of the  preclinical
tests and complete  manufacturing  information  are submitted in a NDA or PLA to
the FDA for approval.

     If a NDA or PLA is  submitted to the FDA,  there can be no  assurance  that
such application will be reviewed and approved by the FDA in a timely manner, if
at all.  Even after  initial FDA approval has been  obtained,  further  studies,
including   post-market   studies,   may  be  required  to  provide   additional
information.  Results  of such  post-market  programs  may limit or  expand  the
further marketing of the product.

     The Company is also subject to foreign  regulatory  requirements  governing
development, manufacturing and sales of pharmaceutical products that vary widely
from country to country. Approval of a drug by applicable regulatory agencies of
foreign  countries  must be secured prior to the marketing of such drug in those
countries.  The  regulatory  approval  process may be more or less rigorous from
country to country and the time  required  for approval may be longer or shorter
than that required in the United States.

     In  addition  to  government  agencies  that  promulgate   regulations  and
guidelines  directly  applicable to the Company and its  products,  professional
societies, practice management groups, and health/science organizations may also
publish, from time to time, guidelines or recommendations to the health care and
patient  communities  that  affect  the  usage of  certain  therapies,  drugs or
procedures, including the Company's products. Such recommendations may relate to
such matters as usage,  dosage,  route of administration  and use of concomitant
therapies  and  could  have a  material  effect  on  the  Company's  results  of
operations.

Manufacturing

     Agouron utilizes world-wide contract manufacturing to produce VIRACEPT. The
Company  procures and transfers raw materials to contracted bulk drug producers,
sends the converted  bulk drug to finishing  facilities and moves finished goods
into a  distribution  center.  Product  supply and associated raw materials have
been  available in sufficient  quantities to meet  business  needs.  In order to
accommodate  anticipated  sales volume growth,  capacity  expansion  efforts are
being

                                       15
<PAGE>


pursued. The Company will be dependent upon its contract manufacturers to comply
with good manufacturing practices and to meet its production requirements. There
can be no  assurance  that the  Company's  contract  manufacturers  will  timely
deliver  sufficient  quantities  of the  Company's  products or that the Company
would be able to find substitute manufacturers, if necessary.

Marketing

     The Company distributes  VIRACEPT in the United States through wholesalers.
Sales  volumes in the United  States are  influenced  by  underlying  demand and
wholesale inventory management practices.

     VIRACEPT  is covered by  Medicaid  programs in all states and is covered by
virtually all state AIDS Drug Assistance Programs ("ADAPs"). Currently, VIRACEPT
is paid for predominately by Medicaid,  private insurance and ADAPs. The Company
offers a patient  assistance  program  based upon  medical need for patients who
have no other means of coverage.
     Outside of North America and parts of Japan, VIRACEPT is marketed on behalf
of the  Company  and JT by Roche.  The  Company  receives  a royalty  on Roche's
world-wide sales of VIRACEPT.

     The  Company's   sales  and  marketing   efforts   utilize  a  field  sales
organization  which focuses primarily on office and  hospital-based  physicians,
including key medical thought  leaders.  Additionally,  the Company has obtained
market  access  and  availability  for its  products  in  part  by  establishing
relationships   within  key  market  segments,   including  health   maintenance
organizations, third-party payers and governmental agencies.

Human Resources

     As of July 28, 1998,  the Company had 991  employees,  of which 619 and 146
employees,  respectively,  were engaged in, or directly supported,  research and
product development and sales and marketing efforts. The Company's employees are
not covered by a collective  bargaining  agreement and the Company considers its
relations  with its  employees  to be  excellent.  The Company has entered  into
confidentiality agreements with all of its employees.

Item 2.       PROPERTIES

     The Company  currently leases  approximately  317,000 square feet of office
and laboratory space in the Torrey Pines and Sorrento Valley areas of San Diego.

     The Company's corporate  headquarters and administrative  offices currently
comprise approximately 118,000 square feet under lease agreements, most of which
expire in calendar 1999.

     Research and development  activities are located in  approximately  197,000
square feet of leased  space under  agreements  which  expire from 1999 to 2004.
These  state-of-the-art  facilities  are designed to  implement  and support the
Company's  innovative  approach to drug design.  Included in the  facilities are
approved scale-up  laboratories in which kilogram quantities of Company-designed
drug compounds are manufactured under current good manufacturing

                                       16
<PAGE>


practices  for  use  in  clinical  trials.  Additionally,   the  Company  leases
approximately  2,000 combined square feet in the United Kingdom and Canada which
is  utilized,  respectively,  by its  European  clinical  development  staff and
Canadian marketing organization.

Item 3.       LEGAL PROCEEDINGS

     The Company is involved in certain legal proceedings  generally  incidental
to its normal  business  activities.  While the outcome of any such  proceedings
cannot be  accurately  predicted,  the Company  does not  believe  the  ultimate
resolution of any such existing matters should have a material adverse effect on
its financial position or results of operations.

Item 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     During the fourth  quarter of the year ended June 30, 1998, no matters were
submitted to a vote of the Company's security holders.

                                       17
<PAGE>


                                     PART II


Item 5.       MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
              MATTERS

     The  Company's  common  stock  trades on The Nasdaq  Stock Market under the
symbol AGPH. There were approximately 30,000 shareholders of the common stock of
the Company as of July 28, 1998.  The Company has not paid cash dividends on its
common stock and does not intend to do so in the foreseeable future.


The  following  table  sets  forth the range of high and low  selling  prices as
reported by The Nasdaq Stock Market for the periods indicated.
<TABLE>
<CAPTION>

                                                                              High              Low
                                                                           ---------        ---------
1997
<S>      <C>                                                                  <C>              <C>

         First Quarter                                                     $  23.125        $  14.500
         Second Quarter                                                       35.750           21.125
         Third Quarter                                                        50.500           33.500
         Fourth Quarter                                                       45.500           29.187

1998

         First Quarter                                                     $  56.500        $  39.250
         Second Quarter                                                       56.500           26.750
         Third Quarter                                                        40.000           29.250
         Fourth Quarter                                                       40.250           28.750
</TABLE>




                                       18
<PAGE>


Item 6.       SELECTED CONSOLIDATED FINANCIAL DATA

     The following table summarizes certain selected consolidated financial data
for each of the five years in the period  ended June 30, 1998.  The  information
presented  should  be  read  in  conjunction  with  the  consolidated  financial
statements included elsewhere in this report.
<TABLE>
<CAPTION>

(In thousands, except
per share amounts)                                      1998         1997         1996         1995         1994
----------------------------------------------------------------------------------------------------------------
<S>                                               <C>          <C>          <C>          <C>           <C>

Statement of Income (Loss) Data:
Years ended June 30,
     Total revenues                               $  466,505   $  132,063   $   55,955   $   26,722    $  16,301
     Product sales                                   409,298       56,969            0            0            0
     Research and development expenses(1)            150,657      108,137       71,010       36,317       23,957
     Net income (loss) (1)  and (2)                   13,154      (42,806)     (19,523)     (12,939)      (9,462)
     Net income (loss) per share                  $      .40   $    (1.59)  $     (.99)  $     (.89)   $    (.66)
     Shares used in computing net income
          (loss) per share                            33,214       26,946       19,688       14,592       14,482

Balance Sheet Data:
At June 30,
     Working capital                              $  127,728   $  115,786   $   70,381   $    8,837    $  21,039
     Total assets                                    363,337      266,914      102,577       27,097       37,178
     Long-term liabilities                             6,915        7,217        1,734        1,884        2,285
     Stockholders' equity(3)                         236,169      191,282       75,583       12,591       24,852
</TABLE>

     (1) In 1998, includes in-licensing  expenses of $26,000,000  ($15,600,000
         net of tax) for commercial rights to three development stage anti-HIV
         products.

     (2) In 1997, includes the write-off of $57,500,000 of in-process technology
         associated with the acquisition of Alanex Corporation, partially offset
         by the  realization of  $43,800,000  of deferred tax assets  associated
         with the Company's expectation of future taxable income.

     (3) The Company has never  declared  or paid cash  dividends  on its common
         stock.

                                       19
<PAGE>


Item 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
              RESULTS OF OPERATIONS

Overview

     This discussion contains  forward-looking  statements.  Such statements are
subject to certain risks and  uncertainties  which could cause actual results to
differ  materially  from  those  projected.  See  "Important  Factors  Regarding
Forward-Looking  Statements"  attached as Exhibit 99 to this Form 10-K.  Readers
are cautioned not to place undue  reliance on these  forward-looking  statements
which speak only as of the date hereof.  The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.

     The Company is committed to the discovery,  development,  manufacturing and
marketing of human  pharmaceuticals  targeting  cancer,  AIDS, and other serious
diseases.  Operations  to date have been  principally  funded from the Company's
equity-derived  working capital,  various  collaborative  arrangements and, most
recently,  from the gross margin contribution of its first product,  VIRACEPT(r)
(nelfinavir mesylate). The net income reported in fiscal 1998 is principally due
to the  commercialization  of VIRACEPT  while the Company's  prior net operating
losses reflect primarily the result of its independent  research and substantial
investment in the clinical and  commercial  development  of VIRACEPT and certain
anti-cancer compounds.

     In March 1997, the Company  received  clearance from the United States Food
and Drug Administration ("FDA") to market VIRACEPT in the United States. For the
fiscal year ended June 30,  1998,  due  principally  to the  increasing  product
contribution  from  VIRACEPT  sales,  license  fees and  royalties,  the Company
realized a net income of $13,154,000.

Results of Operations

Product sales

     Product  sales  for the  fiscal  years  ended  June 30,  1997 and 1998 were
approximately  $57,000,000 and  $409,300,000  which included sales in the United
States of $55,559,000 and $358,321,000,  respectively.  The Company  anticipates
that  VIRACEPT  sales in the United  States  will  approximate  $430,000,000  to
$440,000,000 for fiscal 1999.

Contract revenues

     Collaborative  research and development  agreements with Japan Tobacco Inc.
("JT"), Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd (collectively "HLR")
accounted for  substantially  all of the Company's  contract  revenues for 1998,
1997 and 1996. Total contract revenues for 1998 decreased approximately 40% from
1997 due principally to decreased  VIRACEPT program  spending by Agouron,  which
was partially funded by JT. Additionally,  the amortization to revenue over a 24
month period of JT's $24,000,000 milestone payment, which was received in August
1995, was completed in June 1997. The increase in contract revenues

                                       20
<PAGE>


from 1996 to 1997 of approximately  59% was due principally to increased program
activity and spending on the JT collaborations.

     In December 1997, the Company agreed to end its  collaboration  with HLR in
the field of  cancer.  As a result of the  termination  agreement,  Agouron  has
regained all rights to its anti-cancer  drugs previously within the scope of the
HLR collaboration.

     The  Company  anticipates  that  contract  revenues  for  fiscal  1999 will
approximate $35,000,000 to $40,000,000.

License fees and royalties

     The Company's license fees and royalties for 1998 and 1997 were principally
derived  from F.  Hoffmann-La  Roche Ltd  ("Roche");  license  fees in 1996 were
earned from HLR. Total revenues for 1998 increased  approximately  83% from 1997
due to European marketing  approval for VIRACEPT.  The 33% decrease from 1996 to
1997 is principally due to $9,000,000 for initial European  marketing rights for
VIRACEPT in 1997 versus  $15,000,000 for initial  world-wide  development rights
for two anti-cancer drugs in 1996.

     In January and March 1998,  VIRACEPT was  approved for  marketing in Europe
and Japan,  respectively.  Upon such approvals,  the Company realized as revenue
license  fees  totaling  $12,000,000.  In July 1997,  the Company and JT granted
Roche certain exclusive rights to VIRACEPT in several Asian countries.  For such
rights, the Company received a license fee of $2,000,000.

     Royalty revenues of  approximately  $3,852,000 have been recognized in 1998
based on estimated and actual Roche sales of VIRACEPT in its licensed territory.
The Company  anticipates  that license fees and  royalties  for fiscal 1999 will
range from $30,000,000 to $35,000,000.

Cost of product sales

     The  aggregate  cost of product  sales as a percentage of product sales was
approximately  43% and 42% for 1997 and 1998,  respectively.  Gross  margins  on
United States  commercial sales were  approximately  57% and 65% during 1997 and
1998, respectively.  The Company anticipates that gross margins on United States
commercial  sales will  improve as product  sales  volumes  increase and certain
manufacturing process and scale efficiencies are realized,  and will approximate
71% in 1999.  Aggregate  gross  margins will also be impacted by the size of the
Company's  patient  assistance  program  (which  provides free goods to indigent
individuals), the Company's manufacturing supply arrangement with Roche (whereby
Roche  has  the  right  to  either  purchase  product  at  Agouron's  cost  plus
contractually  determined  mark-ups or manufacture drug product for its own use,
subject to contractually determined fees to be paid to Agouron) and the level of
sales subject to Medicaid and other discounts or rebates in the United States.


                                       21
<PAGE>


Research and development

     Research and development  ("R&D") spending  increased by approximately  39%
from 1997 to 1998 due to license fees for three  development stage HIV products,
increasing  average  R&D  staff  levels  (approximately  28%) and  staff-related
spending  (including  occupancy  and the addition of Alanex since late 1997) and
increased  expenditures for human clinical trial activities  associated with the
clinical  development  of certain of the Company's  anti-cancer  compounds.  R&D
spending  increased  by  approximately  52% from 1996 to 1997 due  generally  to
increasing  average  R&D  staff  levels  (approximately  39%) and  staff-related
expenditures  (including occupancy),  increased expenditures in support of human
clinical  trials,  an expanded  access  program  associated  with  VIRACEPT  and
increased  expenditures for clinical trial activities associated with AG3340 and
other anti-cancer compounds.  The Company anticipates that total R&D expenses in
fiscal 1999,  excluding the impact of any license fees or milestone  expenses in
either 1998 or 1999, will exceed fiscal 1998 expenses by approximately 40%.

Selling, general and administrative

     Selling,   general  and   administrative   ("SG&A")  expenses   represented
approximately  28% of total  operating  expenses  (excluding the cost of product
sales,  royalties and write-off of in-process technology purchased) in 1998, 23%
in 1997 and 10% in 1996. SG&A increased by  approximately  76% from 1997 to 1998
due  principally to a full year of expenses  associated with the sales force and
other marketing personnel. Spending increases from 1996 to 1997 were due chiefly
to increasing staff levels (approximately 214%) and staff-related  expenditures,
certain  premarketing  and advertising  and promotion costs  associated with the
launch of VIRACEPT in March 1997 and other costs associated with a growing sales
and marketing  infrastructure.  The Company anticipates that total SG&A expenses
will increase by  approximately  40% in fiscal 1999 due to increasing  sales and
marketing activities and the support of VIRACEPT phase IV marketing studies.

Royalties

     The Company's  obligation to share VIRACEPT profits with JT is reflected in
royalty  expense  for 1998 and  represents  approximately  19% of United  States
product sales. Royalties in fiscal 1997 were not significant.  It is anticipated
that  royalty  expense  for fiscal  1999 will  approximate  24% to 25% of United
States product sales.

Write-off of in-process technology purchased

     In 1997, the Company  acquired  Alanex,  a research  company engaged in the
discovery of drug leads  through the  high-speed  screening of diverse  chemical
libraries  designed by  computational  methods and  generated  by  combinatorial
chemistry. Alanex was acquired in a purchase transaction through the issuance of
approximately  1,992,000  equivalent shares  (including  548,000 for options and
warrants) of the  Company's  common stock valued at  approximately  $61,000,000,
plus $1,300,000 of related  acquisition  costs. The purchase price was allocated
to various tangible and intangible assets and either capitalized  (approximately
$4,800,000) or expensed  (approximately  $57,500,000)  as in-process  technology
based on an

                                       22
<PAGE>


independent valuation of the Alanex assets, technology and research programs at 
the date of acquisition.

Interest and other income

     Interest  income  increased  by 1%  from  1997  to  1998.  Interest  income
increased by  approximately  23% from 1996 to 1997 due  principally  to a higher
average  investment  portfolio  balance  resulting  from  the July  1996  public
offering, receipt of $15,000,000 and $9,000,000,  respectively,  in license fees
from HLR (June 1996) and Roche (January 1997),  significantly increased contract
funding from JT and HLR and the exercise of employee stock options.  The Company
anticipates that, absent additional  revenue sources or a significant  change in
interest  rates,  fiscal 1999  interest  income will be less than that of fiscal
1998.

Interest expense

     Interest expense increased in 1998 from 1997 due to borrowings under a line
of credit  which  was used to  partially  fund  quarterly  royalties  paid to JT
throughout  the  year.   Interest  expense   decreased  in  1997  from  1996  by
approximately  38%  due  to  a  decreasing  level  of  debt  and  capital  lease
obligations from year to year.

Income tax provision (benefit)

     The income tax  provision  in 1998 has been  computed  using an  effective,
combined  federal  and  state  rate of 40%.  The cash  obligation  of such  1998
provision has been mostly offset by the  utilization of its deferred tax assets.
Based on its 1998 pre-tax  profit and its estimates for future  taxable  income,
the Company  believes it is more  likely than not that its  deferred  tax assets
(comprised mostly of net operating loss carryforwards,  deductions  generated by
the exercise of stock options,  and research  credits) will be realized and has,
therefore,  recorded  the full tax  benefit  of its  deferred  tax  assets.  The
Company's accumulated net deferred tax assets totaled approximately  $55,900,000
and  $64,100,000  at June 30, 1997 and 1998.  The Company  anticipates  that its
effective  income  tax rate for fiscal  1999 will  range  from 10% to 15%.  Such
decrease from fiscal 1998 is attributed to greater expected  availability of R&D
tax credits due to the anticipated  increase in R&D spending and the anticipated
reduction in R&D contract revenues.

Year 2000

     The Year 2000 issue  results from  computer  programs and systems that were
created  to  accept  only  two  digit  dates.  Such  systems  may not be able to
distinguish  20th century  dates from 21st century  dates.  This could result in
miscalculations  and system  failures.  The Company has  established a Year 2000
project  team  that  is  currently   reviewing  computer  systems  and  computer
controlled  equipment that could be affected by this issue. In this process, the
Company  expects to both  replace and  upgrade  certain  systems and  equipment.
Additionally, the Company is in the process of contacting all of its significant
external  business  partners  to  determine  the extent to which the  Company is
vulnerable to their failure to obtain Year 2000 compliance. While the total cost
of  obtaining  Year 2000  compliance  is not  known at this  time,  the  Company
believes such cost will not have a material  effect on the  Company's  business,
financial position, or results

                                       23
<PAGE>


of operation.  However, even though the Company plans to have obtained Year 2000
compliance  prior to the year 2000, the inability of the Company or its business
partners to adequately  address year 2000 issues could have a significant impact
on the Company's business.

Liquidity and Capital Resources

     Prior to fiscal 1998, the Company relied  principally on equity  financings
and corporate collaborations to fund its operations and capital expenditures. In
fiscal 1998,  due  primarily to the  successful  commercialization  of VIRACEPT,
operating  activities  have  provided  $827,000  of  cash  compared  with  using
$73,467,000  in fiscal  1997.  Commercial  sales of  VIRACEPT  for 1997 and 1998
resulted in gross margins of approximately $32,370,000 and $236,654,000.

     At June 30,  1998,  the Company had net  working  capital of  approximately
$127,728,000,  an  increase  of  $11,942,000  over  June  30,  1997  levels  due
principally to the Company's pre-tax profit of $21,924,000.  Individual  working
capital components  significantly  impacted by the commercialization of VIRACEPT
include trade accounts receivable (an increase of $18,416,000),  inventories (an
increase of  $44,906,000),  accounts  payable (an increase of  $15,560,000)  and
accrued  liabilities  (an  increase  of  $26,467,000,  primarily  due to accrued
royalties  payable  to  JT).  It  is  anticipated  that  these  working  capital
components and cash and short-term investments will continue to be significantly
impacted as VIRACEPT  sales  increase.  At June 30, 1998,  the Company had cash,
cash equivalents and short-term  investments of approximately  $87,123,000.  The
Company  believes  that its  current  capital  resources,  existing  contractual
commitments and anticipated  VIRACEPT product sales  contribution are sufficient
to maintain its current  operations through fiscal 1999. This belief is based on
current research and clinical  development  plans,  anticipated  working capital
requirements  associated with the expanding  commercialization of VIRACEPT,  the
current  regulatory   environment,   historical   industry   experience  in  the
development of therapeutic drugs and general economic conditions.

     The Company believes that additional  financing may be required to meet the
planned operating needs after fiscal 1999 if significant and increasing positive
cash flows are not  generated  from  commercial  activities.  Such  needs  would
include the expenditure of substantial funds to continue and expand research and
development  activities,  conduct existing and planned  preclinical  studies and
human clinical trials and to support the increasing working capital requirements
of a  growing  commercial  infrastructure  including  manufacturing,  sales  and
marketing  capabilities.  As a result, the Company anticipates  pursuing various
financing alternatives such as collaborative  arrangements and additional public
offerings or private  placements of  securities.  If such  alternatives  are not
available,  the Company may be required to defer or restrict certain  commercial
activities,  delay  or  eliminate  expenditures  for  certain  of its  potential
products  under  development,  cancel  licenses from third parties or to license
third parties to commercialize  products or technologies  that the Company would
otherwise seek to develop or commercialize itself.

     During fiscal 1998, capital  expenditures totaled $33,086,000 compared with
$14,727,000 and $3,710,000 during 1997 and 1996, of which $1,579,000, $2,355,000
and $457,000  were financed  through  capital  lease  obligations.  Of the total
capital  expenditures  during 1998,  1997 and 1996,  approximately  $14,331,000,
$4,728,000 and $318,000 represented  leasehold improvement costs associated with
certain  of the  Company's  facilities.  With  the  exception  of the  leasehold
improvement costs,  virtually all of the capital  expenditures during 1998, 1997
and 1996

                                       24
<PAGE>


represented  laboratory  and office  equipment  and  scientific  instrumentation
necessary  to  support  an  expanding  research,   development,  and  commercial
infrastructure.   Capital   expenditures   during   1999  are   expected  to  be
approximately  $18,000,000  to  support  continued  product   commercialization,
development and research activities.  Of the total expected capital expenditures
during  1999,   approximately   $4,000,000  is  associated  with  the  leasehold
improvement  of existing  and  anticipated  new  administrative  and  laboratory
facilities.  The  Company  may  utilize  lease  or debt  financing  for  certain
expenditures if available on acceptable terms.

                                       25
<PAGE>


Item 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES                               PAGE
-------------------------------------------                               ----

Report of Independent Accountants                                          F-1

Consolidated Balance Sheet as of June 30, 1998 and 1997                    F-2

Consolidated Statement of Income (Loss) for the years ended                F-3
           June 30, 1998, 1997 and 1996

Consolidated Statement of Stockholders' Equity for the
           years ended June 30, 1998, 1997 and 1996                        F-4

Consolidated Statement of Cash Flows for the years ended
           June 30, 1998, 1997 and 1996                                    F-5

Notes to Consolidated Financial Statements                                 F-6

NOTE:  All schedules are omitted  because they are not  applicable,  or not
       required,  or because the required  information is included in the
       consolidated financial statements or notes thereto.

                                       26
<PAGE>


                                                   

REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of Agouron Pharmaceuticals, Inc.

In our opinion,  the  accompanying  consolidated  balance  sheet and the related
consolidated  statements of income (loss),  of stockholders'  equity and of cash
flows  present  fairly,  in all material  respects,  the  financial  position of
Agouron  Pharmaceuticals,  Inc. and its  subsidiaries at June 30, 1998 and 1997,
and the results of their  operations  and their cash flows for each of the three
years in the period ended June 30, 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 an 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

San Diego, California
July 16, 1998





                                      F-1
<PAGE>


AGOURON PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>


                                                                                           June 30,
                                                                                ----------------------------
                                                                                      1998              1997
                                                                                ----------       -----------
ASSETS

Current assets:
<S>                                                                             <C>              <C>

       Cash and cash equivalents                                                $   19,098       $    52,484
       Short-term investments                                                       68,025            38,833
       Accounts receivable, net                                                     51,341            31,375
       Inventories                                                                 103,706            58,800
       Current deferred tax assets                                                     564               500
       Other current assets                                                          5,247             2,209
                                                                                ----------       -----------

       Total current assets                                                        247,981           184,201

Property and equipment, net                                                         47,212            22,613

Deferred tax assets                                                                 64,644            56,000

Purchased intangibles                                                                3,500             4,100
                                                                                ----------       -----------

                                                                                $  363,337       $   266,914
                                                                                ==========       ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
       Accounts payable                                                         $   44,393       $    28,833
       Accrued liabilities                                                          35,356             8,889
       Deferred revenue and advances                                                23,563            27,567
       Current deferred tax liabilities                                              1,139               600
       Loan payable and current portion of long-term debt                           15,802             2,526
                                                                                ----------       -----------

       Total current liabilities                                                   120,253            68,415
                                                                                ----------       -----------

Long-term liabilities:
       Long-term debt, less current portion                                          5,892             5,940
       Accrued rent                                                                  1,023             1,277
                                                                                ----------       -----------

       Total long-term liabilities                                                   6,915             7,217
                                                                                ----------       -----------

Stockholders' equity:
       Common stock, no par value, 75,000,000 shares authorized,
           31,053,380 and 29,429,920 shares issued and outstanding                 348,482           317,133
       Unrealized gains (losses) on short-term investments                             384                 0
       Accumulated deficit                                                        (112,697)         (125,851)
                                                                                ----------       -----------

       Total stockholders' equity                                                  236,169           191,282
                                                                                ----------       -----------

Commitments
                                                                                $  363,337       $   266,914
                                                                                ==========       ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-2
<PAGE>


AGOURON PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENT OF INCOME (LOSS)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>

                                                                          Years ended June 30,
                                                              --------------------------------------------
                                                                       1998           1997            1996
                                                              -------------  -------------   -------------

<S>                                                           <C>            <C>             <C> 
Revenues:
     Product sales                                            $     409,298  $      56,969   $           0
     Contracts                                                       38,855         65,094          40,955
     License fees and royalties                                      18,352         10,000          15,000
                                                              -------------  -------------   -------------

                                                                    466,505        132,063          55,955
                                                              -------------  -------------   -------------
Operating expenses:
     Cost of product sales                                          172,644         24,599               0
     Research and development                                       150,657        108,137          71,010
     Selling, general and administrative                             58,012         32,941           8,082
     Royalties                                                       68,423              0               0
     Write-off of in-process technology purchased                         0         57,500               0
                                                              -------------  -------------   -------------

                                                                    449,736        223,177          79,092
                                                              -------------  -------------   -------------

Operating income (loss)                                              16,769        (91,114)        (23,137)
                                                              -------------  -------------   -------------

Other income (expenses):
     Interest and other income                                        5,907          5,873           4,776
     Interest expense                                                  (752)          (142)           (228)
                                                              -------------  -------------   -------------

                                                                      5,155          5,731           4,548
                                                              -------------  -------------   -------------

Income (loss) before income taxes                                    21,924        (85,383)        (18,589)

Income tax provision (benefit)                                        8,770        (42,577)            934
                                                              -------------  -------------   -------------

Net income (loss)                                             $      13,154  $     (42,806)  $     (19,523)
                                                              =============  =============   =============

Earnings per share:
     Basic                                                    $         .43  $       (1.59)  $        (.99)
                                                              =============  =============   =============
     Diluted                                                  $         .40  $       (1.59)  $        (.99)
                                                              =============  ==============  =============

Shares used in calculation of:
     Basic                                                           30,571         26,946          19,688
     Diluted                                                         33,214         26,946          19,688
</TABLE>





See accompanying notes to consolidated financial statements.



                                      F-3
<PAGE>


AGOURON PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>


                                                                       Unrealized
                                                                          gains
                                                                       (losses) on
                                                 Common Stock          short-term     Accumulated
                                             Shares         Amount     investments        Deficit          Total
                                         ----------    -----------     -----------    -----------    -----------
<S>                                      <C>           <C>             <C>            <C>            <C>

Balance at June 30, 1995                 14,718,564    $    76,113     $         0    $   (63,522)   $    12,591

   Stock issuances:
     Public sale                          6,000,000         78,579                             --         78,579
     Exercise of stock options              586,412          2,990                             --          2,990
     Exercise of stock warrants              90,000            283                             --            283
     Employee stock purchase plan            68,398            663                             --            663
   Net loss                                      --             --                        (19,523)       (19,523)
                                        -----------    -----------     -----------    -----------    -----------

Balance at June 30, 1996                 21,463,374        158,628               0        (83,045)        75,583

   Stock issuances:
     Public sale                          5,470,000         77,245                             --         77,245
     Acquisition of Alanex                1,444,236         61,051                             --         61,051
     Exercise of stock options              980,472          6,720                             --          6,720
     Employee stock purchase plan            71,838          1,389                             --          1,389
   Tax benefit of stock options exercised              --              12,100                        --
12,100
   Net loss                                      --             --                        (42,806)       (42,806)
                                        -----------    -----------     -----------    -----------    -----------

Balance at June 30, 1997                 29,429,920        317,133               0       (125,851)       191,282

Stock issuances:
     Exercise of stock options            1,344,104         11,031                             --         11,031
     Exercise of stock warrants             169,522            680                             --            680
     Employee stock purchase plan           109,834          2,742                             --          2,742
   Tax benefit of stock options exercised              --              16,896                        --
16,896
   Change in unrealized gains (losses) on
     short-term investments                                                    384                           384
   Net income                                    --             --                         13,154         13,154
                                        -----------    -----------     -----------    -----------    -----------

Balance at June 30, 1998                 31,053,380    $   348,482     $       384    $  (112,697)   $   236,169
                                        ===========    ===========     ===========    ===========    ===========
</TABLE>



See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>


AGOURON PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>

                                                                                   Years ended June 30,
                                                                       -----------------------------------------
                                                                              1998           1997           1996
                                                                       -----------    -----------    -----------

Cash flows from operating activities:
<S>                                                                    <C>            <C>            <C>        
     Cash received from product sales, contracts and licenses          $   442,484    $   116,692    $    61,376
     Cash paid to suppliers, employees and service providers              (446,863)      (195,890)       (73,738)
     Interest received                                                       5,958          5,873          4,776
     Interest paid                                                            (752)          (142)          (228)
                                                                       -----------    -----------    -----------

     Net cash provided (used) by operating activities                          827        (73,467)        (7,814)
                                                                       -----------    -----------    -----------

Cash flows from investing activities:
     Proceeds from maturities/sales of short-term investments              147,292        127,501         59,686
     Purchases of short-term investments                                  (176,100)       (91,227)      (118,224)
     Purchase of  property and equipment                                   (31,507)       (12,372)        (3,252)
     Cost to acquire Alanex, net of cash acquired                                0            608              0
                                                                       -----------    -----------    -----------

     Net cash provided (used) by investing activities                      (60,315)        24,510        (61,790)
                                                                       -----------    -----------    -----------

Cash flows from financing activities:
     Net proceeds from issuance of common stock                             14,453         85,354         82,515
     Proceeds from credit line                                              53,600              0              0
     Principal payments on credit line, long-term debt,
       and capital leases                                                  (41,951)          (364)          (818)
                                                                       -----------    -----------    -----------

     Net cash provided (used) by financing activities                       26,102         84,990         81,697
                                                                       -----------    -----------    -----------

Net increase (decrease) in cash and cash equivalents                       (33,386)        36,033         12,093
Cash and cash equivalents at beginning of year                              52,484         16,451          4,358
                                                                       -----------    -----------    -----------

Cash and cash equivalents at end of year                               $    19,098    $    52,484    $    16,451
                                                                       ===========    ===========    ===========

Reconciliation of net loss to net cash provided (used)
 by operating activities:
     Net income (loss)                                                 $    13,154    $   (42,806)   $   (19,523)
     Depreciation and amortization                                           9,087          3,910          2,411
     Write-off of in-process technology purchased                                0         57,500              0
     Provision (benefit) for deferred income taxes                           8,727        (43,800)             0
     Net (increase) decrease in inventories                                (44,906)       (58,547)             0
     Net (increase) decrease in accounts receivable and other
       current assets                                                      (23,004)       (28,209)        (1,198)
     Net increase (decrease) in accounts payable, accrued
       liabilities, deferred revenue and advances, and other liabilities    37,769         38,485         10,496
                                                                        ----------     ----------    -----------


Net cash provided (used) by operating activities                       $       827    $   (73,467)   $    (7,814)
                                                                       ===========    ===========    ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>


AGOURON PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 - The Company and its significant accounting policies

The Company

Agouron  Pharmaceuticals,  Inc.  ("Agouron" or the  "Company") was organized and
incorporated in California in June 1984. Agouron is an integrated pharmaceutical
company committed to the discovery, development,  manufacturing and marketing of
innovative therapeutic products engineered to inactivate proteins which play key
roles in cancer, AIDS and other serious diseases.  The Company,  through its own
sales and marketing  organization,  is currently  marketing in the United States
its  first  drug,  VIRACEPT(r)   (nelfinavir  mesylate)  for  treatment  of  HIV
infection.  The Company is also conducting  pivotal phase II/III clinical trials
for AG3340 for treatment of lung and prostate  cancer.  In addition,  Agouron is
expected  to  initiate  a phase  II/III  pivotal  clinical  trial  of  REMUN(tm)
(AG1661),  an immune-based  therapeutic agent for treatment of HIV infection and
AIDS being co-developed by Agouron and The Immune Response  Corporation ("IRC").
Further,  the Company has a number of programs  in  progress  for  discovery  or
development of other new drugs in the fields of cancer,  viral disease and other
serious diseases.  The Company is also using the proprietary core drug discovery
technology of Alanex Corporation  ("Alanex"),  a wholly-owned  subsidiary of the
Company,  to  accelerate  the steps  necessary to discover  small-molecule  drug
candidates,  from the initial  identification of compounds that exhibit activity
against  selected  biological  targets to the  progression of these compounds to
drug candidates for human clinical trials.

Principles of consolidation

     The consolidated  financial  statements include the accounts of the Company
and its wholly-owned  subsidiaries.  All significant  intercompany  accounts and
transactions have been eliminated.

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,  liabilities,  revenues
and expenses and related disclosures as of the date of the financial statements.
Actual results could differ from such estimates.

Cash and cash equivalents

     The Company  considers cash equivalents to be only those  investments which
are highly liquid,  readily  convertible to cash and which mature within 90 days
from date of purchase.


                                      F-6
<PAGE>


Short-term investments

     Short-term  investments  consist  principally  of  government or government
agency securities,  corporate notes and bonds, commercial paper and certificates
of deposit with original maturities of three to thirty-six months, and corporate
equity  securities.  The Company has classified  its  short-term  investments as
available-for-sale. Included in short-term investments at June 30, 1998 and 1997
is $1,262,000 and $588,000 of accrued interest receivable.

Inventories

     Inventories  are stated at the lower of cost or market.  Cost is determined
using the first-in, first-out method.

Concentration of credit and market risk

     The Company  invests its excess cash  principally in marketable  securities
from a diversified  portfolio of institutions with strong credit ratings and, by
policy,  limits  the amount of credit  exposure  at any one  institution.  These
investments  are generally not  collateralized  and primarily  mature within one
year. The Company has not realized any material losses from such  investments in
1998, 1997 or 1996.

Financial instruments and risk management

     The  Company  has  contract  manufacturing  operations  in Europe and Asia.
Accordingly,  the Company from  time-to-time  enters into  forward  contracts to
manage its exposure to fluctuations in foreign currency  exchange rates. At June
30, 1998, the Company had several forward contracts with maturities of less than
six  months  to  purchase  Japanese  Yen  for  approximately  $9,426,000.  These
contracts are  designated  and effective as hedges and,  accordingly,  gains and
losses are  recognized  in the same  period the  offsetting  gains and losses of
hedged transactions are realized and recognized.

Property and equipment

     Property and equipment is recorded at cost.  Depreciation is computed using
principally  the  straight-line  method over estimated  useful lives of three to
five years. Leasehold improvements are amortized over the life of the lease.

Purchased intangibles

     In  conjunction  with the 1997  acquisition  of  Alanex,  the  Company  has
recorded purchased intangibles (primarily drug discovery technology and chemical
compound  libraries)  which are being  amortized on a  straight-line  basis over
their estimated useful lives of seven years.

Deferred revenue and advances

     Approximately  $22,414,000 of cash received from JT has been  classified as
deferred  contract revenue and advances.  Approximately  $21,452,000 of the cash
received from JT represents JT's

                                      F-7
<PAGE>


advance of the  Company's  VIRACEPT  development  funding  obligation  which was
completed  in March  1998.  Such  amounts are to be repaid by the Company out of
future profits, if any, generated by sales of VIRACEPT in the United States. The
balance of the payments from JT are  non-refundable  and are being recognized as
contract  revenue on a  prospective  basis  generally as  collaborative  program
expenses are incurred.

Product sales

     The Company ships VIRACEPT to wholesalers  throughout the United States and
recognizes  sales  revenue upon  shipment.  Sales are reported net of discounts,
rebates, chargebacks and product returns.

     Also  included  in  product  sales  for 1998  and  1997  are  approximately
$50,979,000  and  $1,441,000  of sales  (at cost plus  contractually  determined
mark-ups) to Roche of clinical and commercial  drug supplies to be used by Roche
in its licensed territory.  The Company receives a royalty on Roche's subsequent
commercial sales of such drug supplies.

Contract revenues

     Contract revenues are earned and recognized  generally as contract research
costs are incurred  according to the  provisions of each  underlying  agreement.
Amounts  received in advance of  performance  are recorded as deferred  revenue.
Contract  milestone  payments are  recognized as revenues upon the completion of
the milestone event or requirement.

License fees and royalties

     License fees are  recognized as revenue 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  revenues are  recognized  based on  estimated  and actual sales of
licensed products in licensed territories.

Research and development costs

     Research and development costs are expensed in the period incurred.

Income tax provision (benefit)

     The  Company  records a  provision  (benefit)  for income  taxes  using the
liability method.  Current income tax expense (benefit)  generally is the amount
of income taxes expected to be payable for the current year.  Deferred taxes are
recorded by applying  applicable tax rates to cumulative  temporary  differences
based on when and how they are expected to affect the tax return.


                                      F-8
<PAGE>


Earnings (loss) per share

     The Company  computes  earnings per share in accordance  with  Statement of
Financial  Accounting  Standards  No. 128  "Earnings  Per Share" Basic  earnings
(loss)  per share is based upon the  weighted  average  number of common  shares
outstanding during a period. Diluted earnings (loss) per share is based upon the
weighted  average number of common shares  outstanding and dilutive common stock
equivalents  during a period.  Common stock  equivalents  are options  under the
Company's  stock  option  plans  which are  included in the  earnings  per share
computation  under the treasury  stock method and common  shares  expected to be
issued under the Company's employee stock purchase plan.

     Common stock  equivalents of  approximately  2,643,000 shares for 1998 were
used to calculate  diluted earnings per share.  For 1997 and 1996,  common stock
equivalents  of  approximately  3,168,000 and 2,014,000  shares were not used to
calculate  diluted  earnings  (loss) per share  because  of their  anti-dilutive
effect.  There are no reconciling  items in calculating  the numerator for basic
and diluted earnings (loss) per share for any of the periods presented.

Stock-based compensation plans

     The Company measures compensation expense for its stock-based  compensation
plans using the  intrinsic  method and  provides  pro-forma  disclosures  of net
income and earnings (loss) per share as if the fair value-based  method had been
applied in measuring compensation expense.

Statement of cash flows

     For purposes of the Statement of Cash Flows,  cash  equivalents  are highly
liquid  investments  purchased with an original maturity of ninety days or less.
Non-cash financing and investing  activities are comprised  primarily of capital
lease obligations of $1,579,000, $2,355,000 and $457,000 for 1998, 1997 and 1996
and the acquisition of Alanex in 1997.

New accounting standards

     In June 1997, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement  of  Financial  Accounting  Standards  No. 130 ("FAS 130")  "Reporting
Comprehensive  Income,"  which  requires  additional  disclosures  to be adopted
beginning with the quarter ending September 30, 1998. Under FAS 130, the Company
will be required to display  comprehensive  income and its components as part of
the Company's complete set of financial statements.

     In June 1997, the FASB also issued FAS 131,  "Disclosures about Segments of
an Enterprise and Related Information," which requires additional disclosures to
be adopted on June 30, 1999. FAS 131 requires that the Company report  financial
and descriptive information about its reportable operating segments. The Company
is evaluating the impact on its disclosures, if any.


                                      F-9
<PAGE>


Note 2 -  Short-term investments

     The cost of the  Company's  investment  portfolio  by type of security  and
contractual maturity in the balance sheet is as follows:
<TABLE>
<CAPTION>

                                                                                       June 30,
                                                                      ----------------------------------
                                                                                1998                1997
                                                                      --------------      --------------

              <S>                                                      <C>                <C>
              (Dollars in thousands)

              Type of security:
                  Corporate debt                                       $      46,023      $       24,401
                  U.S. Treasury and agencies                                  10,766              11,994
                  Other interest-bearing                                       9,462               2,438
                  Corporate equity                                             1,774                   0
                                                                       -------------      --------------

                                                                       $      68,025      $       38,833
                                                                       =============      ==============

              Contractual maturity:
                  Maturing in less than twelve months                  $      41,389      $       35,827
                  Maturing between twelve and
                      thirty-two months                                       26,636               3,006
                                                                       -------------      --------------

                                                                       $      68,025      $       38,833
                                                                       =============      ==============
</TABLE>

     The  cost  of  securities   sold,  if  any,  is  based  upon  the  specific
identification  method.  The net unrealized  holding gain on  available-for-sale
securities included as a separate component of stockholders'  equity at June 30,
1998 totaled $384,000. There were no material unrealized gains or losses nor any
material  differences  between the estimated fair values and costs of securities
in the investment  portfolio at June 30, 1997.  Realized gains and losses on the
disposal  of  available-for-sale  securities  during  1998  totaled  $20,000 and
$2,000,  respectively.  During  1997 such gains and losses  totaled  $12,000 and
$4,000, respectively. During 1996, such gains totaled $22,000.


                                      F-10
<PAGE>


Note 3 - Composition of certain financial statement captions
<TABLE>
<CAPTION>

                                                                                         June 30,
                                                                                --------------------------
                                                                                      1998            1997
                                                                                ----------     -----------
(Dollars in thousands)

<S>                                                                             <C>            <C>
Accounts receivable, net:
     Trade                                                                      $   44,471     $    26,055
     Contract                                                                        2,451           4,668
     Royalties                                                                       2,339               0
     Employee                                                                          252             269
     Other                                                                           1,828             383
                                                                                ----------     -----------

                                                                                $   51,341     $    31,375
                                                                                ==========     ===========

Inventories:
     Raw materials and work in process                                          $   95,517     $    57,883
     Finished goods                                                                  8,189             917
                                                                                ----------     -----------

                                                                                $  103,706     $    58,800
                                                                                ==========     ===========

Property and equipment, net:
     Scientific instrumentation                                                 $   26,869     $    16,614
     Leasehold improvements                                                         25,135          10,804
     Computer equipment                                                             15,619           8,892
     Furniture and fixtures                                                          3,910           2,464
                                                                                ----------     -----------

                                                                                    71,533          38,774
     Less accumulated depreciation and amortization                                (24,321)        (16,161)
                                                                                ----------     -----------

                                                                                $   47,212     $    22,613
                                                                                ==========     ===========

Accrued liabilities:
     Royalties                                                                  $   21,410     $         0
     License fees                                                                    6,000               0
     Vacation                                                                        2,955           1,932
     Clinical studies                                                                2,731           3,578
     Other                                                                           2,260           3,379
                                                                                ----------     -----------

                                                                                $   35,356     $     8,889
                                                                                ==========     ===========
</TABLE>

                                      F-11
<PAGE>


Note 4 - Significant contract arrangements

Japan Tobacco Inc.

     In February 1994, the Company entered into a strategic  alliance with JT in
the  field of  anti-viral  drugs  for the  treatment  of  infections  caused  by
hepatitis C and the herpes  family of viruses.  In  December  1994,  the Company
added its anti-HIV drug, VIRACEPT, to the JT collaboration with the execution of
a world-wide  development and licensing agreement.  Agouron and JT share equally
the costs of further development of VIRACEPT.

     Currently,  Agouron has exclusive  commercial  rights to VIRACEPT (with the
right to sublicense) in North America and JT has exclusive  commercial rights to
VIRACEPT (with the right to  sublicense)  in parts of Japan.  The Company and JT
share profits and/or royalties equally from the world-wide  commercialization of
VIRACEPT.

     Under the  combined  terms of the JT  agreements,  the Company has incurred
costs of $51,898,000,  $71,825,000 and $46,969,000 and recognized  corresponding
contract  revenues of  $17,359,000,  $48,886,000  and  $37,197,000 for the years
ended June 30, 1998, 1997 and 1996.

Roche

     The Company and JT have granted Roche  certain  exclusive  royalty  bearing
marketing  rights to VIRACEPT  outside of North America and parts of Japan.  For
such  rights,  the Company has  received  (and  recognized  as revenue)  initial
license fees and  additional  product  approval  license fees.  The Company also
receives  royalties  based  either on Roche's  sales of VIRACEPT  or, in certain
circumstances,  Invirase(r) and Fortavase(r) (saquinavir),  Roche's HIV protease
inhibitors.  VIRACEPT license fees and royalties from Roche totaled  $17,852,000
and $9,000,000 for the years ended June 30, 1998 and 1997.

HLR

     In June 1996,  Agouron  granted HLR  world-wide  development  rights in two
anti-cancer   drugs  and  agreed  to  collaborate  with  HLR  on  an  additional
early-stage  anti-cancer drug discovery program.  In return for such rights, HLR
paid  $15,000,000  in  initial  license  fees and  agreed to bear 80% of certain
future  development  costs and to provide annual research support to the Company
of $3,000,000.  In December 1997, Agouron and HLR agreed to end this anti-cancer
research and development collaboration.  The Company has regained all commercial
rights  to  the   anti-cancer   drugs   previously   within  the  scope  of  the
collaboration.

     Under  the terms of the  anti-cancer  agreements  with HLR which  have been
terminated,  the Company  incurred  costs of  $23,486,000  and  $17,854,000  and
recognized  corresponding  contract  revenues of $15,428,000 and $14,270,000 for
the years ended June 30, 1998 and 1997.

The Immune Response Corporation

     In June 1998, the Company  entered into a binding letter of intent with IRC
to  collaborate  on  final  development  and  commercialization  of  REMUNE,  an
immune-based therapeutic agent
                                      F-12
<PAGE>


discovered  by IRC  and  currently  the  subject  of  several  clinical  studies
including a large phase III clinical  trial.  The two companies  intend to enter
promptly into a definitive  agreement and will endeavor to complete  development
and registration of REMUNE in 1999. IRC will manufacture  commercial supplies of
REMUNE,  and  Agouron  will have  exclusive  rights  to  market  REMUNE in North
America,  Europe and  certain  other  countries.  The two  companies  will share
equally  all  profits  from the  commercialization  of  REMUNE  in the  licensed
territory.  Agouron paid an initial  $10,000,000 license fee to IRC in June 1998
and also purchased 118,256 newly issued common shares of IRC for $2,000,000. The
Company's  development  funding  obligation  commences  October  15,  1998  and,
assuming ongoing  successful  development,  registration and approval of REMUNE,
the Company  may pay to IRC up to  $53,000,000  in  additional  development  and
milestone payments and $12,000,000 in purchases of additional IRC common stock.

Shionogi & Co., Ltd.

     In June 1998,  the  Company  entered  into a binding  letter of intent with
Shionogi  & Co.,  Ltd.  ("Shionogi")  to develop  and  commercialize  AG1549,  a
second-generation  non-nucleoside reverse transcriptase  inhibitor ("NNRTI") for
the treatment of HIV infection.  Discovered by Shionogi, AG1549 is currently the
subject of several  clinical trials  evaluating its dose and its concomitant use
with other antiretroviral treatments.

     Agouron  has   exclusive   world-wide   rights  to  the   development   and
commercialization  of AG1549  except in Japan,  South Korea and Taiwan.  Agouron
paid an initial  $10,000,000 license fee in June 1998. Agouron may pay, assuming
ongoing successful development,  registration and approval of AG1776, additional
license  fees of up to  $30,000,000.  In  addition,  Agouron  will pay  Shionogi
royalties based on sales, if any, of AG1549.

Japan Energy Corporation

     In June 1998,  the Company  entered  into an  agreement  with Japan  Energy
Corporation  ("JE")  to  develop  and  commercialize  AG1776,  a novel  protease
inhibitor for the treatment of HIV infection.  Agouron has exclusive  world-wide
rights to the development and commercialization of AG1776 except in Japan, South
Korea,  North Korea and Taiwan;  JE will  manufacture  bulk  compound for use in
final drug product.  Agouron incurred an initial  $6,000,000 license fee in June
1998. Agouron may pay, assuming ongoing successful development, registration and
approval of AG1776,  additional license fees of up to $20,000,000.  In addition,
Agouron will pay JE royalties based on sales, if any, of AG1776.


                                      F-13
<PAGE>


Note 5 - Long-term debt

     Long-term debt and capital lease obligations are as follows:
<TABLE>
<CAPTION>

                                                                                        June 30,
                                                                         -------------------------------
                                                                           
                                                                                  1998              1997
                                                                         -------------    --------------
(Dollars in thousands)

<S>                                                                      <C>              <C>
Notespayable,  secured  with  personal  property and a
     certificate  of deposit; interest at CD rate plus 1.5%,
     paid off in June 1998.                                              $           0    $          142

Capital leases with interest rates between 5.86% and 16.5%,
     maturing at various dates through June 2003.                                3,214             2,462

Line of credit, $20,000,000 secured; interest at bank reference
      rate or LIBOR plus 1.5%, expiring September 30, 1998.                     15,000                 0

Unsecured,  non-interest  bearing,  term  obligation;
     face value of $4,500,000; discounted  to an  8.95%
     effective  rate,  includes  imputed  interest  of $548,000
     due June 28, 2001.                                                          3,480             3,194

Term obligation for tenant improvements, interest
     at 11% per annum, payable in monthly installments,
     paid off in October 1997.                                                       0             2,668
                                                                         -------------    --------------

Total long-term debt and capital lease obligations                              21,694             8,466

Current portion                                                                (15,802)           (2,526)
                                                                         -------------    --------------

                                                                         $       5,892    $        5,940
                                                                         =============    ==============
</TABLE>

     Maturities of long-term debt,  excluding  capital  leases,  are as follows:
1999 - $15,000,000;  2000- $0; and 2001 - $4,500,000,  less imputed  interest of
$1,020,000.

                                      F-14
<PAGE>


Note 6 - Income taxes

(Dollars in thousands)

     The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>

                                                          1998         1997         1996
                                                     ---------    ---------     --------
          <S>                                        <C>          <C>           <C>
          Year ended June 30,
          Current:
              Federal                                $       0    $       0     $      0
              State                                         43            1            1
              Foreign                                        0        1,222          933
                                                     ---------    ---------     --------
                                                            43        1,223          934
                                                     ---------    ---------     --------

          Deferred:
              Federal                                    8,495      (37,800)           0
              State                                        232       (6,000)           0
              Foreign                                        0            0            0
                                                     ---------    ---------     --------
                                                         8,727      (43,800)           0
                                                     ---------    ---------     --------

                                                     $   8,770    $ (42,577)    $    934
                                                     =========    =========     ========
</TABLE>

     The income tax  reconciliation  from  income  (loss)  before  income  taxes
computed at the federal  statutory rate (34%) to the Company's actual income tax
provision is as follows:
<TABLE>
<CAPTION>

          Year ended June 30,                             1998         1997         1996
                                                     ---------    ---------     --------
          <S>                                        <C>          <C>           <C>      
          Tax at U.S. federal statutory rate         $   7,454    $ (29,030)    $ (6,320)
          State taxes, net of federal benefit              181            1            1
          Foreign taxes                                      0        1,222          933
          Purchase accounting book/ tax basis
            differences                                      0       19,781            0
          Change in valuation allowance                      0      (42,449)       6,245
          Other                                          1,135          415           75
          Adjustments to carryover amounts                   0        7,483            0
                                                     ---------    ---------     --------
                                                     $   8,770    $ (42,577)    $    934
                                                     =========    =========     ========
</TABLE>

     The Company's deferred tax assets and liabilities are as follows:


                                                             June 30
                                                     ----------------------
                                                          1998         1997
                                                     ---------    ---------
          Book and tax depreciation/amortization
            differences                              $   5,891    $     831
          Accrued liabilities                            1,951        1,363
          Net operating loss carryforwards              51,281       49,348
          Tax credits                                    6,956        5,676
          Other                                         (2,010)      (1,318)
                                                     ---------    ---------
                                                        64,069       55,900
          Valuation allowance                                0            0
                                                     ---------    ---------
          Deferred taxes, net                        $  64,069    $  55,900
                                                     =========    =========

     The Company has not recorded  current  provisions for United States federal
income taxes due to net operating losses for tax reporting purposes. At June 30,
1998, the Company had net operating loss carryforwards for federal tax reporting
purposes  of  approximately  $150,000,000  expiring  from 2000 to 2013.  The net
operating  loss  includes  the tax  benefit  related  to the  exercise  of stock
options, which benefit was recorded to common stock. The Company also has
 
                                     F-15
<PAGE>


federal   research  and  development   credit   carryforwards  of  approximately
$4,800,000  at June 30,  1998.  The future  utilization  of net  operating  loss
carryforwards for federal income tax purposes may be impacted by the issuance of
additional equity securities.

     Due to California's  partial conformity with federal  provisions  regarding
net operating loss and research and development credit  carryforwards,  and as a
result of the Company's use of certain state tax planning strategies,  for state
tax reporting  purposes at June 30, 1998,  the Company has no net operating loss
carryforwards  and  has  research  and  development   credit   carryforwards  of
approximately $2,200,000. Such credits do not expire.

     Based on its 1998  operating  results and its  estimates of future  taxable
income,  the Company  believes that it is more likely than not that its deferred
tax assets  (comprised  mostly of net operating loss  carryforwards and research
credits) will be realized and has therefore recorded the full tax benefit of its
deferred tax assets as of June 30, 1998.

     Foreign tax expense  represents  certain  withholding taxes associated with
collaboration payments from JT.


                                      F-16
<PAGE>


Note 7 -  Stockholders' equity

Stock Options

     The Company's stock option plans, as amended, 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 at the date of grant and, for certain  non-qualified  stock options,  the
price shall not be less than 85% of the fair  market  value of the shares at the
date of  grant  and  others  may be at any  price  determined  by the  Board  of
Directors.  The  options  expire  not later  than ten years from the date of the
grant and generally become exercisable  ratably over a three or four year period
beginning one year from the grant date. In February 1998, the Board of Directors
adopted  the most  recent  plan  and  reserved  1,000,000  shares  for  issuance
thereunder.  At June 30, 1998, the Company had 1,898,556  shares of common stock
available  for future grant under its stock option plans.  The  following  table
summarizes stock option activity for 1996 through 1998:
<TABLE>
<CAPTION>
                                                                              Shares                Prices
                                                                       -------------     -----------------

<S>                                                                    <C>               <C>        <C>   
           Outstanding June 30, 1995                                       5,171,384     $  .24-    $12.25
                Options granted                                            2,324,950      11.78-     23.00
                Options exercised                                           (586,412)      2.70-      9.19
                Options canceled                                             (81,208)      3.94-     19.57
                                                                       -------------

           Outstanding June 30, 1996                                       6,828,714       2.70-     23.00

                Alanex options assumed                                       378,084        .27-      3.98
                Options granted                                            2,798,500      15.19-     47.13
                Options exercised                                           (980,472)       .27-     22.19
           Options canceled                                                 (205,536)      4.32-     36.35
                                                                       -------------

           Outstanding June 30, 1997                                       8,819,290        .27-     47.13

                Options granted                                            1,115,394      28.00-     55.13
           Options exercised                                              (1,344,104)       .27-     34.82
           Options canceled                                                 (169,312)       .27-     55.13
                                                                       -------------

           Outstanding June 30, 1998                                       8,421,268     $  .27-    $55.13
                                                                       =============
</TABLE>

                                      F-17
<PAGE>


     The following  table  summarizes  information  concerning  outstanding  and
exercisable options as of June 30, 1998:
<TABLE>
<CAPTION>

                                                 Options Outstanding                      Options Exercisable
                                -------------------------------------------------     --------------------------
                                   Number           Weighted         Weighted            Number         Weighted
                                 Outstanding         Average          Average          Exercisable       Average
          Ranges of Exercise        as of           Remaining        Exercise             as of         Exercise
          Prices                June 30, 1998     Life (years)         Price          June 30, 1998       Price
                                -------------    --------------   ---------------     -------------   ----------
 
          <S>                  <C>               <C>              <C>               <C>              <C>          
          Less than $20.00         3,601,287               6.14   $         8.70        2,810,426    $        7.47
          $20.00 to $40.00         3,276,381               8.25            27.18        1,149,617            23.74
          Greater than $40.00      1,543,600               8.99            42.56          370,058            41.26
                               -------------     --------------   --------------    -------------    -------------
                                   8,421,268               7.48   $        22.10        4,330,101    $       14.68
                               =============     ==============   ==============    =============    =============
</TABLE>

     The Company  applies APB  Opinion  No. 25 and  related  Interpretations  in
accounting  for  its  plans.  Accordingly,  no  compensation  expense  has  been
recognized  for  its  stock  option  plans.  Had  compensation  expense  for the
Company's  stock option plans been  determined  based upon the fair value method
prescribed  under  FAS 123,  the  Company's  reported  results  would  have been
impacted as follows:
<TABLE>
<CAPTION>

(In thousands, except per share amounts)                   1998          1997           1996
                                                      ---------      --------      ---------

                  <S>                                 <C>           <C>             <C>
                  Net income (loss)
                    As reported                       $ 13,154      $(42,806)       $(19,523)
                    Compensation expense:
                      Stock options                    (19,891)       (9,496)         (1,133)
                      Employee stock purchase plan      (1,441)         (394)           (204)
                                                      --------       -------        --------
                    Pro-forma                         $ (8,178)     $(52,696)       $(20,860)
                                                      ========      ========        ========

                  Pro-forma earnings (loss) per share:
                    Basic                             $   (.27)      $ (1.96)       $  (1.06)
                    Diluted                           $   (.27)      $ (1.96)       $  (1.06)
</TABLE>

     The  weighted-average  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  1998,  1997  and  1996,  respectively:
expected volatility of 50% each year;  risk-free interest rate of 5.7%, 6.1% and
6.1%;  an  average  expected  life of 3  years,  4  years  and 4  years;  and no
dividends.  The weighted average fair value of stock option grants was $16.57 in
1998, $15.25 per share in 1997 and $8.97 per share in 1996.

     In connection with its 1997 acquisition of Alanex,  the Company assumed all
of the issued and  outstanding  options of Alanex  which  resulted in options to
purchase  an  aggregate  of  378,084  shares of the  Company's  common  stock at
exercise prices ranging from $.27 to $3.98 per share.

Employee Stock Purchase Plan

     The Company  has a stock  purchase  plan in which  eligible  employees  may
purchase  shares of the Company's  common stock through  payroll  deductions.  A
total of 500,000  shares of common stock have been  reserved for issuance  under
the plan,  of which  131,156  shares  remain  available for purchase at June 30,
1998. Funds deducted from participating employees' salaries are used to purchase
common stock at prices equal to 85% of the fair market value of the common stock
on either  the first or last day of a  purchase  period.  During  1998,  109,834
shares were issued at a

                                      F-18
<PAGE>


price of $24.97 per share.  During 1997,  9,730 shares were issued at a price of
$14.29 per share,  47,036  shares were issued at a price of $17.37 per share and
15,072  shares were issued at a price of $28.69 per share.  During 1996,  12,262
shares were issued at a price of $4.94 per share, 46,480 shares were issued at a
price of $9.99 per share and 9,656  shares  were issued at a price of $14.29 per
share.

     Under FAS 123,  pro-forma  compensation  expense equal to the fair value of
the purchase rights granted under the employee stock purchase plan was estimated
using the Black-Scholes model with the following  assumptions for 1998, 1997 and
1996:  an  expected  life of one year;  expected  volatility  of 50  percent;  a
risk-free interest rate of 5.6 percent;  and no dividends.  The weighted-average
fair value of purchase  rights  granted was $13.12 per share in 1998,  $5.96 per
share in 1997 and $3.47 per share in 1996.

Warrants

     In connection with its 1997  acquisition of Alanex,  the Company assumed an
issued and outstanding warrant to purchase Alanex common stock. Accordingly,  at
June 30,  1997,  a warrant to purchase  an  aggregate  of 169,522  shares of the
Company's  common stock at an exercise price of $4.01 per share was outstanding.
In July 1997, the warrant was exercised in its entirety  generating net proceeds
to the Company of approximately $679,800.

Stockholder Rights Plan

         In November 1996, the Company's Board of Directors  declared a dividend
of one preferred  stock purchase right ("Right") for each  outstanding  share of
the  Company's  common stock held on the date (this  dividend now amounts to one
half of a Right  per share of common  stock now  outstanding  as a result of the
two-for-one  split of common  stock in August  1997).  The Rights will expire 10
years after issuance,  and will be exercisable only if a person or group becomes
the beneficial owner of 15% or more of the common stock (such person or group, a
"15% holder") or commences a tender or exchange  offer which would result in the
offeror  beneficially  owning 15% or more of the common  stock.  Each Right will
entitle  stockholders  to buy one  one-ten  thousandth  of a share  of  Series B
Participating Preferred Stock of the Company at an exercise price of $500.00 per
share subject to certain anti-dilution adjustments.

     If a person or group  accumulates  15% or more of the  common  stock,  each
Right (other than Rights held by a 15% holder and certain related parties, which
will be voided) will be adjusted so that upon  exercise the holder will have the
right  to  receive  that  number  of  shares  of  common  stock  (or in  certain
circumstances,  a combination  of securities  and/or  assets)  having a value of
twice the  exercise  price of the Right.  In addition,  if following  the public
announcement  of the  existence  of a 15%  holder,  the Company is involved in a
merger or business  combination or a sale of 50% or more of the Company's assets
or earning power, each Right (other than Rights held by a 15% holder and certain
related parties,  which will be voided) will represent the right to purchase, at
the exercise price, common stock of the acquiring entity having a value of twice
the exercise price at the time. The Board of Directors will also have the right,
following the public  announcement  of the  existence of a 15% holder,  to cause
Rights  (other than Rights held by the 15% holder and certain  related  parties,
which will be voided) to be exchanged  for one share of common stock  (presently
at an exchange ratio of two shares of common stock for each Right).

                                      F-19
<PAGE>


Note 8 - Commitments

     Certain  scientific  instrumentation,  computers  and other  equipment  are
subject to leases which are classified as capital  leases.  At June 30, 1998 and
1997,  $4,331,000  ($3,408,000,  net) and $2,895,000  ($2,629,000,  net) of such
leased equipment are included in property and equipment.

     Rental  expenses   (principally  for  leased   facilities  under  long-term
operating  lease  commitments)  were  $5,031,000,  $3,509,000 and $2,548,000 for
1998, 1997 and 1996. Future minimum payments for capital and operating leases at
June 30, 1998 are as follows:
<TABLE>
<CAPTION>

                                                      Capital Leases               Operating Leases
                                                      --------------               ----------------
(Dollars in thousands)
<S>                                                   <C>                           <C>

           1999                                       $        819                  $        7,472
           2000                                                812                           5,507
           2001                                                818                           5,314
           2002                                                578                           3,943
           2003                                                243                           2,630
           Thereafter                                            0                           2,047
                                                      ------------                  --------------

           Total minimum lease payments                      3,270                  $       26,913
                                                                                    ==============
           Less amount representing interest                   (56)
                                                      -------------

           Obligations under capital leases           $      3,214
                                                      ============
</TABLE>

     The Company is involved in certain legal proceedings  generally  incidental
to its normal  business  activities.  While the outcome of any such  proceedings
cannot be  accurately  predicted,  the Company  does not  believe  the  ultimate
resolution of any such existing matters should have a material adverse effect on
its financial position or results of operations.


                                      F-20
<PAGE>


Note 9 - Alanex acquisition

     In April 1997, the Company executed a merger  agreement with Alanex,  which
now operates as a wholly-owned subsidiary of Agouron. For all outstanding shares
of Alanex common stock and related options and warrants, approximately 2,000,000
shares of Agouron  common  stock were issued,  subject to certain  restrictions.
Such  shares had an  aggregate  fair  market  value on the  measurement  date of
approximately  $61,000,000 and transaction costs were approximately  $1,300,000.
Of the total purchase  price  (including  transaction  costs),  $57,500,000  was
allocated  (as more  fully  described  below) to certain  intangible  assets and
expensed as in-process technology and approximately  $4,800,000 was allocated to
certain tangible and intangible assets and capitalized.

     The  identifiable  intangibles of Alanex include  several drug research and
discovery programs, a proprietary drug discovery technology, a chemical compound
library and an assembled work force.  These intangibles were valued using either
a replacement cost approach (work force, library and proprietary  technology) or
an income approach (research programs). Values assigned to the chemical compound
library and proprietary drug discovery technology have been capitalized, as such
intangibles are of a general nature and may have a number of alternative  future
uses. Values assigned to the drug discovery programs have been expensed, as such
programs  are  pursuing  specific  drug  targets  or  chemical  compounds,   the
technological  feasibility of which having not been demonstrated,  and there may
be no  alternative  future uses for such  targets or chemical  compounds  if the
programs are ultimately less than successful.

     The Company's statement of income (loss) includes the results of operations
related to the  acquisition  since  April  1997.  The  following  are  unaudited
pro-forma  results of operations as if the transaction  had been  consummated on
July 1, 1995:

(In thousands except for per share amounts.)

         Year ended June 30,                    1997              1996
                                             (unaudited)       (unaudited)

         Revenues                           $     138,872    $      62,392
                                            =============    =============

         Net income (loss)                  $      14,276    $     (19,421)
                                            =============    =============

         Earnings (loss) per share          $         .51    $        (.92)
                                            =============    =============


                                      F-21
<PAGE>



Note 10 - Quarterly financial data (unaudited)

(In thousands, except for
per share amounts)
<TABLE>
<CAPTION>
                                                                   Quarter Ended
                                        ---------------------------------------------------------------
                                         September 30     December 31         March 31          June 30
                                        -------------     -------------    -------------     ----------
<S>                                     <C>               <C>              <C>               <C>    

1997
Product sales                           $           0     $           0    $      13,401     $   43,568
Gross margin from product sales                     0                 0            7,378         24,992
Net loss                                      (14,447)          (12,556)          (4,999)       (10,804)
Earnings (loss) per share:
  Basic                                          (.57)             (.46)            (.18)          (.38)(1)
  Diluted                                        (.57)             (.46)            (.18)          (.38)(1)

1998
Product sales                           $      79,502     $      91,800    $     111,950     $  126,046
Gross margin from product sales                45,429            53,858           62,730         74,637
Net income (loss)                               3,630             4,922           13,525         (8,923)
Earnings (loss) per share:
  Basic                                           .11               .16              .44           (.29)(2)
  Diluted                                         .11               .15              .41           (.29)(2)

</TABLE>

(1)  During the fourth  quarter of 1997,  the Company  recorded a  write-off  of
     $57,500,000 ($2.03 per share) of in-process  technology associated with the
     acquisition of Alanex,  partially  offset by the realization of $43,800,000
     ($1.54 per share) of  deferred  tax assets  associated  with the  Company's
     expectation of future taxable income.

(2)  During the fourth quarter of 1998, the Company incurred in-licensing costs
     of $26,000,000 (tax-effected $.50 per share) for commercial rights to three
     development stage anti-HIV products.


                                      F-22
<PAGE>




Item 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
              FINANCIAL DISCLOSURE

                                      None.


                                     29
<PAGE>


                                    PART III

Item 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>

                  Name                          Age                        Position
                  ----                          ---                        --------

           <S>                                   <C>          <C>                                                         
           Peter Johnson                         53           President, Chief Executive Officer and Director

           Marvin R. Brown, M.D.                 51           Vice President, and President of Alanex

           Neil J. Clendeninn, M.D., Ph.D.       49           Corporate Vice President, Head of Clinical Affairs

           Steven S. Cowell                      49           Corporate Vice President, Finance and Chief
                                                                Financial Officer

           William C. Denby                      43           Vice President, Head of Marketing and Sales

           Gary E. Friedman                      51           Corporate   Vice    President,    General    Counsel,
                                                                Secretary and Director

           Donna C. Nichols                      41           Vice President, Head of Corporate Communications

           Barry D. Quart, Pharm.D.              41           Senior Vice President, Head of Drug Development

           R. Kent Snyder                        44           Senior Vice President, Head of Commercial Affairs

           Michael D. Varney, Ph.D.              40           Vice President, Head of Research

           Stephanie Webber, Ph.D.               50           Vice President, Head of Development Pharmacology

           Glenn R. Zinser                       55           Corporate Vice President, Head of Operations

           John N. Abelson, Ph.D.(1)             59           Director

           Patricia M. Cloherty(2)               56           Director

           A.E. Cohen(1)                         62           Director

           Michael E. Herman(1)                  57           Director

           Irving S. Johnson, Ph.D.              73           Director

           Antonie T. Knoppers, M.D.(2)          83           Director

           Melvin I. Simon, Ph.D.(2)             61           Director
</TABLE>



(1)  Member of Directors Compensation Committee
(2)  Member of Audit Committee

                                       30
<PAGE>


     Peter  Johnson,  a founder of the Company,  has served as a director and as
president  and chief  executive  officer of the Company  since its  inception in
1984.  Through  1989,  Mr.  Johnson  held  various  positions  with The  Agouron
Institute,  including executive  director.  Mr. Johnson received a M.A. from the
University of California, San Diego.

     Marvin R. Brown joined the Company in 1997 as vice president, and president
of Alanex.  In 1991,  Dr. Brown founded  Alanex and, from 1993 until joining the
Company, served as president,  chief executive officer and chairman of the board
of Alanex.  Prior to joining  Alanex,  Dr. Brown served as professor of medicine
and surgery and director of the peptide biology  laboratory at the University of
California,  San Diego from 1986 through 1991 and was on the faculty of the Salk
Institute for Biological  Studies from 1975 to 1986. Dr. Brown received his M.D.
from the University of Arizona.

     Neil J. Clendeninn  joined the Company in 1993 as vice president,  clinical
affairs. In 1997, Dr. Clendeninn was promoted to corporate vice president,  head
of clinical  affairs.  From 1985 until joining the Company,  Dr. Clendeninn held
various   positions  with  Burroughs   Wellcome  Co.,   including  head  of  the
chemotherapy  section from 1988. From 1981 through 1985, Dr.  Clendeninn  worked
with the  clinical  oncology and  clinical  pharmacology  groups at the National
Institutes of Health. Dr. Clendeninn received a M.D. and a Ph.D. in pharmacology
from New York University.

     Steven S. Cowell joined the Company in 1991 as vice president,  finance and
chief  financial  officer.  In 1997,  Mr. Cowell was promoted to corporate  vice
president.  From 1982  until  joining  the  Company,  Mr.  Cowell  held  various
positions,  the most recent of which was vice  president and controller at Cetus
Corporation,   a  public   biotechnology   company   primarily  engaged  in  the
development, manufacture and marketing of pharmaceutical products. Mr. Cowell is
a Certified  Public  Accountant  in  California  and received a B.S. in business
administration from the University of California, Berkeley.

     William  C.  Denby  joined  the  Company in 1995 and in 1997 was named vice
president,  head of marketing and sales. Previously,  Mr. Denby served as senior
director of marketing and sales. From 1978 until joining the Company,  Mr. Denby
held  various  positions  at  Marion  Laboratories,  Inc.  (now  Hoechst  Marion
Roussel),  including  strategic  planning  manager  and managed  care  marketing
manager.  Mr. Denby received a B.A. in English from the State  University of New
York, and holds a M.B.A. in Finance from Rockhurst College.

     Donna C.  Nichols  joined  the  Company  in 1987 and in 1997 was named vice
president,  head of  corporate  communications.  Previously,  Ms.  Nichols  held
various  positions  within  the  Company,  most  recently  as  senior  director,
corporate communications. Ms. Nichols attended Kent State University.

     Gary E. Friedman,  a founder of the Company, has served as a director since
its inception,  as the secretary of the Company since 1986 and as vice president
and general  counsel since 1991. In 1997, Mr. Friedman was promoted to corporate
vice president.  Previously,  from 1982 until joining the Company,  Mr. Friedman
was a  principal  of the law firm of  Friedman,  Jay &  Cramer,  a  Professional
Corporation. Mr. Friedman is a California Certified Specialist in Taxation. Mr.

                                       31
<PAGE>


Friedman  received a J.D. and a M.B.A.  from the  University of California,
Berkeley and a L.L.M. in taxation from the University of San Diego.
     
     Barry D. Quart  joined the  Company in 1993 as vice  president,  regulatory
affairs.  In 1997,  Mr. Quart was named to senior vice  president,  head of drug
development.  From 1983 until  joining  the  Company,  Dr.  Quart  held  various
positions with  Bristol-Myers  Squibb Company,  including  executive director of
international  regulatory  affairs from 1992. Dr. Quart  received a Pharm.D.  in
clinical pharmacy from the University of California, San Francisco.

     R. Kent  Snyder  joined  the  Company in 1991 as vice  president,  business
development.  In  1995,  Mr.  Snyder's  title  was  changed  to vice  president,
commercial  affairs and in 1997, he was named senior vice  president,  corporate
affairs.  From 1982 until joining the Company, Mr. Snyder held various positions
with Marion Laboratories,  Inc. (now Hoechst Marion Roussel), including director
of  U.S./European  licensing.  Prior to his  employment at Marion,  from 1978 to
1982, he held various sales and marketing positions with Hoffmann-LaRoche Ltd.
Mr. Snyder received a M.B.A. from Rockhurst College.

     Michael D. Varney  joined the  Company in 1987 and in 1997 was  promoted to
vice president,  head of research.  A synthetic organic chemist,  Dr. Varney has
been  involved  in all  aspects  of drug  discovery  at the  Company  since  its
inception.  Dr.  Varney  received his B.S. in Chemistry  from UCLA and Ph.D.  in
Natural Product  Synthesis from the California  Institute of Technology.  Before
joining the Company, he completed  postdoctoral research in Bioorganic Chemistry
at Columbia University.

     Stephanie  Webber  joined the  Company in 1988 and in 1997 was  promoted to
vice president, head of development pharmacology.  Previously, Dr. Webber served
as senior director,  pharmacology and toxicology.  From 1980 to 1988, Dr. Webber
was a  research  fellow at the  Scripps  Clinic  and  Research  Foundation.  She
received her B.S. in Biology from the University of Sussex, England, and holds a
Ph.D. in Zoology from the University of London.

     Glenn R. Zinser joined the Company in 1987 and,  since 1995,  has served as
vice president,  operations.  In 1997, Mr. Zinser was promoted to corporate vice
president,  head of operations.  Previously,  from 1987 through 1995, Mr. Zinser
held various management  positions with the Company,  including senior director,
operations  from 1993  through  1995.  Mr.  Zinser  received  a M.B.A.  from the
University of California, Los Angeles.

     John N. Abelson,  a founder of the Company,  has served as a director since
its inception.  Dr. Abelson, a molecular biologist,  is a member of the National
Academy of Sciences. Since 1982, Dr. Abelson has been a member of the faculty of
the Division of Biology at the California  Institute of Technology  where,  from
1989 until 1995, he served as chairman.  Previously, Dr. Abelson was a member of
the faculty in the Department of Chemistry at the University of California,  San
Diego.  Dr.  Abelson  received  a Ph.D.  in  biophysics  from The Johns  Hopkins
University and was a postdoctoral  fellow at the Laboratory of Molecular Biology
in  Cambridge,  England.  Dr.  Abelson  also serves as a director of The Agouron
Institute.


                                       32
<PAGE>


     Patricia M. Cloherty joined the Board in 1988. Since 1970, Ms. Cloherty has
been  associated  with Patricof & Co.  Ventures,  Inc.  (formerly  Alan Patricof
Associates, Inc.), a New York venture capital firm ("Patricof"),  and has been a
general partner of its funds since 1973.  From1993 until 1997, she was president
of  Patricof.  From  1997  to the  present,  Ms.  Cloherty  has  been  executive
co-chairman as well as general partner of Patricof.  Ms. Cloherty also served as
deputy  administrator  for the U.S.  Small Business  Administration  in 1977 and
1978.  Ms.  Cloherty  also serves on the board of directors  of several  private
companies.

     A.E. Cohen joined the Board in 1992. Mr. Cohen is an independent management
consultant.  From 1957 until his  retirement  in 1992,  Mr.  Cohen held  various
positions at Merck & Co., Inc., including senior vice president and president of
the Merck Sharp & Dohme  International  Division.  Currently,  Mr.  Cohen is the
chairman of the board of Neurobiological  Technologies,  Inc. and is a member of
the board of directors of Akzo Nobel N.v., Teva Pharmaceutical  Industries Ltd.,
Smith Barney (Mutual Funds), and Pharmaceutical  Product Development,  Inc., all
of which are public  companies.  Mr.  Cohen also serves as a  consultant  to The
Population  Council and Chugai  Pharmaceutical  Co. Ltd., Tokyo ("Chugai"),  and
serves as chairman of the board of Chugai's U.S. subsidiary companies. Mr. Cohen
also is a member of the board of directors of Lung Check, Inc.

     Michael  E.  Herman  joined  the  Board in 1992.  Mr.  Herman  is a private
investor,  as well as president and chief  operating  officer of the Kansas City
Royals  Baseball  Team.  From 1974 until his retirement in 1990, Mr. Herman held
various  positions at Marion  Laboratories,  Inc. (now Hoechst Marion  Roussel),
including executive vice president and chief financial officer.  Currently,  Mr.
Herman serves as chairman of the finance  committee of the Ewing Marion Kauffman
Foundation, a private foundation located in Kansas City, where from 1985 through
1990,  he was the president and chief  operating  officer.  Mr. Herman is also a
member of the board of directors of Cerner Corporation, Seafield Capital and SLH
Corporation,  all of which  are  public  companies,  and  serves on the board of
directors of several private companies.

     Irving S. Johnson  joined the Board in 1989.  Dr. Johnson is an independent
consultant in biomedical research working with numerous private companies.  From
1953 until his  retirement in 1988,  Dr.  Johnson held various  positions at Eli
Lilly and Company,  including  vice  president of research from 1973 until 1988.
Dr.  Johnson  also  served on  several  committees  of the  National  Academy of
Sciences,  the Office of Technology  Assessment  and the National  Institutes of
Health.  Currently,  he is a  member  of  the  board  of  directors  of  Allelix
Biopharmaceuticals Inc. and Ligand Pharmaceuticals  Incorporated,  and is on the
scientific  advisory  board  of  ELAN  Corporation,  all  of  which  are  public
companies.  Dr.  Johnson  received a Ph.D.  in  developmental  biology  from the
University of Kansas.

     Antonie  T.  Knoppers  joined  the  Board  in  1991.  Dr.  Knoppers  is  an
independent management  consultant.  From 1952 until his retirement in 1975, Dr.
Knoppers held various positions at Merck & Co., Inc., including vice chairman of
the board and president and chief operating officer. Dr. Knoppers is a member of
the board of directors of Centocor,  Inc., a public  biotechnology  company.  In
addition,  he is a former  chairman  of the U.S.  Council  of the  International
Chamber  of  Commerce  and  a  member  of  the  advisory  board  of  PaineWebber
Development Corporation, an affiliate of PaineWebber Incorporated.  Dr. Knoppers
received a

                                       33
<PAGE>


M.D. from the University of Amsterdam and a Ph.D. from the University of Leiden,
The Netherlands.

     Melvin I. Simon,  a founder of the Company,  has served as a director since
its inception.  Dr. Simon, a molecular  geneticist,  is a member of the National
Academy of Sciences. Currently, Dr. Simon is chairman of the Division of Biology
at the  California  Institute  of  Technology  where he has been a member of the
faculty  since 1982.  Previously,  Dr.  Simon was a member of the faculty in the
Department of Biology at the  University  of  California,  San Diego.  Dr. Simon
received a Ph.D. in biochemistry from Brandeis University. Dr. Simon also serves
as a director of The Agouron Institute.

Item 11.      EXECUTIVE COMPENSATION

Item 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Item 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information  required under Part III, Items 10 (in part), 11, 12 and 13
has been  omitted  from this report  since the Company  intends to file with the
Securities and Exchange  Commission,  not later than 120 days after the close of
its fiscal year, a definitive  proxy statement  prepared  pursuant to Regulation
14A, which information is hereby incorporated by reference.


                                       34
<PAGE>


                                     PART IV


Item 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 (a)          List of documents filed as part of this report:

              (1)     Financial Statements and Supplementary Data
                      Reference is made to the Index to Financial Statements and
                      Schedules  under  Item 8 in Part II  hereof,  where  these
                      documents are listed.
              (2)     Exhibits - see (c) below

 (b)          Reports on Form 8-K

     No reports on Form 8-K were filed during the fourth quarter of fiscal 1998.

(c)           Exhibits

         Exhibit
         Number                             Exhibit
         --------     ----------------------------------------------------------

           2.1(a)     Agreement and Plan of Reorganization dated as of April 28,
                      1997,  between  Agouron  Pharmaceuticals,   Inc.,  Agouron
                      Acquisition Corporation and Alanex Corporation.
           3.1(b)     Restated Articles of Incorporation (December 10, 1992).
           3.2(c)     Amended and Restated Bylaws (Restated June 17, 1991).
           4.1(d)     Rights  Agreement  dated  November 7, 1996,  as amended on
                      November  27,  1996,  between the Company and Chase Mellon
                      Shareholder  Services.  L.L.C., which includes, as Exhibit
                      A,  the  Certificate  of  Determination,  Preferences  and
                      Rights of Series B Participating  Preferred Stock as filed
                      with the  California  Secretary  of State on November  20,
                      1996.
         10.01(h)     1990 Stock Option Plan (Restated November 2, 1995).
         10.02(k)     Form of 1990 Incentive Stock Option Agreement.
         10.03(k)     Form of 1990 Non-Statutory Stock Option Agreement for 
                      Employees/Officers/Directors.
         10.04(k)     Form of 1990 Non-Statutory Stock Option Agreement for 
                      Consultants.
         10.05(c)     1985 Stock Option Plan (Last Amended August 14, 1991).
         10.06(e)     Agouron Pharmaceuticals, Inc. 401(k) Plan
                      (Amended August 1992).
         10.07(b)     Agouron Pharmaceuticals, Inc. Employee Stock Purchase Plan
                      (October 15, 1992).
         10.08(b)     Agouron Pharmaceuticals, Inc. Flexible Benefits Plan 
                      (December 10, 1992).
         10.09(f)     Agreement  Two  dated  February  28,  1994  between  Japan
                      Tobacco  Inc.  and  the  Company.
                      (Portions of the agreement receive confidential  treatment
                      pursuant to an application  filed April 25, 1994; File No.
                      0-15609).

                                       35
<PAGE>


         Exhibit
         Number                             Exhibit
         --------     ----------------------------------------------------------

         10.10(g)     Development  and License  Agreement dated December 1, 1994
                      between  Japan  Tobacco Inc. and the Company  (Portions of
                      the agreement receive  confidential  treatment pursuant to
                      an application dated January 31, 1995).
         10.11(h)     First  Amendment  to  Development  and  License  Agreement
                      effective  December 1, 1994 between Japan Tobacco Inc. and
                      the Company.  (Confidential  treatment has been  requested
                      for portions of this agreement  pursuant to an application
                      dated January 31, 1996. The underlying agreement was filed
                      as  Exhibit  10.54  on  Form  10-Q  for the  period  ended
                      December  31,   1994,   and   portions   thereof   receive
                      confidential   treatment  pursuant  to  an  order  of  the
                      Securities and Exchange Commission dated June 28, 1995.)
         10.12(i)     Amendment effective January 1, 1996 to the Agouron
                      Pharmaceuticals, Inc. 401(k) Plan.
         10.13(j)     1996 Stock Option Plan.
         10.14(j)     Form of 1996 Incentive Stock Option Agreement.
         10.15(j)     Form  of  1996  Non-Statutory   Stock  Option  Agreement
                      for Employees/Officers/Directors.
         10.16(j)     Form  of  1996  Stock  Option
                      Agreement for Consultants  10.17(l) Second Amendment to 
                      Development and License Agreement effective January 17, 
                      1997 between Japan   Tobacco  Inc.   and  the  Company
                      (Confidential treatment   has  been   requested  for  
                      portions  of  this agreement  pursuant  to an  application
                      dated  August 21, 1997, as separately filed with the
                      Securities and Exchange Commission.  The underlying 
                      agreement was filed as Exhibit 10.54 on Form 10-Q for the
                      period ended December 31, 1994, and  portions  thereof  
                      receive   confidential   treatment pursuant  to an  orde
                      of  the  Securities  and  Exchange Commission dated
                      June 28, 1995.)
         10.18(l)     Third  Amendment  to  Development  and  License  Agreement
                      effective  December 1, 1996 between Japan Tobacco Inc. and
                      the Company.  (Confidential  treatment has been  requested
                      for portions of this agreement  pursuant to an application
                      dated  August  21,  1997,  as  separately  filed  with the
                      Securities   and  Exchange   Commission.   The  underlying
                      agreement  was filed as Exhibit 10.54 on Form 10-Q for the
                      period  ended  December 31,  1994,  and  portions  thereof
                      receive confidential treatment pursuant to an order of the
                      Securities and Exchange Commission dated June 28, 1995.)
         10.19(l)     VIRACEPT License  Agreement  between the Company and Japan
                      Tobacco Inc. and F.  Hoffmann-La  Roche Ltd dated June 30,
                      1997.  (Confidential  treatment  has  been  requested  for
                      portions  of this  agreement  pursuant  to an  application
                      dated  August  21,  1997,  as  separately  filed  with the
                      Securities and Exchange Commission.)
         10.20(m)     Form of 1998 Employee Stock Option Plan.
         10.21(m)     Form of 1998 Employee Non-Statutory Stock Option
                      Agreement.


                                       36
<PAGE>


         Exhibit
         Number                             Exhibit
         --------     ----------------------------------------------------------

         10.22        License and Supply Agreement between the Company and Japan
                      Energy   Corporation   effective  as  of  June  30,  1998.
                      (Confidential treatment has been requested for portions of
                      this agreement  pursuant to an application dated August 4,
                      1998, as separately filed with the Securities and Exchange
                      Commission.)
         10.23        Common  Stock  Purchase   Agreement   between  The  Immune
                      Response  Corporation and the Company dated June 11, 1998.
                      (Confidential treatment has been requested for portions of
                      this agreement  pursuant to an application dated August 4,
                      1998, as separately filed with the Securities and Exchange
                      Commission.)
         10.24        Amendment to the VIRACEPT  License  Agreement  between the
                      Company and Japan  Tobacco Inc. and F.  Hoffmann-La  Roche
                      Ltd as of May 1, 1998.  (Confidential  treatment  has been
                      requested  for portions of this  agreement  pursuant to an
                      application dated August 4, 1998, as separately filed with
                      the Securities and Exchange Commission.)
         21           Subsidiaries of Agouron Pharmaceuticals, Inc.
         23.1         Consent of Independent Accountants.
         27           Financial  Data  Schedule.  (Exhibit 27 is  submitted  as
                      an exhibit  only in the  electronic format of this  Annual
                      Report on Form 10-K submitted to the Securities and
                      Exchange Commission.)
         99           Important Factors Regarding Forward-Looking Statements.


     (a) Incorporated by Reference to Form 8-K filed on May 23, 1997.
     (b)  Incorporated  by  Reference  to Form 10-Q filed for the quarter  ended
     December 31, 1992. (c) Incorporated by Reference to Form 10-K filed for the
     year ended June 30, 1991.  (d)  Incorporated  by  Reference  for Form 8-K/A
     filed on December  20,  1996.  (e)  Incorporated  by Reference to Form 10-K
     filed for the year ended June 30, 1992.  (f)  Incorporated  by Reference to
     Form 10-Q/A filed for the quarter ended March 31, 1994. (g) Incorporated by
     Reference to Form 10-Q filed for the quarter ended  December 31, 1994.  (h)
     Incorporated by Reference to Form 10-Q filed for the quarter ended December
     31, 1995. (i)  Incorporated by Reference to Form 10-Q filed for the quarter
     ended March 31, 1996.  (j)  Incorporated  by Reference to Form S-8 filed on
     November  26,  1996.  (k)  Incorporated  by  Reference to Form 10-Q for the
     quarter ended December 31, 1996. (l) Incorporated by Reference to Form 10-K
     for the year ended June 30, 1997. (m) Incorporated by Reference to Form S-8
     filed on February 19, 1998.

                                       37
<PAGE>


                                   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.
                                   AGOURON PHARMACEUTICALS, INC.

August 4, 1998                     By:  /s/ Peter Johnson
                                   ---------------------------------
                                   Peter Johnson
                                   President, Chief Executive Officer
                                   and Director

     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 date indicated.
<TABLE>
<CAPTION>

Signature                                                 Title                         Date
---------                                                 -----                         ----
<S>                                         <C>                                         <C>

/s/ Peter Johnson                           President, Chief Executive                  August 4, 1998
------------------------------------
Peter Johnson                               Officer and Director

/s/ Steven S. Cowell                        Corporate Vice President, Finance           August 4, 1998
------------------------------------
Steven S. Cowell                            and Chief Financial Officer

/s/ Gary E. Friedman                        Corporate Vice President,                   August 4, 1998
------------------------------------
Gary E. Friedman                            General Counsel, Secretary
                                            and Director

/s/ John N. Abelson                         Director                                    August 4, 1998
John N. Abelson, Ph.D.

/s/ Patricia M. Cloherty                    Director                                    August 4, 1998
------------------------------------
Patricia M. Cloherty

/s/ A. E. Cohen                             Director                                    August 4, 1998
A. E. Cohen

/s/ Michael E. Herman                       Director                                    August 4, 1998
------------------------------------
Michael E. Herman

/s/ Irving S. Johnson                       Director                                    August 4, 1998
Irving S. Johnson, Ph.D.

/s/ Antonie T. Knoppers                     Director                                    August 4, 1998
Antonie T. Knoppers, M.D.

/s/ Melvin I. Simon                         Director                                    August 4, 1998
Melvin I. Simon, Ph.D.
</TABLE>

                                       38