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 [FEE REQUIRED]

For the fiscal year ended June 30, 1997
                                  OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 [NO FEE REQUIRED]For the transition period from
 .....................................      to      .............................
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. Employer Identification 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 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. [ ]

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during the  preceding  12 months and (2) has been  subject to such  filing
requirements for the past 90 days. Yes X No
                                   -----

     On August 15, 1997, the aggregate  market value of the voting stock held by
nonaffiliates  totaled  approximately  $1,372,842,000 based on the closing stock
price as reported by The Nasdaq Stock  Market.  On August 15,  1997,  there were
approximately  15,015,000  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 November 6, 1997, 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.  The Company's actual results could differ  materially from those
discussed  here.  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. General

     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 small-molecule  drugs engineered to
inactivate  proteins  which  play key roles in  cancer,  AIDS and other  serious
diseases.  The  Company  is  currently  marketing  its first  drug,  VIRACEPT(R)
(nelfinavir mesylate) for treatment of HIV infection.  In addition,  the Company
is  conducting  phase II/III  clinical  trials for a second  drug,  THYMITAQ(TM)
(nolatrexed  dihydrochloride,  formerly known as AG337),  for treatment of solid
malignant tumors. Further, the Company has 18 programs in progress for discovery
or  development  of other new  drugs in the  fields of  cancer,  viral  disease,
inflammatory  disease and other  serious  diseases.  Seven of these  preclinical
programs are being  pursued by Alanex  Corporation  ("Alanex"),  a  wholly-owned
subsidiary of Agouron. The Company's business currently consists of one business
segment, the operations of which are described below.

     Agouron's  goal is to generate  increasing  profitability  from the sale of
drugs generated principally from its own drug discovery and development efforts.
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.  Consistent  with this  commercial  goal, 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.  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.

     The Company's  common stock account 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  (calendar
1987,  1989,  1991,  1995 and 1996)  generated  net  proceeds  of  approximately
$211,600,000 and the issuance of approximately 9,894,000 shares. The most recent
public  offering  raised  approximately  $77,245,000  through  the  issuance  of
2,735,000 shares. Private placements have generated approximately $17,100,000 in
net proceeds and the issuance of approximately 2,782,000 shares. The exercise of
warrants and employee  stock options  (including  employee  stock  purchase plan
transactions)  have  generated  proceeds of  approximately  $15,300,000  and the
issuance of approximately 1,317,000 shares. In 1997, the Company acquired Alanex
in a purchase  transaction through the issuance of approximately  722,000 shares
of the Company's common stock valued at approximately $61,000,000. The
                                       2
<PAGE>


Company also  recorded in its  financial  statements a  $12,100,000  increase to
common stock which reflects the  anticipated  tax benefit of stock options which
have been exercised through fiscal 1997.

Narrative Description of Business

     Agouron  is  developing  innovative  drugs for  treatment  of  cancer,  HIV
infection and other serious diseases and has expended approximately $299,000,000
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 drug therapy.  The orally administered  product
is available in adult and  pediatric  formulations.  Protease  inhibitors  are a
relatively new class of drugs.

     Currently,   according  to  the  International  AIDS  Society,  combination
antiretroviral  drug therapy,  including a potent  protease  inhibitor,  such as
VIRACEPT,  is  recommended  for  HIV-infected  individuals  with  plasma HIV RNA
greater than 5,000-10,000 copies/mL.

     Agouron has developed  VIRACEPT in  collaboration  with the  pharmaceutical
division of Japan  Tobacco Inc.  ("JT").  Agouron and JT have granted  exclusive
commercial  rights in Europe,  Asia and certain other  countries in the world to
Hoffmann-La Roche Inc. and F. Hoffmann-La  Roche Ltd ("Roche").  The Company and
JT  will  share   profits   and/or   royalties   equally   from  the   worldwide
commercialization of VIRACEPT.

     The Company's fiscal 1997 operating results were significantly  impacted by
the  clinical  development  and  commercialization  of  VIRACEPT,  resulting  in
increased  costs and  revenues.  VIRACEPT  sales  since its launch in March 1997
totaled $56,969,000 for the fiscal year ended June 30, 1997. Published data from
industry surveys indicate that the demand for VIRACEPT has continued to increase
steadily since its introduction in March 1997. The Company estimates that 35,000
patients were taking  VIRACEPT at the end of June 1997. It is  anticipated  that
continued increasing VIRACEPT sales will make a substantial  contribution toward
the  achievement by the Company of profitable  financial  results in fiscal 1998
and beyond.

  THYMITAQ

     THYMITAQ, an inhibitor of the enzyme thymidylate synthase, is presently the
subject of phase II/III clinical studies  evaluating an intravenous  formulation
of the drug as a  chemotherapeutic  agent for the  treatment of malignant  solid
tumors  associated  with  cancer  of the  head/neck  and  liver  (hepatocellular
carcinoma).  An oral  formulation  of  THYMITAQ is also being  developed  by the
Company.  If successful,  the phase II/III pivotal clinical trials could lead to
submission  of a New Drug  Application  ("NDA") for THYMITAQ in calendar 1998 or
calendar 1999.  Agouron intends to engage in the sales and marketing of THYMITAQ
in North America upon its approval by the FDA.

                                       3
<PAGE>



     In June 1996,  Agouron  granted Roche worldwide  development  rights in two
anti-cancer  drugs  currently  being  developed  by the  Company  and  agreed to
collaborate with Roche on an additional  early-stage  anti-cancer drug discovery
program.  In return for rights to the Company's most advanced  anti-cancer drugs
(THYMITAQ and an earlier stage  AG3340),  Roche has paid  $15,000,000 in initial
license fees and has agreed to pay milestone  payments of up to $40,000,000  and
to bear  80% of the  future  development  costs  of these  two  drugs.  In North
America,  the Company and Roche will cooperatively market the two drugs and will
share equally in resulting  profits.  Outside of North America,  Roche will lead
commercialization  efforts  and pay  royalties  to the  Company  or, in  certain
circumstances,  will share  profits  with the  Company.  For similar  commercial
rights to compounds  generated in a  collaborative  research  program focused on
cyclin-dependent  kinases  (initially  targeting the enzyme  cdk4),  Roche is to
provide annual research  support to the Company of $3,000,000 for three years as
well as subsequent  milestone  payments of up to  $20,000,000  and has agreed to
bear 80% of any post-research development costs.


                                       4
<PAGE>


Research and Development Programs


     Agouron's research and development  programs primarily address the areas of
cancer, viral disease,  inflammatory disease, pain and diabetes.  Agouron's drug
discovery  programs apply the Company's core  technologies of  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 the  Company's  portfolio of
research and  development  programs.  Agouron is pursuing some of these programs
independently  while others are being  undertaken  in  collaboration  with other
companies.
<TABLE>
<CAPTION>

Program                                   Indication                 Development Stage          Partner
-------                                   ----------                 -----------------          -------
<S>                                      <C>                        <C>                         <C>
Cancer

    THYMITAQ-i.v.                         Solid Tumors                   Phase II/III            Roche
    THYMITAQ-oral                         Solid Tumors                   Phase I                 Roche
    AG2034                                Solid Tumors                   Phase I                 None
    AG3340                                Metastasis                     Phase I                 Roche
    AICART                                Solid Tumors                   Research                None
    cdk4                                  Solid Tumors                   Research                Roche
    VEGF Receptor                         Solid Tumors                   Research                None

Viral Disease

    VIRACEPT                              HIV Infection                  Approved                JT
    Rhinovirus                            Common Cold                    Research                None
    Cytomegalovirus                       CMV Infection                  Research                JT
    Herpes simplex virus                  Herpes Infection               Research                JT
    Hepatitis C virus                     Viral Diseases                 Research                JT

Inflammatory Disease

    MMP                                   Arthritis                      Phase I                 Roche
    AICART                                Inflammation                   Research                None

Pain
    Opiate Agonist*                       Pain                           Preclinical             Astra Pharma
    Antagonist*                           Undisclosed                    Research                Roche Bioscience


Diabetes
    Antagonist*                           Undisclosed                    Research                Novo Nordisk
    Agonist*                              Undisclosed                    Research                Novo Nordisk

Other

    Neuropeptide Y Antagonist*            Obesity and cardiovascular
                                            disease                      Preclinical             None
    CRF Antagonist*                       Depression and Anxiety         Preclinical             None
    GnRH Antagonist*                      Endometriosis and Sex          Research                None
                                          Hormone-Dependent Tumors
</TABLE>

*  Programs undertaken by Alanex

                                       5
<PAGE>


Cancer

     Overview

     The  development  of  new  drugs  for  treatment  of  cancer  is a  primary
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 anti-cancer  drugs which are less toxic and more efficacious  either as
tumoricidal (tumor-killing) or tumoristatic (tumor-controlling) agents.

     The  Company's  anti-cancer  drug  discovery and  development  programs are
targeting  inhibitors of the following  enzymes:  thymidylate  synthase  ("TS");
glycinamide ribonucleotide  formyltransferase  ("GART"); matrix metalloproteases
("MMPs");    aminoimidazole   carboxamide    ribonucleotide    formyltransferase
("AICART");  cyclin  dependent  kinase 4 ("cdk4");  and a receptor  for vascular
endothelial growth factor ("VEGF").  Three of these enzyme targets (TS, GART and
AICART) have a common  structural  motif that permits lead  inhibitors  from one
program to be useful potentially in others.

     TS Inhibitors: THYMITAQ

     The enzyme TS  catalyzes  a critical  step in the  synthesis  of DNA and is
especially  crucial  to  cancer  cells  undergoing  uncontrolled  proliferation.
Agouron  has focused on the design and  development  of TS  inhibitors  of novel
chemical  character  that may be  capable of  penetrating  fatty  membranes  and
tissues,  circumventing  some of the more common  forms of drug  resistance  and
passing  into  and out of cells  by  passive  diffusion,  allowing  for  greater
clinical control of toxicity and for a broader spectrum of anti-tumor  activity.
Agouron's development compound in the TS program is THYMITAQ.

     Pivotal phase II/III  clinical trials are currently under way in the United
States,  Canada,  Europe,  and Asia for evaluation of THYMITAQ as a single agent
treatment  in cancer of the  head/neck  and in liver  cancer.  For  treatment of
head/neck  cancer,  THYMITAQ  is being  compared to the  chemotherapeutic  agent
methotrexate in patients who have failed  first-line  therapy.  For treatment of
liver cancer,  THYMITAQ is being  evaluated both in a  non-comparative  clinical
trial and in a clinical  trial which compares  THYMITAQ to the  chemotherapeutic
agent doxorubicin. If successful, the pivotal trials could permit the Company to
file a NDA for THYMITAQ in calendar 1998 or calendar 1999.

     THYMITAQ is  currently  being  developed by Agouron in  collaboration  with
Roche. Under the terms of the collaboration,  Roche will bear 80% of development
costs of THYMITAQ and will lead  commercialization  of the drug outside of North
America  subject to payment of  royalties  to Agouron.  Roche and  Agouron  will
co-promote  THYMITAQ in North America and will share equally in profits  derived
from North American sales of the drug.


                                       6
<PAGE>


     GART Inhibitors: AG2034

     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.

     In fiscal  1997,  Agouron  began  Phase I studies  of AG2034 in the  United
States and United  Kingdom.  To date,  27 patients have been enrolled in the two
studies.  The Company  presently  retains all commercial rights to any compounds
resulting from this program.

     MMP Inhibitors: AG3340

     Independent  research has shown MMPs to be involved in many disease states.
Certain MMPs have been  associated  with tumor growth,  the  metastasis of tumor
cells to  secondary  sites  within the body and the growth of new blood  vessels
(angiogenesis) through which tumor cells obtain nutrients and growth factors.

     In fiscal  1997,  Agouron  completed  a Phase I study of AG3340,  a potent,
selective  inhibitor of certain  MMPs, in  Edinburgh,  Scotland.  In this study,
healthy male volunteers  received single and multiple doses of AG3340 between 10
mg and 200 mg in tablet  form.  The  purpose  of the study was to  evaluate  the
tolerability of the drug and to determine whether adequate blood  concentrations
could be achieved  following oral  administration.  AG3340 was well tolerated at
all  dose  levels   studied.   AG3340  was  rapidly   absorbed   following  oral
administration.   Sustained  blood   concentrations   were  observed  that  were
substantially greater than those showing efficacy in animal cancer models.

     In June 1997,  Agouron  received  clearance  from the FDA to begin  Phase I
clinical studies of AG3340 in the United States.  Under an  Investigational  New
Drug  Application  ("IND")  submitted to the FDA in May 1997,  the University of
Wisconsin  Comprehensive Cancer Center in Madison,  Wisconsin and The Vanderbilt
Clinic at  Vanderbilt  University in Nashville,  Tennessee are  proceeding  with
extended, dose-escalation studies of AG3340 in patients with advanced cancer. If
successful,   the  completion  of  this  study  will  position  the  Company  to
investigate the safety and anti-cancer  activity of AG3340 in longer-term  Phase
II clinical trials.

     AG3340 is currently being developed by Agouron in collaboration with Roche.
Under the terms of the  collaboration,  Roche  will bear 80% of the  development
costs of AG3340  and will lead  commercialization  of the drug  outside of North
America  subject to payment of  royalties  to Agouron.  Roche and  Agouron  will
co-promote  AG3340 in North  America and will share  equally in profits  derived
from North American sales of the drug.

     AICART Inhibitors

     The  enzyme  AICART  catalyzes  a  rate-determining   step  in  the  purine
biosynthetic  pathway and represents a second target for anti-cancer  drugs that
are active by virtue of their anti-purine
                                       7
<PAGE>


effects.  The Company's scientists have solved the  three-dimensional  molecular
structure  of AICART and are  engaged in design,  synthesis  and  evaluation  of
AICART  inhibitors  intended to be efficacious  in the treatment of cancer.  The
Company presently retains all commercial rights to any compounds  resulting from
this program.

     cdk4 Inhibitor

     Cyclin-dependent  kinases are  enzymes  that play roles in  regulating  the
transitions  between  phases in the life  cycle of all  cells.  A member of this
family of enzymes known as cdk4 has been  implicated by independent  research in
driving  cells  from  a  quiescent  phase  to  the  highly  proliferative  phase
characteristic of malignancies - particularly in familial melanomas,  esophageal
carcinomas  and  pancreatic  cancers.  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 cdk4 and  therefore  block the  transition  of cancer
cells into their proliferative phase.

     This program is being pursued in collaboration  with Roche,  which will pay
Agouron annual research  funding for three years in support of the cdk4 program.
Commercial  rights for all  indications  in compounds  that are generated in the
program are similar to those held by Roche for the MMP inhibitor AG3340.

     VEGF Receptor

     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
Vascular  Endothelial  Growth Factor  ("VEGF")  which,  by binding to a receptor
known as kdr, triggers the growth of endothelial cells.  Agouron is engaged in a
drug discovery program whose objective is the design of 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  presently  retains all  commercial
rights to any compounds resulting from this program.

Viral Disease

     Overview

     The development of new drugs for the treatment of certain viral diseases is
another scientific and commercial focus of the Company. The Company is presently
conducting  programs  aimed at discovery  and/or  development of four 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 a HIV protease inhibitor (VIRACEPT), rhinovirus
3C  protease  inhibitors,  herpes  virus  protease  inhibitors,  cytomegalovirus
inhibitors and hepatitis C protease inhibitors. Agouron is developing certain of
its anti-viral drugs in collaboration with JT.


                                       8
<PAGE>


     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,  four
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 marketing  studies
designed to expand the utilization of the product.

     Rhinovirus 3C Protease Inhibitors

     Rhinoviruses  are  believed  to be the single  most  frequent  cause of the
common cold. While rhinovirus infections are a periodic annoyance to most normal
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-designed  potent,  selective rhinovirus 3C protease inhibitors currently
are being evaluated in preclinical pharmacological studies.

     CMV and HSV-1 Protease Inhibitors

     Among  the most  clinically  significant  members  of the  family of herpes
viruses are herpes simplex virus-1 ("HSV-1") and cytomegalovirus  ("CMV").  Like
HIV and rhinoviruses, HSV-1 and CMV each contain a protease enzyme essential for
virus   maturation   and   infection.   Agouron   scientists   have  solved  the
three-dimensional  molecular  structure of the targeted protease enzyme from CMV
and are seeking to solve the HSV-1  protease in preparation  for  application of
Agouron's drug design  technologies.  However,  no inhibitor of HSV-1 or CMV has
yet been  selected by Agouron  for  development.  The  Company is pursuing  this
research program in collaboration with JT.

     Hepatitis C Protease Inhibitors

     The hepatitis C virus ("HCV") is a virus that causes illness 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 a key protease
enzyme for the production of new infectious virus.

     During  fiscal  1997,  Agouron  scientists  solved  the   three-dimensional
molecular structure of the protease enzyme encoded by the human HCV. Solution of
the HCV protease structure has permitted the initiation of a program to design a
new class of  anti-viral  drugs that block the HCV  protease and disrupt the HCV
life cycle.  However,  no inhibitor of HCV has yet been  selected by Agouron for
development. The Company is pursuing this research program in collaboration with
JT.


                                       9
<PAGE>


Inflammatory Disease

     Overview

     Another  scientific and commercial  focus of the Company is the development
of drugs for treatment of inflammatory disease. These include MMP inhibitors for
use  against   degenerative   diseases   such  as   rheumatoid   arthritis   and
osteoarthritis  and AICART  inhibitors for use as  anti-inflammatory  agents and
immuno-suppressive agents for treatment of various neuro-degenerative disorders.

     MMP Inhibitors

     In addition  to their role in the growth and  metastasis  of solid  tumors,
MMPs display high levels of enzymatic activity in degenerative  diseases such as
rheumatoid  arthritis and osteoarthritis.  Certain members of the MMP family are
associated most closely with these disease states and, Agouron  believes,  offer
targets  for orally  active  drugs with  potential  for  minimal  toxicity.  The
development  of MMP  inhibitors  associated  with these disease  states is being
pursued  by an  affiliate  of  Roche.  If  successfully  developed  by the Roche
affiliate,  the Company believes such selective  inhibitors of certain MMPs have
the potential to interrupt the  progression  of arthritic  disease itself rather
than just to treat the symptoms.  The Company will receive a royalty on sales by
Roche  of  any  anti-inflammatory  products  resulting  from  the  collaborative
program.

     AICART Inhibitors

     AICART  is  being  pursued  by  Agouron  scientists  as a  target  for  the
development of novel  anti-inflammatory  drugs.  It is widely  believed that the
anti-inflammatory  effects observed following administration of low doses of the
anti-cancer  drug  methotrexate  result from the drug's  indirect  inhibition of
AICART.  Used for chronic  therapy,  methotrexate  accumulates  in the liver and
other tissues and frequently  results in serious  toxicity.  Agouron  scientists
believe that inhibitors of AICART designed to avoid  accumulation in tissues may
be  superior  anti-inflammatory  drugs for  conditions  such as  arthritis.  The
Company's initial lead compounds in this program are being used to validate this
hypothesis.  Having  solved the  three-dimensional  molecular  structure  of the
AICART enzyme,  Agouron scientists are engaged in the design of novel inhibitors
of the AICART enzyme.  No candidate for  development  has yet been identified in
this  program.  The  Company  presently  retains  all  commercial  rights to any
compounds resulting from this program.

The research programs of the Company's newly acquired  wholly-owned  subsidiary,
Alanex Corporation, are described below:

Pain

     Overview

     The drugs used for the treatment of severe or chronic pain are generally of
limited  effectiveness  or associated with problems of tolerance,  addiction and
gastrointestinal side effects.

                                       10
<PAGE>


As a result,  there is a substantial  need for effective pain  relieving  agents
with a more favorable side effect profile.

     Opiate Agonist

     On  behalf of Astra  Pharma,  Alanex  applied  its  Pharmacophore  Directed
Parallel  Synthesis  technology  to discover a new class of analgesic  compounds
that interact with a novel opiate  receptor  target.  These  compounds have been
shown to be  orally  active  in  preclinical  studies  and are  currently  being
considered by Astra Pharma as clinical development  candidates.  Under the terms
of an  agreement  with Astra  Pharma,  Alanex is entitled  to receive  milestone
payments  related  to  the  development  of  any  products  resulting  from  the
collaborative  agreement, but has no right to commercialize or receive royalties
on any such products.

     Antagonist for undisclosed target

     In June 1996, Alanex entered into a collaboration  with Roche Bioscience to
discover an antagonist for an undisclosed target for the treatment of pain. This
project is in the lead  development  phase.  Alanex will  perform all aspects of
this  drug  discovery  project,   including  high-throughput  screening  of  its
exploratory  library and lead  optimization to provide Roche Bioscience with one
or more  drug  candidates.  Roche  Bioscience  will  fund all of  Alanex's  pain
antagonist  research  activities.  The  collaboration  agreement  provides Roche
Bioscience  with  an  option  to  exclusively   license  compounds  for  further
development  and worldwide  commercialization.  In return,  Alanex would receive
milestone  payments and  royalties on any sales of products  developed  from the
collaboration.

Diabetes

     Diabetes is a common and  frequently  devastating  disease that can lead to
the development of debilitating  and  life-threatening  cardiovascular  disease,
blindness,  kidney failure and neurologic  disorders.  Alanex  currently has two
programs for the discovery of new drugs to treat diabetes. Alanex has discovered
and is optimizing lead compounds in both programs. Both development programs are
being  conducted in  collaboration  with Novo  Nordisk  pursuant to an agreement
initiated in October 1995.  Under terms of the agreement,  Novo Nordisk provides
funding  for these  programs  in  exchange  for  exclusive  rights  to  products
identified  in the  collaboration.  In addition,  Alanex will receive  milestone
payments from Novo Nordisk upon the  achievement  of research and  developmental
benchmarks as well as royalty payments based on sales of any products discovered
through Alanex's technology.

Other

     Obesity

     Obesity  is  a  major  risk  factor  responsible  for  the  development  of
hypertension,  diabetes, degenerative joint disease, abnormal wound healing, and
other major medical problems.

     Neuropeptide  Y ("NPY") is a 36-amino  acid peptide that is involved in the
regulation of the cardiovascular,  immune and gastrointestinal systems. NPY is a
powerful known appetite
                                       11
<PAGE>


stimulant and has been  demonstrated to be present in abnormally high amounts in
the brains of obese animals. Alanex has discovered lead compounds that block NPY
feeding in several different  preclinical models of appetite  regulation.  These
compounds are currently being evaluated for their effects on feeding and obesity
in preclinical  models.  Alanex presently  retains all commercial  rights to any
compounds resulting from this program.

     Depression and Anxiety

     Depression  and anxiety  represent  major health  problems  throughout  the
world. Corticotropin releasing factor ("CRF") is a 41-amino acid peptide that is
synthesized in the brain and is released following stress.  Studies performed on
preclinical  models  and human  subjects  indicate  a  potential  role of CRF in
mediating depression and anxiety. Development of a potent, orally available drug
that  blocks  the  actions  of CRF  may be  useful  in the  treatment  of  these
indications.  Alanex has  discovered  lead  compounds  that are highly active on
specific  CRF  receptor  subtypes,  and  these  compounds  are  currently  being
optimized  and evaluated in  preclinical  models for their effects on depression
and anxiety.  Alanex  presently  retains all commercial  rights to any compounds
resulting from this program.

     GnRH Antagonist Program

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

                                       12
<PAGE>


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 its equity  securities
and corporate collaborative arrangements.  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.

     Roche

     In January  1997,  the  Company  and JT  granted  Roche  certain  exclusive
marketing  rights to  VIRACEPT  in  Europe  and other  countries  outside  North
America, Japan and Asia. For such rights, the Company received and recognized as
revenue in January 1997, an initial  license fee of  $9,000,000  and will,  upon
approval of VIRACEPT in Europe, receive an additional license fee of $11,000,000
and  subsequent  royalties  based  either on Roche's  sales of  VIRACEPT  or, in
certain circumstances, InviraseAE (saquinavir), Roche's HIV protease inhibitor.

     Subsequent  to the end of fiscal  1997,  the Company  and JT granted  Roche
certain exclusive  marketing rights to VIRACEPT in most Asian  territories.  For
such rights,  the Company received a license fee of $2,000,000  during the first
quarter of fiscal 1998 and will, upon approval in one of the Asian  territories,
receive an additional  license fee of  $1,000,000  and  subsequent  royalties as
described above.

     In June 1996,  Agouron  granted Roche worldwide  development  rights in two
anti-cancer  drugs  currently  being  developed  by the  Company  and  agreed to
collaborate with Roche on an additional  early-stage  anti-cancer drug discovery
program.  In return for rights to the Company's most advanced  anti-cancer  drug
(THYMITAQ) and an earlier stage anti-cancer  compound  (AG3340),  Roche has paid
$15,000,000 in initial license fees and has agreed to pay milestone  payments of
up to $40,000,000 and to bear 80% of the future  development  costs of these two
drugs. In North America, the Company and Roche will cooperatively market the two
drugs and will share  equally in resulting  profits.  Outside of North  America,
Roche will lead  commercialization  efforts and pay royalties to the Company or,
in certain  circumstances,  will share  profits  with the  Company.  For similar
commercial  rights to compounds  generated in a collaborative  research  program
focused on cyclin-dependent kinases (initially targeting the enzyme cdk4), Roche
is to provide  annual  research  support to the Company of $3,000,000 as well as
subsequent milestone payments of up to $20,000,000 and has agreed to bear 80% of
any  post-research  development  costs.  The  Company  also has a right in North
America to commercialize a Roche anti-cancer  product to be named in the future.
The Company received and recognized as revenue in June 1996, the initial license
payments of $15,000,000.

     Japan Tobacco Inc.

     In  December  1992,  the  Company  entered  into  an  agreement  with JT to
collaborate  on  the  discovery,  development  and  commercialization  of  novel
therapeutic  drugs which act on key proteins  related to the human immune system
("JT 1992"). In February 1994, the Company expanded its strategic  alliance with
JT into the field of anti-viral drugs for the treatment of infections  caused by
hepatitis C, cytomegalovirus, the herpes family of viruses and the
                                       13
<PAGE>


rhinoviruses ("JT 1994"). In December 1994, the Company added its anti-HIV drug,
VIRACEPT,  to the JT collaboration with the execution of a worldwide development
and  licensing  agreement  ("JT HIV").  In January 1995, JT 1992 was canceled by
mutual agreement and JT 1992 resources were reallocated to JT 1994 programs.  In
February  1996, JT 1994 was modified to delete  rhinoviruses  from the strategic
alliance.

     Under the  provisions  of JT 1994,  JT has agreed to make certain  research
payments  to the  Company  of not less than  $8,000,000  over a two year  period
ending December 1996. Such payments could approximate more than $21,000,000 over
a four year period if certain technical milestones are achieved. In addition, JT
made an up-front  payment of  $7,778,000,  which was amortized to revenue over a
twenty-four  month period.  Under the provisions of JT HIV, JT has made payments
of  $30,000,000  to Agouron  representing  initial  and  subsequent  payments of
$2,500,000,  $3,500,000 and $24,000,000.  Additional payments  representing JT's
share of VIRACEPT development costs have also been received. Agouron and JT will
ultimately share equally the costs of further development of VIRACEPT.

     Under the provisions of JT 1994, the Company will have exclusive  rights to
develop,    manufacture   and   market   anti-hepatitis   C,   anti-herpes   and
anti-cytomegalovirus drugs in the United States, Canada and Mexico. JT will have
exclusive rights to develop, manufacture and market these drugs in Japan, Taiwan
and South Korea. Outside the countries in which they respectively have exclusive
rights,  Agouron and JT will have co-exclusive  rights to manufacture and market
jointly developed anti-hepatitis C, anti-herpes and anti-cytomegalovirus  drugs.
Each company will pay royalties to the other based upon their  respective  sales
of  anti-hepatitis  C,  anti-herpes and  anti-cytomegalovirus  drugs.  Under the
provisions  of JT HIV,  Agouron  will  retain  exclusive  commercial  rights  to
VIRACEPT (with the right to sublicense,  subject to JT's right of first refusal)
in the United States,  Canada and Mexico.  JT was granted  exclusive  commercial
rights to VIRACEPT (with the right to sublicense,  subject to Agouron's right of
first  refusal)  in  Japan  and  certain  other  countries  in  Asia.  Exclusive
commercial  rights (with the right to  sublicense)  in Europe,  Asia and certain
other  countries in the world have been licensed by the Company and JT to Roche.
The  Company  and JT will  share  profits  and/or  royalties  equally  from  the
worldwide commercialization of VIRACEPT.

The  substantive  collaborations  of the Company's  newly acquired  wholly-owned
subsidiary, Alanex Corporation, are described below.

     Roche Bioscience

     In April  1997,  Alanex  and Roche  Bioscience  entered  into a  three-year
library  screening  and  license  agreement  under  which  Alanex  will  provide
compounds  from  its  exploratory  libraries  on a  nonexclusive  basis to Roche
Bioscience and anti-cytomegalovirus. The agreement provides for Roche Bioscience
to pay a  nonrefundable  fee of $1,000,000  which was received and recognized as
license fee revenue in May 1997.  Roche Bioscience is to pay $6,000,000 over the
three-year  period  during which library  compounds  are provided.  In addition,
Roche  Bioscience is obligated to make additional  payments upon the achievement
of certain milestones. Under the terms of the agreement, Roche Bioscience has an
option for an exclusive  royalty bearing license to active leads that arise from
the screening of the Alanex libraries.

                                       14
<PAGE>


     In June  1996,  Alanex  and  Roche  Bioscience  entered  into a  three-year
collaboration  agreement  targeting the treatment of pain.  Roche  Bioscience is
obligated to make certain  payments upon the achievement of defined  milestones.
In addition,  during the term of the agreement,  Roche Bioscience will provide a
minimum of $5,500,000  to support  research at Alanex.  The  agreement  provides
Roche Bioscience an exclusive  worldwide  license to commercialize any compounds
resulting  from the research  that is selected by Roche  Bioscience  for further
development  and to pay  royalties to Alanex on any sales of products  developed
from the collaboration.

     Novo Nordisk

     In  October  1995,  Alanex  and  Novo  Nordisk  entered  into a  three-year
collaboration  agreement for the  characterization of drugs for the treatment of
diabetes.  Novo Nordisk is obligated to provide up to  $4,500,000  of funding to
support  research  at  Alanex  in the  field  of the  collaboration  and to make
additional  payments to Alanex upon the achievement of certain  milestones.  The
agreement grants Novo Nordisk an option to obtain an exclusive worldwide license
to develop and  commercialize  any drug candidate arising from the collaboration
which they elect to pursue.  Alanex will  receive  royalties on the sales of any
such drug.

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 greater experience than
the Company in preclinical  testing and in conducting  human clinical  trials of
potential  pharmaceutical products and in obtaining the FDA and other regulatory
approvals.  All of these companies and other research organizations compete with
the  Company  in  recruiting  and  retaining  highly  qualified  scientific  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.  However, in recent
years several pharmaceutical companies have undertaken to establish capabilities
in  protein  x-ray  crystallography,   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  structure-based  drug  design.  The
Company expects that the technology for protein structure-based drug design will
become more
                                       15
<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 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.

     Currently, four HIV protease inhibitors are available in the United States.
FDA approval dates and estimated prescription market shares at June 30, 1997 are
noted in the following table:
<TABLE>
<CAPTION>

         COMPANY           PRODUCT NAME          GENERIC NAME            APPROVAL              MARKET SHARE
         <S>               <C>                   <C>                     <C>                   <C>

         Roche             INVIRASE(R)           saquinavir              December, 1995        23%
         Abbott            NORVIR(R)             ritonavir               March, 1996           13%
         Merck             CRIXIVAN(R)           indinavir               March, 1996           42%
         Agouron           VIRACEPT(R)           nelfinavir              March, 1997           22%
</TABLE>

     Future competition from new HIV protease  inhibitors is expected from Glaxo
and other pharmaceutical companies.

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 United States Patent and Trademark Office under United States patent law.

     The Company's  strategy is to pursue a strong patent  portfolio and Agouron
holds several patents,  including a patent covering the chemical  composition of
VIRACEPT.  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,   including   THYMITAQ,   VIRACEPT  and  certain
proprietary technology. The Company will continue to file patent applications on
its  evolving  technology,  processes  and  products.  The Company has  recently
received one United  States  patent  covering  processes of making  THYMITAQ and
related  compounds and  intermediates  thereof.  The Company's failure to obtain
patent protection for its products 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 are dependent upon the skills,  knowledge and experience of
its scientific and technical personnel,  which skills,  knowledge and experience
are not patentable.  To protect its rights in these areas,  the Company requires
all employees, significant consultants and advisors,
                                       16
<PAGE>


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.

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.  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 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 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 NDA;  and (e)
review and approval of the NDA 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 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
                                       17
<PAGE>


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 to the FDA for approval.

     If a NDA 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,  or expose the Company to product  liability
claims.

     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  the  regulatory  framework  for  pharmaceutical   product
approvals,  the  Company is and may become  subject to various  federal,  state,
local and foreign laws, regulations and recommendations relating to safe working
conditions,  laboratory and  manufacturing  practices,  the  experimental use of
animals  and  the  use  and  disposal  of  hazardous  or  potentially  hazardous
substances,  including radioactive compounds and infectious disease agents, used
in connection  with  Agouron's  research and  development  work.  The Company is
unable  to  predict  the  extent  of  restrictions  that  might  arise  from any
governmental or administrative action.

Manufacturing

     Agouron utilizes worldwide contract  manufacturing to produce VIRACEPT. The
Company  procures and transfers raw materials to contracted bulk drug producers,
sends the converted  bulk drug to a finishing  facility and moves finished goods
into a  distribution  center.  Product  supply and associated raw materials have
been  available  in adequate  quantities  to meet  business  needs.  In order to
accommodate  anticipated  sales volume growth,  capacity  expansion  efforts are
being pursued. The Company will be dependent upon its contract  manufacturers to
comply with good  manufacturing  practices  ("GMP")  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 predominately by
                                       18
<PAGE>


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.

     The Company expects VIRACEPT to be commercially available in major European
markets in the first calendar quarter of 1998 and in Japan in the second quarter
calendar 1998.

     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 June 30, 1997, the Company had 708 employees,  138 of whom hold Ph.D.
or M.D.  degrees.  Four  hundred  seventy  seven  employees  are  engaged in, or
directly support, research and product development.  The Company's employees are
not covered by a collective  bargaining  agreement and the Company considers its
relations  with its  employees  to be  excellent.  The Company has entered  into
confidentiality agreements with all of its employees.


                                       19
<PAGE>


Item 2.       PROPERTIES

     At June 30, 1997, the Company leased  approximately  263,000 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 77,000 square feet under lease agreements which expire in
1999.

     Research and Development  activities are located in  approximately  186,000
square feet of leased  space under  agreements  which  expire from 1999 to 2004.
These  state-of-the-art  facilities are designed  specifically  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 GMP for use in
clinical trials.  Additionally,  the Company leases  approximately  1,000 square
feet  in  the  United  Kingdom  which  is  utilized  by  its  European  clinical
development staff.

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

     No matters were submitted  during the fourth quarter of the year ended June
30, 1997 to a vote of the Company's security holders.

                                       20
<PAGE>


                                     PART II


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

     The  Company's  common stock is traded in the  over-the-counter  market and
prices  are  quoted on The  Nasdaq  Stock  Market  under the  symbol  AGPH.  The
following  table sets forth the high and low  selling  prices as reported by The
Nasdaq Stock Market for the periods indicated.
<TABLE>
<CAPTION>
                                                                             High              Low
                                                                           ---------        ---------
<S>                                                                        <C>               <C>

1996

         First Quarter                                                     $  39.250        $  22.750
         Second Quarter                                                       35.875           22.500
         Third Quarter                                                        47.625           32.750
         Fourth Quarter                                                       47.000           32.000

1997

         First Quarter                                                     $  46.250       $   29.000
         Second Quarter                                                       71.500           42.250
         Third Quarter                                                       101.000           67.000
         Fourth Quarter                                                       91.000           58.375
</TABLE>


     On August 15,  1997,  the closing  price of the  Company's  common stock as
reported  by The  Nasdaq  Stock  Market  was  $94.0625  per  share.  There  were
approximately  12,000 shareholders of the common stock of the Company as of such
date.  The Company has not paid cash  dividends on its common stock and does not
intend to do so in the foreseeable future.

     On July 30, 1997, the Company's  Board of Directors  approved a two-for-one
stock split in the form of a special stock dividend of one share of common stock
for each share of the Company's common stock outstanding. The record date of the
transaction  is August  15,  1997 and the  distribution  date will be August 26,
1997.



                                       21
<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, 1997.  The  information
presented  should  be  read  in  conjunction  with  the  consolidated  financial
statements included elsewhere in this report.
<TABLE>
<CAPTION>

(In thousands, except                 Years ended
per share amounts)                    June 30,          1997         1996         1995         1994         1993
----------------------------------------------------------------------------------------------------------------
<S>                                                 <C>          <C>          <C>          <C>           <C>

Statement of Operations:
     Total revenues                                 $132,063     $ 55,955     $ 26,722     $ 16,301     $  8,266
     Product sales                                    56,969            0                         0            0
     Net loss                                        (42,806)*    (19,523)     (12,939)      (9,462)      (9,829)
     Net loss per common share                     $  (3.18)     $  (1.98)    $  (1.77)     $ (1.31)     $ (1.40)
     Shares used in computing net
          loss per common share                       13,473        9,844        7,296        7,241        6,997

     To give effect for 2-for-1 stock
         split declared on July 30, 1997
         (unaudited):

     Pro-forma net loss per common share          $    (1.59)    $   (.99)    $   (.89)     $  (.66)     $  (.70)
     Shares used in computing pro-forma net
       loss per common share                          26,946       19,688       14,592       14,482       13,994

Balance Sheet:
     Working capital                                $115,786     $ 70,381     $  8,837     $ 21,039      $29,933
     Total assets                                    266,914      102,577       27,097       37,178       41,721
     Long-term liabilities                             7,217        1,734        1,884        2,285        2,613
     Stockholders' equity #                          191,282       75,583       12,591       24,852       33,757
</TABLE>

     *   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.

     #   The Company has never declared or paid cash dividends on its common
         stock.
                                       22
<PAGE>

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

Overview

     This discussion contains forward-looking statements and 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 the  Company's  annual
report on Form 10-K for the year ended June 30, 1997.  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  has been  engaged in the  research  and  development  of human
pharmaceuticals   utilizing  protein   structure-based  drug  design  since  its
inception in 1984.  Such research and  development  has been funded  principally
from the  Company's  equity-derived  working  capital and through  collaborative
arrangements  with other companies.  The Company's net operating losses incurred
since inception are primarily a result of the Company's independent research and
development  activities  and  an  investment  in  the  clinical  and  commercial
development of its two leading  compounds in cancer and AIDS. Net losses for the
fiscal years ended June 30, 1997,  1996 and 1995 were  $42,806,000,  $19,523,000
and $12,939,000.  In March 1997, the Company  received  approval from the United
States Food and Drug  Administration  (the FDA) to market  VIRACEPT  (nelfinavir
mesylate,  an HIV  protease  inhibitor)  in the  United  States.  For the fourth
quarter of fiscal 1997, due principally to the increasing  product  contribution
from  VIRACEPT  sales and before the  application  of the one-time  write-off of
$57,500,000  associated with the acquisition of Alanex  Corporation  ("Alanex"),
the Company  realized a pre-tax  profit of $3,201,000.  It is  anticipated  that
product sales will  continue to increase  from quarter to quarter  during fiscal
1998  and  the  Company  should  be  profitable  for  fiscal  1998.  It is  also
anticipated that the Company may be profitable in each quarter of fiscal 1998.

Results of Operations

     Product sales

     In March 1997,  the Company  received  clearance from the FDA to market its
anti-HIV drug,  VIRACEPT.  Product sales for the period ended June 30, 1997 were
approximately  $57,000,000.  VIRACEPT is one of four  FDA-approved  HIV protease
inhibitors  which,  when used in combination with other anti-HIV drugs (commonly
referred to as a "cocktail"),  have become the preferred method for treating HIV
infected  patients in the United  States.  Market demand is expected to increase
for protease inhibitors as combinations  containing these drugs are increasingly
prescribed  for  patients  with   earlier-stage   HIV  infection.   The  Company
anticipates that future product sales of VIRACEPT will increase accordingly.


                                       23
<PAGE>


     Contract revenues, license fees

     Collaborative  research and development  agreements with Japan Tobacco Inc.
("JT"),  Hoffmann-La  Roche Inc.  and F.  Hoffmann-La  Roche Ltd.  (collectively
"Roche")  and  Syntex  (U.S.A.)  Inc.  accounted  for  substantially  all of the
Company's  total contract and license  revenues for 1997,  1996 and 1995.  Total
contract and license revenues for 1997 increased approximately 34% over 1996 due
mainly to increased program activity and spending on the JT  collaborations  and
an initial license payment from Roche for certain  marketing rights to VIRACEPT.
The increase in contract and license revenues from 1995 to 1996 of approximately
109% was due  principally  to the  effect of a full year of  increasing  program
activities on the anti-HIV  collaboration  with JT (initiated in December  1994)
and the initial  payments  associated with a collaboration  (June 30, 1996) with
Roche. The Company anticipates that contract revenue and license fees for fiscal
1998 will approximate the amounts recorded in fiscal 1997.

     Cost of product sales

     The  aggregate  cost of product  sales as a percentage of product sales was
approximately  43% for the period ended June 30, 1997.  The Company  anticipates
that gross margins will improve as product  sales  volumes  increase and certain
manufacturing  process and scale  efficiencies  are  realized.  Aggregate  gross
margins will also be impacted by the size of the  Company's  patient  assistance
program,  the Company's  manufacturing supply agreement with Roche and the level
of sales  subject  to  Medicaid  and other  discounts  or  rebates in the United
States.

     Research and development

     Research and development  spending increased by approximately 52% from 1996
to 1997 due  generally to  increasing  average  research and  development  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 THYMITAQo  (nolatrexed  dihydrochloride) and AG3340.
Research and development  spending  increased by approximately  96% from 1995 to
1996 due generally to increasing  average research and development  staff levels
(approximately 23%) and staff-related  expenditures and significantly  increased
expenditures  for human clinical trial  activities  associated with VIRACEPT and
THYMITAQ. Collaborator-funded program expenditures representing 84%, 72% and 65%
of total research and development  expenses in 1997, 1996 and 1995,  generated a
significant majority of the increases in research and development expenses.  The
Company's self-funded research and development programs generated  approximately
16%, 28% and 35% of total research and  development  expenses in 1997,  1996 and
1995. The Company  anticipates  that total research and development  expenses in
fiscal 1998 will exceed fiscal 1997 expenses by approximately 10%.

     Selling, general and administrative

     Selling, general and administrative expenses represented  approximately 24%
of total operating  expenses  (excluding the cost of product sales and write-off
of  in-process  technology  purchased) in 1997 and 11% in each of 1996 and 1995.
Spending  increases from 1996 to 1997 are due chiefly to increasing staff levels
(approximately 214%) and staff-related expenditures,
                                       24
<PAGE>


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.  Spending  increases  from  1995 to 1996 are due
principally  to  increasing  average  staff  levels   (approximately   38%)  and
staff-related  expenditures  including occupancy.  Also contributing to the 1996
increase  are  certain  costs  associated  with a growing  sales  and  marketing
infrastructure.   The  Company  anticipates  that  total  selling,  general  and
administrative expenses will increase in fiscal 1998 due to the full-year effect
of fiscal 1997 staff additions, additional occupancy costs, increasing sales and
marketing activities and the support of VIRACEPT Phase IV marketing studies.

     Royalties

     Pursuant to the terms of the  VIRACEPT  Development  and License  Agreement
with JT, the Company  anticipates  that  royalty  expense in fiscal 1998 will be
significant. Royalties in fiscal 1997 were not significant.

     Write-off of in-process technology purchased

     In  the  fourth  quarter  of  fiscal  1997,  the  Company  acquired  Alanex
Corporation  ("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,  or potential issuance,
of  approximately  996,000  shares  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 independent  valuation of the
Alanex assets, technology and research programs at the date of acquisition.

     Interest and other income

     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 a total of  $24,000,000  in license fees
from Roche (June 1996 and January 1997), significantly increased funding from JT
and Roche and the exercise of employee stock options.  Interest income increased
from 1995 to 1996 due to a higher average investment portfolio balance resulting
from the receipt of a  $24,000,000  payment  from JT in August 1995 and a public
offering of common stock in September 1995. The Company anticipates that, absent
additional  revenue sources or a significant  change in interest  rates,  fiscal
1998 interest income will be less than that of fiscal 1997.

     Interest expense

     Interest expense decreased in 1997 by approximately 38% due to a decreasing
level of debt and capital lease obligations from year to year.  Interest expense
decreased  in  1996  due  to a  decreasing  level  of  debt  and  capital  lease
obligations  but  such  decrease  was  totally  offset  by  the  exercise  costs
associated with certain lease buy-out options.


                                       25
<PAGE>


     Income tax provision (benefit)

     Based on its fourth  quarter  pre-tax profit  (excluding the  non-recurring
charge  associated  with the  acquisition of Alanex) 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, 1997.  An income tax provision
representing  approximately 40% of any future pre-tax net income will be made on
a quarterly basis.

Liquidity and Capital Resources

     Historically,  the Company has relied  principally on equity financings and
corporate  collaborations  to fund  its  operations  and  capital  expenditures.
However,  on March 14,  1997,  the Company  received  clearance  from the FDA to
market its anti-HIV drug, VIRACEPT.  Fiscal 1997 sales of VIRACEPT since its FDA
approval have resulted in a gross margin of $32,370,000. The Company anticipates
that net sales of VIRACEPT will steadily  increase  through at least fiscal 1998
and  provide  an  increasingly   significant  contribution  toward  funding  the
Company's operations.

     At June 30,  1997,  the Company had net  working  capital of  approximately
$115,786,000,  an  increase  of  $45,405,000  over  June  30,  1996  levels  due
principally to the  commercialization of VIRACEPT and the resultant increases in
inventory  ($58,800,000),  trade accounts receivable  ($26,055,000) and accounts
payable  ($22,174,000).  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,  1997,  the  Company  had cash,  cash
equivalents and short-term investments of approximately $91,317,000. 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  1998.  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 1998 if significant 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  may be  required  to  pursue  various
financing  alternatives  such  as  commercial  lines  of  credit,  collaborative
arrangements and additional  public  offerings or private  placements of Company
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  or to
license third parties to commercialize products or technologies that the Company
would otherwise seek to develop or commercialize itself.

                                       26
<PAGE>


Capital Expenditures

     During  1997,  capital   expenditures  totaled  $14,727,000  compared  with
$3,710,000 and $2,032,000  during 1996 and 1995, of which  $2,355,000,  $457,000
and $17,000  were  financed  through  capital  lease  obligations.  Of the total
capital  expenditures  during  1997,  1996 and 1995,  approximately  $4,728,000,
$318,000 and $130,000  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 1997, 1996
and  1995   represented   laboratory   and  office   equipment  and   scientific
instrumentation  necessary to support an expanding  research,  development,  and
commercial infrastructure.

     Capital   expenditures   during  1998  are  expected  to  be  approximately
$14,000,000 to support  continued  product  commercialization,  development  and
research  activities.  Of the total expected capital  expenditures  during 1998,
approximately  $5,000,000  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.

                                       27
<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, 1997 and 1996                     F-2

Consolidated Statement of Operations for the years ended                    F-3
           June 30, 1997, 1996 and 1995

Consolidated Statement of Stockholders' Equity for the
           years ended June 30, 1997, 1996 and 1995                         F-4

Consolidated Statement of Cash Flows for the years ended
           June 30, 1997, 1996 and 1995                                     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.
                                       28
<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 operations, of stockholders' equity and of cash flows
present  fairly,  in all material  respects,  the financial  position of Agouron
Pharmaceuticals,  Inc.  and its  subsidiary  at June 30, 1997 and 1996,  and the
results of their  operations and their cash flows for each of the three years in
the period ended June 30, 1997, in conformity with generally accepted accounting
principles.  These financial  statements are the responsibility of the Company's
management;  our  responsibility  is to express  an  opinion on these  financial
statements  based on our audits.  We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion  expressed
above.



/s/ PRICE WATERHOUSE LLP

San Diego, California
July 30, 1997





                                       F-1
<PAGE>


AGOURON PHARMACEUTICALS, INC.

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

ASSETS
                                                                                           June 30,
                                                                                -----------------------------
Current assets:                                                                       1997              1996
                                                                                ----------       -----------
<S>                                                                             <C>              <C>
       Cash and cash equivalents                                                $   52,484       $    16,451
       Short-term investments                                                       38,833            74,424
       Accounts receivable, net                                                     31,375             2,966
       Inventories                                                                  58,800                 0
       Current deferred tax assets                                                     500                 0
       Other current assets                                                          2,209             1,800
                                                                                ----------       -----------

       Total current assets                                                        184,201            95,641

Property and equipment, net                                                         22,613             6,936

Deferred tax assets                                                                 56,000                 0

Purchased intangibles                                                                4,100                 0
                                                                                ----------       -----------

                                                                                $  266,914       $   102,577
                                                                                ==========       ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
       Accounts payable                                                         $   28,833       $     6,659
       Accrued liabilities                                                           8,889             4,327
       Deferred revenue                                                             27,567            13,788
       Current deferred tax liabilities                                                600                 0
       Current portion of long-term debt                                             2,526               486
                                                                                ----------       -----------

       Total current liabilities                                                    68,415            25,260
                                                                                ----------       -----------

Long-term liabilities:
       Long-term debt, less current portion                                          5,940               501
       Accrued rent                                                                  1,277             1,233
                                                                                ----------       -----------

       Total long-term liabilities                                                   7,217             1,734
                                                                                ----------       -----------

Stockholders' equity:
       Common stock, no par value, 75,000,000 shares authorized,
           14,714,960 and 10,731,687 shares issued and outstanding                 317,133           158,628
       Accumulated deficit                                                        (125,851)          (83,045)
                                                                                ----------       -----------

       Total stockholders' equity                                                  191,282            75,583
                                                                                ----------       -----------

Commitments (Note 8)

                                                                                $  266,914       $   102,577
                                                                                ==========       ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       F-2
<PAGE>


AGOURON PHARMACEUTICALS, INC.

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

                                                                          Years ended June 30,
                                                              --------------------------------------------
                                                                       1997           1996            1995
                                                              -------------  -------------   -------------
<S>                                                           <C>            <C>             <C>          

Revenues:
     Product sales                                            $      56,969  $           0   $           0
     Contract                                                        65,094         40,955          26,722
     License fees                                                    10,000         15,000               0
                                                              -------------  -------------   -------------

                                                                    132,063         55,955          26,722
                                                              -------------  -------------   -------------
Operating expenses:
     Cost of product sales                                           24,599              0               0
     Research and development                                       108,137         71,010          36,317
     Selling, general and administrative                             32,941          8,082           3,494
     Write-off of in-process technology purchased                    57,500              0               0
                                                              -------------  -------------   -------------

                                                                    223,177         79,092          39,811
                                                              -------------  -------------   -------------

Operating loss                                                      (91,114)       (23,137)        (13,089)
                                                              -------------  -------------   -------------

Other income (expense):
     Interest and other income                                        5,873          4,776           1,239
     Interest expense                                                  (142)          (228)           (225)
                                                              -------------  -------------   -------------

                                                                      5,731          4,548           1,014
                                                              -------------  -------------   -------------

Loss before income taxes                                            (85,383)       (18,589)        (12,075)

Income tax provision (benefit)                                      (42,577)           934             864
                                                              -------------  -------------   -------------

Net loss                                                      $     (42,806) $     (19,523)  $     (12,939)
                                                              =============  =============   =============

Net loss per common share                                     $       (3.18) $       (1.98)  $       (1.77)
                                                              =============  =============   =============

Shares used in computing net loss per common share                   13,473          9,844           7,296
                                                              =============  =============   =============


To give effect for 2-for-1 stock split declared on
 July 30, 1997 (unaudited):

Pro-forma net loss per common share                           $       (1.59) $        (.99)  $        (.89)
                                                              =============  =============   =============

Shares used in computing pro-forma net loss per
  common share                                                       26,946         19,688          14,592
                                                              =============  =============   =============


</TABLE>


See accompanying notes to consolidated financial statements.



                                       F-3
<PAGE>


AGOURON PHARMACEUTICALS, INC.

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


                                                  Common Stock            
                                        -------------------------------      Accumulated  
                                               Shares            Amount          Deficit             Total
                                        -------------     -------------    -------------     -------------    
<S>                                         <C>           <C>              <C>               <C>

Balance at June 30, 1994                    7,278,488     $      75,435    $     (50,583)    $      24,852

   Stock issuances:
     Exercise of stock options                 49,125               382               --               382
     Employee stock purchase plan              31,669               296               --               296
   Net loss                                        --                --          (12,939)          (12,939)
                                        -------------     -------------    -------------     -------------

   Balance at June 30, 1995                 7,359,282            76,113          (63,522)           12,591

   Stock issuances:
     Public sale                            3,000,000            78,579               --            78,579
     Exercise of stock options                293,206             2,990               --             2,990
     Exercise of stock warrants                45,000               283               --               283
     Employee stock purchase plan              34,199               663               --               663
   Net loss                                        --                --          (19,523)          (19,523)
                                        -------------     -------------    -------------     -------------

Balance at June 30, 1996                   10,731,687           158,628          (83,045)           75,583

   Stock issuances:
     Public sale                            2,735,000            77,245               --            77,245
     Acquisition of Alanex                    722,118            61,051               --            61,051
     Exercise of stock options                490,236             6,720               --             6,720
     Employee stock purchase plan              35,919             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                   14,714,960     $     317,133    $    (125,851)    $     191,282
                                        =============     =============    =============     =============


</TABLE>

See accompanying notes to consolidated financial statements.


                                       F-4
<PAGE>


AGOURON PHARMACEUTICALS, INC.

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

                                                                                   Years ended June 30,
                                                                      ------------------------------------------
                                                                              1997           1996           1995
                                                                      ------------    -----------    -----------
<S>                                                                    <C>            <C>            <C>    

Cash flows from operating activities:
     Cash received from product sales, contracts and licenses          $   116,692    $    61,376    $    25,633
     Cash paid to suppliers, employees and service providers              (195,890)       (73,738)       (34,113)
     Interest received                                                       5,873          4,776          1,239
     Interest paid                                                            (142)          (228)          (225)
                                                                       -----------    -----------    -----------

     Net cash provided (used) by operating activities                      (73,467)        (7,814)        (7,466)
                                                                       -----------    -----------    -----------

Cash flows from investing activities:
     Proceeds from maturities/sales of short-term investments              127,501         59,686         18,000
     Purchases of short-term investments                                   (91,227)      (118,224)        (6,129)
     Purchase of  property and equipment                                   (12,372)        (3,252)        (1,978)
     Cost to acquire Alanex, net of cash acquired                              608              0              0
                                                                       -----------    -----------    -----------

     Net cash provided (used) by investing activities                       24,510        (61,790)         9,893
                                                                       -----------    -----------    -----------

Cash flows from financing activities:
     Net proceeds from issuance of common stock                             85,354         82,515            678
     Principal payments under equipment leases                                (394)          (373)          (613)
     Increase (decrease) in long-term debt, net                                 30           (445)          (238)
                                                                       -----------    -----------    -----------

     Net cash provided (used) by financing activities                       84,990         81,697           (173)
                                                                       -----------    -----------    -----------

Net increase (decrease) in cash and cash equivalents                        36,033         12,093          2,254
Cash and cash equivalents at beginning of year                              16,451          4,358          2,104
                                                                       -----------    -----------    -----------

Cash and cash equivalents at end of year                               $    52,484    $    16,451    $     4,358
                                                                       ===========    ===========    ===========

Reconciliation of net loss to net cash provided (used) 
  by operating activities:
     Net loss                                                          $   (42,806)   $   (19,523)   $   (12,939)
     Depreciation and amortization                                           3,910          2,411          2,455
     Write-off of in-process technology purchased                           57,500              0              0
     Change in deferred tax assets                                         (43,800)             0              0
     Net (increase) decrease in inventory                                  (58,547)             0              0
     Net (increase) decrease in accounts receivable and other
     current assets                                                        (28,209)        (1,198)             4
     Net increase (decrease) in accounts payable, accrued
     liabilities, deferred revenue and other liabilities                    38,485         10,496          3,014
                                                                       -----------    -----------    -----------

Net cash provided (used) by operating activities                       $   (73,467)   $    (7,814)   $    (7,466)
                                                                       ===========    ===========    ===========
</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 incorporated
in the state of California on June 22, 1984 and is an integrated  pharmaceutical
company committed to the discovery, development,  manufacturing and marketing of
small molecule drugs  engineered to inactivate  proteins which play key roles in
cancer, AIDS, and other serious diseases. The Company, through its own sales and
marketing force, is currently marketing  VIRACEPTAE  (nelfinavir  mesylate),  an
inhibitor  of the HIV  protease,  which was cleared for  marketing by the United
States Food and Drug  Administration  ("FDA") in March 1997. The Company intends
to commercialize any subsequently  developed  products through its own sales and
marketing force in certain markets or, when appropriate,  through  manufacturing
and marketing relationships with other pharmaceutical companies.

     Principles of consolidation

     The consolidated  financial  statements include the accounts of the Company
and its wholly-owned subsidiary,  Alanex Corporation ("Alanex"),  the results of
which are reflected  since its acquisition in a purchase  transaction  valued at
approximately   $62,300,000.   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.

     At June 30, 1997, it has been assumed that the existing collaborations with
Japan Tobacco Inc. ("JT") and Hoffmann-La  Roche Inc. and F.  Hoffmann-La  Roche
Ltd ("Roche") will continue in accordance with their  agreement  terms. As such,
approximately  $23,737,000  of  cash  received  from JT and  $3,000,000  of cash
received  from  Roche  have  been  classified  as  deferred   contract  revenue.
Approximately  $22,300,000 of the cash received from JT represents  JT's advance
of the Company's VIRACEPT  development funding obligation through December 1997.
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 and  Roche  are  non-refundable  and are being  recognized  as  contract
revenue on a prospective  basis generally as collaborative  program expenses are
incurred.  Should any of the underlying  collaborations be terminated in advance
of  their  contract  terms,  any  deferred  contract  revenues  related  to such
collaborations would immediately be recognized as revenue by the Company.


                                       F-6
<PAGE>


     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 three
months from date of purchase.  Included in cash and cash equivalents at June 30,
1997 is $2,000,000  which has been pledged as collateral for certain  commercial
letters of credit.

     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. The Company
has  classified its short-term  investments as  available-for-sale.  Included in
short-term  investments  at June 30, 1997 and 1996 is $588,000 and $1,156,000 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 and off balance sheet 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
1997, 1996 or 1995.

     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, 1997, the Company had several forward contracts with maturities of less than
three  months to  purchase  Japanese  yen for  approximately  $4,095,000.  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.


                                       F-7
<PAGE>


     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  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.

     Product sales

     In March 1997,  the Company  received  clearance from the FDA to market its
anti-HIV drug, VIRACEPT.  The Company has the exclusive right to market VIRACEPT
in North America.  Accordingly, in March, the Company began shipping VIRACEPT to
wholesalers  throughout the United States.  The Company recognizes sales revenue
upon shipment.  Sales are reported net of discounts,  rebates,  chargebacks  and
product returns.

     Also  included  in  product  sales are  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 will receive a royalty on
Roche's subsequent commercial sales of such supplies.

     Contract revenues

     Contract revenues are earned and recognized  generally as contract research
costs are incurred according to the provisions of each collaborative  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

     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.

     Research and development costs

     Research and development costs are expensed in the period incurred.


                                       F-8
<PAGE>


     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.

     Stock-based compensation plans

     As  permitted  by  Statement  of  Financial  Accounting  Standards  No. 123
"Accounting for Stock-Based  Compensation"  ("FAS 123"), the Company has elected
to continue to account for stock  options and  stock-based  awards in accordance
with  APB  Opinion  No.  25  ("Accounting   for  Stock  Issued  to  Employees").
Accordingly,  the  Company  has  provided  in Note 7 the  pro-forma  disclosures
required by FAS 123.

     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  (which were $2,355,000,  $457,000 and $17,000 for 1997, 1996
and 1995) and the acquisition of Alanex in 1997.

     New accounting standard

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standards  No. 128  "Earnings  Per Share" ("FAS 128"),
which will be  effective  for  financial  statements  for periods  ending  after
December 15, 1997,  including  interim  periods,  and establishes  standards for
computing earnings per share.  Earlier  application is not permitted.  Under the
new requirements,  primary and fully diluted earnings per share will be replaced
with basic and diluted earnings per share. Basic earnings per share excludes the
dilutive effect of stock options and is generally  higher than primary  earnings
per share.  In its  consolidated  financial  statements  for the quarter  ending
December 31, 1997, the Company will disclose basic and diluted  earnings  (loss)
per share and provide a  reconciliation  of the numerator and denominator of its
basic and diluted  earnings  (loss) per share  computations,  as  required.  The
Company  will  restate  all prior  period  earnings  (loss)  per share data upon
adoption of FAS 128.  The  application  of FAS 128 for the five years ended June
30,  1997  would not have a  material  effect on the  Company's  per share  data
presented for those periods.

     Reclassifications

     Certain prior year amounts have been reclassified to conform to the current
year presentation.


                                       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>

(Dollars in thousands)                                                              June 30,
                                                                       ---------------------------------
                                                                                1997                1996
                                                                       -------------      --------------
              <S>                                                      <C>                <C> 
              Type of security:
                  Corporate debt securities                            $      24,401      $        8,535
                  U.S. Treasury securities and obligations
                      of U.S. government agencies                             11,994              62,883
                  Other interest-bearing securities                            2,438               3,006
                                                                       -------------      --------------

                                                                       $      38,833      $       74,424
                                                                       =============      ==============

              Contractual maturity:
                  Maturing in less than twelve months                  $      35,827      $       69,414
                  Maturing between twelve and
                      twenty-one months                                        3,006               5,010
                                                                       -------------      --------------

                                                                       $      38,833      $       74,424
                                                                       =============      ==============
</TABLE>
     The cost of  securities  sold is based  upon  the  specific  identification
method.  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 and 1996. Realized gains and losses on the
disposal  of  available-for-sale  securities  during  1997  totaled  $12,000 and
$4,000, respectively.  During 1996 such gains totaled $22,000. During 1995, such
gains and losses totaled $3,000 and $7,000, respectively.


                                       F-10
<PAGE>


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

                                                                                         June 30,
                                                                                --------------------------
                                                                                      1997            1996
                                                                                ----------     -----------
(Dollars in thousands)
<S>                                                                             <C>            <C>    

Accounts receivable:
     Trade, net of an allowance for doubtful accounts of $60                    $   26,055     $         0
     Employee                                                                          269             211
     Contract                                                                        4,668           2,645
     Other                                                                             383             110
                                                                                ----------     -----------

                                                                                $   31,375     $     2,966
                                                                                ==========     ===========

Inventories:
     Raw materials                                                              $   18,462     $         0
     Work in process                                                                39,421               0
     Finished goods                                                                    917               0
                                                                                ----------     -----------

                                                                                $   58,800     $         0
                                                                                ==========     ===========

Property and equipment, net:
     Scientific instrumentation                                                 $   16,614     $     9,353
     Computer equipment                                                              8,892           6,881
     Leasehold improvements                                                         10,804           3,184
     Furniture and fixtures                                                          2,464           1,228
                                                                                ----------     -----------

                                                                                    38,774          20,646
     Less accumulated depreciation and amortization                                (16,161)        (13,710)
                                                                                ----------     -----------

                                                                                $   22,613     $     6,936
                                                                                ==========     ===========

Accrued liabilities:
     Vacation                                                                   $    1,932     $       735
     Payroll taxes                                                                   1,670               4
     Commissions                                                                       469               0
     Clinical studies                                                                3,578           3,207
     Other                                                                           1,240             381
                                                                                ----------     -----------

                                                                                $    8,889     $     4,327
                                                                                ==========     ===========

</TABLE>
                                       F-11
<PAGE>


Note 4 - Significant contract arrangements

     Roche

     In January  1997,  the  Company  and JT  granted  Roche  certain  exclusive
marketing  rights to  VIRACEPT  in  Europe  and other  countries  outside  North
America, Japan and Asia. For such rights, the Company received and recognized as
revenue in January 1997, an initial  license fee of  $9,000,000  and will,  upon
approval of VIRACEPT in Europe, receive an additional license fee of $11,000,000
and  subsequent  royalties  based  either on Roche's  sales of  VIRACEPT  or, in
certain circumstances, Invirase(R) (saquinavir), Roche's HIV protease inhibitor.

     Subsequent  to the end of fiscal  1997,  the Company  and JT granted  Roche
certain exclusive marketing rights to VIRACEPT in several Asian territories. For
such rights,  the Company received a license fee of $2,000,000  during the first
quarter of fiscal 1998 and will, upon approval in one of the Asian  territories,
receive an additional  license fee of  $1,000,000  and  subsequent  royalties as
described above.

     In June 1996,  Agouron  granted Roche worldwide  development  rights in two
anti-cancer  drugs  currently  being  developed  by the  Company  and  agreed to
collaborate with Roche on an additional  early-stage  anti-cancer drug discovery
program.  In return for rights to the Company's most advanced  anti-cancer  drug
(THYMITAQ) and an earlier stage anti-cancer  compound  (AG3340),  Roche has paid
$15,000,000 in initial license fees and has agreed to pay milestone  payments of
up to $40,000,000 and to bear 80% of the future  development  costs of these two
drugs. In North America, the Company and Roche will cooperatively market the two
drugs and will share  equally in resulting  profits.  Outside of North  America,
Roche will lead  commercialization  efforts and pay royalties to the Company or,
in certain  circumstances,  will share  profits  with the  Company.  For similar
commercial  rights to compounds  generated in a collaborative  research  program
focused on cyclin-dependent kinases (initially targeting the enzyme cdk4), Roche
is to provide  annual  research  support to the Company of $3,000,000 as well as
subsequent milestone payments of up to $20,000,000 and has agreed to bear 80% of
any  post-research  development  costs.  The  Company  also has a right in North
America to commercialize a Roche anti-cancer  product to be named in the future.
The Company received and recognized as revenue in June 1996, the initial license
payments of $15,000,000.

     Under the terms of the combined agreements with Roche, the Company incurred
costs  of  $17,854,000  and  recognized   corresponding   contract  revenues  of
$14,270,000 for the year ended June 30, 1997.

     In June 1996,  the Company  completed a  three-year  agreement  with Syntex
(U.S.A.) Inc. (now a subsidiary of Roche),  to  collaborate  on the discovery of
novel matrix  metalloprotease  inhibitor drugs.  Each company may pursue further
discovery or development efforts in this program area at its sole discretion and
expense  with  no  subsequent  obligations  to  the  other  company.  Under  the
agreement,  the Company incurred costs and recognized  corresponding revenues of
$3,013,000  during the year ended June 30, 1996. The Company funded a portion of
the activities associated with this collaboration on its own account.


                                       F-12
<PAGE>


     Japan Tobacco Inc.

     In  December  1992,  the  Company  entered  into  an  agreement  with JT to
collaborate  on  the  discovery,  development  and  commercialization  of  novel
therapeutic  drugs which act on key proteins  related to the human immune system
("JT 1992"). In February 1994, the Company expanded its strategic  alliance with
JT into the field of anti-viral drugs for the treatment of infections  caused by
hepatitis C, the herpes family of viruses and the rhinoviruses  ("JT 1994").  In
December  1994,  the  Company  added  its  anti-HIV  drug,  VIRACEPT,  to the JT
collaboration  with the  execution  of a  worldwide  development  and  licensing
agreement ("JT HIV"). In January 1995, JT 1992 was canceled by mutual  agreement
and JT 1992 resources were reallocated to JT 1994 programs. In February 1996, JT
1994 was modified to delete rhinoviruses from the strategic alliance.

     Under the  provisions  of JT 1994,  JT has agreed to make certain  research
payments  to the  Company  of not less than  $8,000,000  over a two year  period
ending December 1996. Such payments could approximate more than $21,000,000 over
a four year period if certain technical milestones are achieved. In addition, JT
made an up-front  payment of  $7,778,000,  which was amortized to revenue over a
twenty-four  month period.  Under the provisions of JT HIV, JT has made payments
of  $30,000,000  to Agouron  representing  initial  and  subsequent  payments of
$2,500,000,  $3,500,000 and $24,000,000.  Additional payments  representing JT's
share of VIRACEPT development costs have also been received. Agouron and JT will
ultimately share equally the costs of further development of VIRACEPT.

     Under the provisions of JT 1994, the Company will have exclusive  rights to
develop,   manufacture   and   market   anti-hepatitis   C,  anti   herpes   and
anti-cytomegalovirus drugs in the United States, Canada and Mexico. JT will have
exclusive rights to develop, manufacture and market these drugs in Japan, Taiwan
and South Korea. Outside the countries in which they respectively have exclusive
rights,  Agouron and JT will have co-exclusive  rights to manufacture and market
jointly developed anti-hepatitis C, anti-herpes and anti-cytomegalovirus  drugs.
Each company will pay royalties to the other based upon their  respective  sales
of  anti-hepatitis  C,  anti-herpes and  anti-cytomegalovirus  drugs.  Under the
provisions  of JT HIV,  Agouron  will  retain  exclusive  commercial  rights  to
VIRACEPT (with the right to sublicense,  subject to JT's right of first refusal)
in the United States,  Canada and Mexico.  JT was granted  exclusive  commercial
rights to VIRACEPT (with the right to sublicense,  subject to Agouron's right of
first  refusal)  in  Japan  and  certain  other  countries  in  Asia.  Exclusive
commercial  rights (with the right to  sublicense)  in Europe,  Asia and certain
other  countries in the world have been licensed by the Company and JT to Roche.
The  Company  and JT will  share  profits  and/or  royalties  equally  from  the
worldwide commercialization of VIRACEPT.

     Under the combined terms of the agreements,  the Company has incurred costs
of  $71,825,000,  $46,969,000,  and  $19,211,000  and  recognized  corresponding
contract  revenues of  $48,886,000,  $37,197,000  and  $22,881,000 for the years
ended June 30, 1997, 1996 and 1995.


                                       F-13
<PAGE>


The  substantive  collaborations  of the Company's  newly acquired  wholly-owned
subsidiary, Alanex Corporation, are described below.

     Roche Bioscience

     In April  1997,  Alanex  and Roche  Bioscience  entered  into a  three-year
library  screening  and  license  agreement  under  which  Alanex  will  provide
compounds  from  its  exploratory  libraries  on a  nonexclusive  basis to Roche
Bioscience.  The agreement  provides for Roche Bioscience to pay a nonrefundable
fee of  $1,000,000  which was received and  recognized as license fee revenue in
May 1997.  Roche  Bioscience is to pay  $6,000,000  over the  three-year  period
during which library  compounds are provided.  In addition,  Roche Bioscience is
obligated  to  make   additional   payments  upon  the  achievement  of  certain
milestones. Under the terms of the agreement, Roche Bioscience has an option for
an  exclusive  royalty  bearing  license  to active  leads  that  arise from the
screening of the Alanex libraries.

     In June  1996,  Alanex  and  Roche  Bioscience  entered  into a  three-year
collaboration  agreement  targeting the treatment of pain.  Roche  Bioscience is
obligated to make certain  payments upon the achievement of defined  milestones.
In addition,  during the term of the agreement,  Roche Bioscience will provide a
minimum of $5,500,000  to support  research at Alanex.  The  agreement  provides
Roche Bioscience an exclusive  worldwide  license to commercialize any compounds
resulting  from the research  that is selected by Roche  Bioscience  for further
development  and to pay  royalties to Alanex on any sales of products  developed
from the collaboration.

     Under all  agreements  with  Roche  Bioscience,  Alanex  incurred  costs of
$376,000 and recognized  corresponding contract revenues of $466,000 for the two
months  ending  June 30,  1997 (the  period  subsequent  to its  acquisition  by
Agouron).

     Novo Nordisk

     In  October  1995,  Alanex  and  Novo  Nordisk  entered  into a  three-year
collaboration  agreement for the  characterization of drugs for the treatment of
diabetes.  Novo Nordisk is obligated to provide up to  $4,500,000  of funding to
support  research  at  Alanex  in the  field  of the  collaboration  and to make
additional  payments to Alanex upon the achievement of certain  milestones.  The
agreement grants Novo Nordisk an option to obtain an exclusive worldwide license
to develop and  commercialize  any drug candidate arising from the collaboration
which they elect to pursue.  Alanex will  receive  royalties on the sales of any
such drug.

     Under the  agreement,  Alanex  incurred  costs of $382,000  and  recognized
corresponding  contract  revenues of $475,000 for the two months ending June 30,
1997.

                                       F-14
<PAGE>


Note 5 - Long-term debt

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

                                                                                      June 30,
                                                                         -------------------------------

                                                                                  1997              1996
                                                                         -------------    --------------    
<S>                                                                      <C>              <C> 
(Dollars in thousands)

Notes payable, secured with personal property and a                      $         142    $          486
     certificate of deposit; interest at CD rate plus 1.5%,
       maturing June 1997 and November 1998

Capital leases with interest rates between 5.86% and 16.5%,                      2,462               501
     maturing at various dates through December 2001.

Unsecured,  non-interest  bearing,  term  obligation;
     face value of $4,500,000; discounted  to an  8.95%
     effective  rate,  includes  imputed  interest  of $262,000
     due June 28, 2001.                                                          3,194                 0

Term obligation for tenant improvements, interest
     at 11% per annum, payable in monthly installments
     maturing October 1997 and April 2002.                                       2,668                 0
                                                                         -------------    --------------

Total long-term debt and capital lease obligations                               8,466               987

Current portion of long-term debt                                               (2,526)             (486)
                                                                         -------------    --------------

Long-term debt                                                           $       5,940    $          501
                                                                         =============    ==============
</TABLE>

     Maturities of long-term debt,  excluding  capital  leases,  are as follows:
1998 - $1,870,000;  1999-  $243,000;  2000 - $225,000;  2001 - $251,000;  2002 -
$4,721,000 and thereafter $0, less imputed interest of $1,306,000.

                                       F-15
<PAGE>


Note 6 - Income taxes

(Dollars in thousands)

     The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
       
          Year ended June 30,                             1997         1996         1995
                                                     ---------    ---------     --------
          <S>                                        <C>          <C>           <C>    
          Current:
              Federal                                $       0    $       0     $      0
              State                                          1            1            1
              Foreign                                    1,222          933          863
                                                     ---------    ---------     --------
                                                         1,223          934          864
                                                     ---------    ---------     --------

          Deferred:
              Federal                                  (37,800)           0            0
              State                                     (6,000)           0            0
              Foreign                                        0            0            0
                                                     ---------    ---------     --------
                                                       (43,800)           0            0
                                                     ---------    ---------     --------

                                                     $ (42,577)   $     934     $    864
                                                     =========    =========     ========
</TABLE>

     The  reconciliation of income tax from 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,                             1997         1996         1995
                                                     ---------    ---------     --------
      <S>                                            <C>          <C>           <C> 
      Tax at U.S. federal statutory rate             $ (29,030)   $  (6,320)    $ (4,106)
      State taxes, net of federal benefit                    1            1            1
      Foreign taxes                                      1,222          933          863
      Purchase accounting book/tax basis differences    19,781            0            0
      Change in valuation allowance                    (42,449)       6,245        4,076
      Other                                                415           75           30
      Adjustments to carryover amounts                   7,483            0            0
                                                     ---------    ---------     --------
                                                     $ (42,577)   $     934     $    864
                                                     =========    =========     ========
</TABLE>

     The Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
                                                             June 30
                                                    ----------------------
                                                         1997         1996
                                                    ---------    ---------                   
          <S>                                        <C>          <C>           
          Deferred revenue                           $       0    $   4,694
          Book and tax depreciation/amortization
            differences                                    831        2,117
          Accrued liabilities                            1,363          807
          Net operating loss carryforwards              49,348       26,593
          Foreign tax credits                                0        3,746
          Research and development tax credits           5,676        4,492
          Uniform capitalization                         1,100            0
          Other                                         (2,418)           0
                                                     ---------    ---------
                                                        55,900       42,449
          Valuation allowance                                0      (42,449)
                                                     ---------    ---------
          Deferred taxes, net                        $  55,900    $       0
                                                     =========    =========
</TABLE>

     The Company  has not  recorded  current  provisions  for any United  States
income taxes due to net operating losses for tax reporting purposes. At June 30,
1997, the Company had net operating loss carryforwards for federal tax reporting
purposes  of  approximately  $135,000,000  expiring  from 2000 to 2012.  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
federal   research  and  development   credit   carryforwards  of  approximately
$3,400,000  at June 30,  1997.  The future  utilization  of net  operating  loss
carryforwards  for federal and state  income tax purposes may be impacted by the
issuance of additional equity securities.

                                       F-16
<PAGE>


     The Company has net  operating  loss and  research and  development  credit
carryforwards  of  approximately   $31,100,000  and  $2,200,000  for  state  tax
reporting purposes at June 30, 1997, expiring from 1998 to 2002.

     Based on its fourth  quarter  pre-tax profit  (excluding the  non-recurring
charge  associated  with the  acquisition of Alanex) 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, 1997.

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


                                       F-17
<PAGE>


Note 7 -  Stockholders' equity

     Stock Options

     The Company has five stock option  plans  whereby  6,409,042  shares of the
Company's  common  stock  have  been  reserved  for  issuance  to its  officers,
directors, employees and consultants. The 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 may be at any price  determined by the Board
of Directors  for others.  The options  expire not later than ten years from the
date of the grant and  generally  become  exercisable  ratably  over a four year
period  beginning  one year from the grant  date.  At June 30,  1997,  1,077,078
options have been  exercised,  1,749,672 were  exercisable and 922,319 shares of
common stock remain  available for grant.  The following table  summarizes stock
option activity for 1995 through 1997:
<TABLE>
<CAPTION>

                                                                              Shares                Prices
                                                                       -------------    ------------------
           <S>                                                         <C>              <C>    
           Outstanding June 30, 1994                                       1,905,439

                Options granted                                              773,275    $  10.13 - $ 24.50
                Options exercised                                            (49,125)       5.40 -   15.50
                Options canceled                                             (43,897)       7.88 -   16.13
                                                                       -------------

           Outstanding June 30, 1995                                       2,585,692         .47 -   24.50

                Options granted                                            1,162,475       23.56 -   46.00
                Options exercised                                           (293,206)       5.40 -   18.38
                Options canceled                                             (40,604)       7.88 -   39.13
                                                                       -------------

           Outstanding June 30, 1996                                       3,414,357        5.40 -   46.00

                Alanex options assumed                                       189,042         .53 -    7.96
                Options granted                                            1,399,250       30.38 -   94.25
                Options exercised                                           (490,236)        .53 -   44.38
                Options canceled                                            (102,768)       8.63 -   72.69
                                                                       -------------

           Outstanding June 30, 1997                                       4,409,645    $    .53 - $ 94.25
                                                                       =============
</TABLE>

                                       F-18
<PAGE>


     The following  table  summarizes  information  concerning  outstanding  and
exercisable options as of June 30, 1997:
<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, 1997     Life (years)         Price          June 30, 1997       Price
                                -------------    --------------   ---------------     -------------     ----------
          <S>                   <C>              <C>              <C>               <C>              <C>  

          Less than $16.25         1,717,954               6.21   $        11.43        1,313,059    $       11.60
          $16.25 to $44.38         1,530,441               8.64            35.85          430,863            33.79
          $44.38 to $82.00         1,088,750               9.33            71.80            5,750            60.29
          Greater than $82.00         72,500               9.73            87.92                0               --
                               -------------     --------------   --------------    -------------    -------------
                                   4,409,645               7.88   $        36.07        1,749,672    $       17.23
                               =============     ==============   ==============    =============    =============
</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-based  compensation plans. Had compensation expense for
the Company's stock-based plans been determined based upon the fair value method
prescribed  under FAS 123, the Company's net loss and related net loss per share
would have been increased to the following pro-forma amounts:

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

                  Net loss
                    As reported                       ($42,806)     ($19,523)
                    Compensation expense:
                      Stock options                     (9,496)       (1,133)
                      Employee stock purchase plan        (394)         (204)
                                                      --------      --------
                    Pro-forma                         ($52,696)     ($20,860)
                                                      ========      ========

                  Net loss per share
                    As reported                         ($3.18)       ($1.98)
                    Pro-forma                           ($3.91)       ($2.12)

     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 1997 and 1996:  expected volatility of 50
percent;  risk-free  interest rate of 6.1 percent;  an average  expected life of
four years and no  dividends.  The  weighted  average fair value of stock option
grants was $30.50 per share in 1997 and $17.93 per share in 1996.

     In  connection  with its  acquisition  of Alanex  Corporation,  the Company
assumed all of the issued and  outstanding  options of Alanex which  resulted in
options to purchase an aggregate of 189,042 shares of the Company's common stock
at exercise prices ranging from $.53 to $7.96 per share.


                                       F-19
<PAGE>


     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 250,000  shares of common stock have been  reserved for issuance  under
the plan,  of which  120,495  shares  remain  available for purchase at June 30,
1997. 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 1997, 4,865 shares
were issued at a price of $28.58 per share, 23,518 shares were issued at a price
of $34.74 per share and 7,536 were  issued at a price of  $57.38.  During  1996,
6,131  shares  were  issued at a price of $9.88 per share,  23,240  shares  were
issued at a price of $19.98 per share and 4,828 shares were issued at a price of
$28.58 per share. During 1995, 25,524 shares were issued at a price of $9.24 per
share and 6,145 shares were issued at a price of $9.88 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 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 $11.91 per share in 1997 and $6.94 per share in
1996.

     Warrants

     In  connection  with its  acquisition  of Alanex  Corporation,  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 84,761
shares of the Company's common stock at an exercise price of $8.02 per share was
outstanding.  Pursuant to the merger  agreement with Alanex,  20% of the warrant
shares are subject to certain  restrictions  through May 1998. In July 1997, the
warrant was exercised in its entirety  generating net proceeds to the Company of
approximately $679,800.

                                       F-20
<PAGE>


     Stockholder rights plan

     On  November  7, 1996,  the Board of  Directors  of the  Company  adopted a
Stockholder Rights Plan (the "Plan"). Under the terms of the Plan,  stockholders
of record as of November 21, 1996,  received a dividend of one  Preferred  Stock
Purchase  Right  ("Right(s)")  for each share of common stock held on that date.
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 antidilution 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
each Right  (other than rights held by the 15% holder) to be  exchanged  for one
share of Common Stock.

     The Board of Directors is entitled to redeem the Rights at $0.001 per Right
at any time prior to the public announcement of the existence of a 15% holder.


                                       F-21
<PAGE>


Note 8 - Commitments

     Certain  scientific  instrumentation,  computer  and  other  equipment  are
subject to leases which are classified as capital  leases.  At June 30, 1997 and
1996, $2,895,000 ($2,629,000,  net) and $938,000 ($484,000,  net) of such leased
equipment are included in property and equipment.

     Rental  expenses   (principally  for  leased   facilities  under  long-term
operating  lease  commitments)  were  $3,509,000,  $2,548,000 and $2,198,000 for
1997, 1996 and 1995. Future minimum payments for capital and operating leases at
June 30, 1997 are as follows:
<TABLE>
<CAPTION>

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

           1998                                       $        683                  $        4,850
           1999                                                669                           5,564
           2000                                                558                           3,541
           2001                                                432                           3,285
           2002                                                167                           2,088

           Thereafter                                            0                           4,309
                                                      ------------                  --------------

           Total minimum lease payments                      2,509                  $       23,637
                                                                                    ==============
           Less amount representing interest                   (47)
                                                      ------------

           Obligations under capital leases           $      2,462
                                                      ============
</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-22
<PAGE>


Note 9 - Alanex acquisition

     On April 28,  1997,  the Company  executed a merger  agreement  with Alanex
Corporation, a research company. Under the terms of the merger agreement, Alanex
will operate as a wholly-owned subsidiary of Agouron.

     Under the terms of the completed  transaction,  each issued and outstanding
share of Alanex  common stock was  exchanged  for  approximately  .188 shares of
Agouron common stock and the Company assumed all issued and outstanding  options
and  warrants to  purchase  shares of common  stock of Alanex at the  previously
noted  exchange  rate.  For all  outstanding  shares of common stock and related
options and warrants,  approximately 995,921 shares of Agouron common stock will
be  issued,  subject  to  certain  escrow,  vesting  and  other  limitations  or
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  transactions  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  operations  includes the results of operations
related  to the  acquisition  for the two  months  ending  June  30,  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.)
<TABLE>
<CAPTION>

         Year ended June 30,                                               1997              1996
                                                                       -------------    -------------
                                                                        (unaudited)       (unaudited)
         <S>                                                           <C>              <C>


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

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

         Net income (loss) per common share                            $        1.02    $       (1.83)
                                                                       =============    =============

         Net income (loss) per common share after giving
           effect to 2-for-1 stock split declared on July 30, 1997     $         .51    $        (.92)
                                                                       =============    =============
</TABLE>

                                       F-23
<PAGE>


Note 10 - Subsequent event

     On July 30, 1997, the Company's  Board of Directors  approved a two-for-one
stock split in the form of a special stock dividend of one share of common stock
for each share of the Company's common stock outstanding. The record date of the
transaction  is August  15,  1997 and the  distribution  date will be August 26,
1997.  In applying the effect of the  two-for-one  stock split on a  retroactive
basis,  reported net losses per common share for the fiscal years ended June 30,
1997,  1996 and 1995 would have been  $1.59,  $.99 and $.89,  respectively,  and
total shares  outstanding  at June 30, 1997 and 1996 would have been  29,429,920
and 21,463,374, respectively.

Note 11 - 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>    

1996
Product sales                           $           0     $           0    $           0     $           0
Gross margin from product sales                     0                 0                0                 0
Net loss                                       (2,523)           (4,132)         (11,006)           (1,862)
Net loss per common share                       (0.33)           (0.40)            (1.04)            (0.17)

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)
Net loss per common share                       (1.15)           (0.93)            (0.37)            (0.76)

</TABLE>
                                       F-24
<PAGE>


31

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                         52           President, Chief Executive Officer and Director

           Marvin R. Brown, M.D.                 50           Vice President

           Neil J. Clendeninn, M.D., Ph.D.       48           Corporate Vice President, Clinical Affairs

           Steven S. Cowell                      48           Corporate Vice President, Finance and Chief
                                                                Financial Officer

           William C. Denby                      42           Vice President, Head of Marketing and Sales

           Gary E. Friedman                      50           Corporate   Vice    President,    General    Counsel,
                                                              Secretary and Director

           Donna C. Nichols                      40           Vice President, Head of Corporate Communications

           Barry D. Quart, Pharm.D.              40           Senior Vice President, Head of Drug Development

           R. Kent Snyder                        43           Senior Vice President, Head of Commercial Affairs

           Michael D. Varney                     39           Vice President, Head of Research

           Stephanie Webber                      49           Vice President, Head of Development Pharmacology

           Glenn R. Zinser                       54           Corporate Vice President, Head of Operations

           John N. Abelson, Ph.D.(1)             58           Director

           Patricia M. Cloherty(2)               55           Director

           A.E. Cohen(1)                         61           Director

           Michael E. Herman(1)                  56           Director

           Irving S. Johnson, Ph.D.              72           Director

           Antonie T. Knoppers, M.D.(2)          82           Director

           Melvin I. Simon, Ph.D. (2)            60           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 June 1997 as vice president. 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 February 1993 as vice president,
clinical  affairs.  In June 1997, Dr.  Clendeninn was promoted to corporate vice
president.  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 August  1991 as vice  president,
finance and chief  financial  officer.  In June 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 June 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 June 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  May 1986 and as vice
president and general  counsel since December  1991. In June 1997, Mr.  Friedman
was promoted to corporate vice president.  Previously,  from 1982 until December
1991, 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.  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.
                                       31
<PAGE>

     Barry  D.  Quart  joined  the  Company  in June  1993  as  vice  president,
regulatory  affairs. In June 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 July 1991 as vice president,  business
development.  In June 1995, Mr.  Snyder's  title was changed to vice  president,
commercial  affairs  and in June  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 June 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 June 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 July 1, 1995,  has
served as vice president,  operations.  In June 1997, Mr. Zinser was promoted to
corporate vice president, head of operations. Previously, from 1987 through June
1995, Mr. Zinser held various management  positions with the Company,  including
senior  director,  operations  from July 1993  through  June  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
October 1989 until June 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 December  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.  In 1993,  she was elected
president 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 March 1992.  Mr.  Cohen is an  independent
management consultant. From 1957 until his retirement in January 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 N.V., Teva Pharmaceutical  Industries
Ltd.,  Vasomedical,  Inc.,  Vion  Pharmaceuticals,  Inc.,  Smith Barney  (Mutual
Funds),  and  Blue  Stone  Capital  Partners,  L.P.,  all of  which  are  public
companies.  Mr.  Cohen also serves as a  consultant  to  MeesPierson  Inc.,  The
Population  Council and Chugai  Pharmaceutical  Co. Ltd., Tokyo ("Chugai"),  and
serves as a director of Chugai's U.S. subsidiary companies.
 
    Michael E. Herman joined the Board in October 1992. Mr. Herman is a private
investor,  as well as president and chief  operating  officer of the Kansas City
Royals Baseball Team. From October 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 May  1989.  Dr.  Johnson  is an
independent  consultant in  biomedical  research  working with numerous  private
companies.  From 1953 until his  retirement in November  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 July 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 M.D. from the University of Amsterdam and a Ph.D. from the University
of Leiden, The Netherlands.
                                       33
<PAGE>


     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

     Two  reports  on Form 8-K were filed  during  the fourth  quarter of fiscal
1997. The first, filed on May 5, 1997,  reported the execution by the Company of
a Definitive Agreement to acquire Alanex Corporation.  The second, filed on June
4, 1997,  reported  the  closing on May 23,  1997 of the  acquisition  of Alanex
Corporation by the Company. Attached to this Form 8-K are the Alanex Corporation
balance  sheet at December  31, 1996 and 1995,  and the  related  statements  of
operations,  stockholders'  equity and cash flows for the three years then ended
December 31, 1996.

 (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(e)     Office Lease dated March 16, 1990 between Nexus Science
                      Centre--Torrey  Pines Associates and the Company.
         10.02(e)     First  Amendment  to  Lease  dated  May 22,  1990  between
                      Nexus  Science  Centre-Torrey  Pines  Associates  and  the
                      Company.
         10.03(q)     Form of 1990 Incentive Stock Option Agreement.
         10.04(q)     Form of 1990 Non-Statutory Stock Option Agreement for 
                      Employees/Officers/Directors.
                                       35
<PAGE>



         Exhibit
         Number                             Exhibit
         -------      ---------------------------------------------------------
         10.05(q)     Form of 1990 Non-Statutory Stock Option Agreement for
                      Consultants.
         10.06(c)     Second  Amendment to Lease dated  January,  1991 between 
                      Nexus Science  Centre-Torrey  Pines  Associates  and  the
                      Company
         10.07(c)     1985 Stock Option Plan (Last Amended August 14, 1991).
         10.08(f)     Agouron Pharmaceuticals, Inc. 401(k) Plan (Amended August
                      1992).
         10.09(b)     Agouron Pharmaceuticals, Inc. Employee Stock Purchase Plan
                      (October 15, 1992).
         10.10(b)     Agouron Pharmaceuticals, Inc. Flexible Benefits Plan
                      (December 10, 1992).
         10.11(g)     Agreement  dated June 8, 1993 between Syntex (U.S.A.) Inc.
                      and the Company.  (Portions of the agreement receive
                      confidential  treatment  pursuant to an application filed
                      September 1, 1993; File No. 0-15609).
         10.12(k)     Lease Amendment dated February 17, 1994 between Koll
                      Hancock Torrey Pines and the Company.
         10.13(h)     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).
         10.14(h)     Agreement  Three 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).
         10.15(i)     Second  Amendment and  Restatement  of Agreement One dated
                      April 22, 1994 (effective December 18, 1992) between Japan
                      Tobacco Inc. and the Company.  (Portions of the  agreement
                      receive confidential  treatment pursuant to an application
                      filed September 9, 1994; File No.
                      0-15609).
         10.16(j)     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).
         10.17(l)     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.)
         10.18(j)     Third  Amendment of Agreement One  effective  January 15,
                      1995 between Japan Tobacco Inc. and the  Company (Portions
                      of the agreement receive confidential treatment pursuant 
                      to an application dated January 31, 1995).
         10.19(k)     Amended and Restated Lease dated September 13, 1995
                      between Health Science  Properties,  Inc. and the Company.
         10.20(l)     1990 Stock Option Plan (Restated November 2, 1995).
         10.21(m)     Amendment effective January 1, 1996 to the Agouron
                      Pharmaceuticals, Inc. 401(k) Plan.

                                       36
<PAGE>


         Exhibit
         Number                             Exhibit
         -------      ---------------------------------------------------------
         10.22(m)     First Amendment to Agreement Three effective February 29,
                      1996 between Japan Tobacco,  Inc. and the Company.
         10.23(n)     Letter of Intent between Hoffmann-La Roche Inc. of Nutley,
                      New Jersey, F. Hoffmann-La Roche Ltd of Basel, Switzerland
                      (Roche) and the Company  dated June 19,  1996.  (Portions
                      of the Letter of Intent receive confidential treatment
                      pursuant to a request filed June 21, 1996.)
         10.24(o)     Sub-sublease  dated July 24, 1996, between ITT Residential
                      Capital Serving Corporation and the Company.
         10.25(q)     Lease  Amendment  No. 3 dated  October 16, 1996 between
                      John Hancock Life  Insurance  Company and the Company.
         10.26(q)     Lease dated October 25, 1996 between Scripps Jack, Ltd.
                      and the Company.
         10.27(q)     Sublease between The Scripps Research Institute and the 
                      Company dated November 4, 1996.
         10.28(q)     Premises  Modification  Agreement dated  November 4, 1996
                      between  The  Scripps  Research Institute and the Company.
         10.29(p)     1996 Stock Option Plan.
         10.30(p)     Form of 1996 Incentive Stock Option Agreement.
         10.31(p)     Form of 1996 Non-Statutory Stock Option Agreement for
                      Employees/Officers/Directors.
         10.32(p)     Form of 1996 Stock Option Agreement for Consultants
         10.33        Lease dated November 8, 1996 between Scripps Jack, Ltd. 
                      and the Company.
         10.34        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.)
         10.35        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 order of the
                      Securities and Exchange Commission dated June 28, 1995.)
         10.36(q)     Letter  of  Intent  between  F.  Hoffmann-La  Roche Ltd of
                      Basel,  Switzerland,  Japan Tobacco Inc.,  and the Company
                      dated January 17, 1997.  (Confidential  treatment has been
                      requested  for portions of this  agreement  pursuant to an
                      application  dated January 27, 1997,  as separately  filed
                      with the Securities and Exchange Commission.)

                                       37
<PAGE>


         Exhibit
         Number                             Exhibit
         -------      ---------------------------------------------------------
         10.37        AG3340  Development and License  Agreement  between
                      F. Hoffmann-La  Roche Ltd and Hoffmann-La Roche Inc. and
                      the Company dated June 11, 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.)
         10.38        THYMITAQ  Development and License  Agreement between
                      F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. and
                      the Company dated June 11, 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.)
         10.39        Lease dated June 13, 1997 between LMC-Sorrento Investment
                      Company, LLC and the Company.
         10.40        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.)
         21           Subsidiary 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,
         File No. 001-12445.
     (e) Incorporated by Reference to Form 8-K filed on May 25, 1990.
     (f) Incorporated by Reference to Form 10-K filed for the year ended
         June 30, 1992.
     (g) Incorporated by Reference to Form 10-K filed for the year ended
         June 30, 1993.
     (h) Incorporated by Reference to Form 10-Q/A filed for the quarter ended
         March 31, 1994.
     (i) Incorporated by Reference to Form 10-K filed for the year ended
         June 30, 1994.
     (j) Incorporated by Reference to Form 10-Q filed for the quarter ended
         December 31, 1994.
     (k) Incorporated by Reference to Form 10-K filed for the year ended
         June 30, 1995.
     (l) Incorporated by Reference to Form 10-Q filed for the quarter ended
         December 31, 1995.
     (m) Incorporated by Reference to Form 10-Q filed for the quarter ended
         March 31, 1996.
     (n) Incorporated by Reference to Form 8-K filed on June 21, 1996.
     (o) Incorporated by Reference to Form 10-K for the year ended June 30, 
         1996.
     (p) Incorporated by Reference to Form S-8 filed on November 26, 1996,
         File No. 333-16815.
     (q) Incorporated by Reference to Form 10-Q for the quarter ended
         December 31, 1996.

                                       38
<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 18, 1997                   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 18, 1997
------------------------------------
Peter Johnson                               Officer and Director

/s/ Steven S. Cowell                        Corporate Vice President, Finance           August 18, 1997
------------------------------------
Steven S. Cowell                            and Chief Financial Officer

/s/ Gary E. Friedman                        Corporate Vice President,                   August 18, 1997
------------------------------------
Gary E. Friedman                            General Counsel, Secretary
                                            and Director

/s/ John N. Abelson                         Director                                    August 18, 1997
------------------------------------
John N. Abelson, Ph.D.

/s/ Patricia M. Cloherty                    Director                                    August 18, 1997
------------------------------------
Patricia M. Cloherty

/s/ A. E. Cohen                             Director                                    August 18, 1997
------------------------------------
A. E. Cohen

/s/ Michael E. Herman                       Director                                    August 18, 1997
------------------------------------
Michael E. Herman

/s/ Irving S. Johnson                       Director                                    August 18, 1997
------------------------------------
Irving S. Johnson, Ph.D.

/s/ Antonie T. Knoppers                     Director                                    August 18, 1997
------------------------------------
Antonie T. Knoppers, M.D.

/s/ Melvin I. Simon                         Director                                    August 18, 1997
------------------------------------
Melvin I. Simon, Ph.D.
</TABLE>

                                       39