<PAGE>

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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                               ----------------

                                   FORM 10-K

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
   OF 1934

  For the fiscal year ended December 31, 1999

                                       or

[_]TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
   EXCHANGE ACT OF 1934

  For the transition period from          to

                       Commission File Number: 333-96053

                               ----------------

                         CENTAUR PHARMACEUTICALS, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                            <C>
                  Delaware                                       77-0304313
       (State or other jurisdiction of                         (IRS Employer
       incorporation or organization)                       Identification No.)
</TABLE>

                              484 Oakmead Parkway
                          Sunnyvale, California 94086
                    (Address of principal executive offices,
                              including zip code)
                                 (408) 822-1600
              (Registrant's telephone number, including area code)

                               ----------------

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

                                      none

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

                                      none

                               ----------------

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

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [X]

   The aggregate value of voting stock held by non-affiliates of the Registrant
was approximately $165,324,391 as of March 27, 2000, based upon the prices at
which the Registrant's Common Stock was sold in recent transactions and the
determination by the Registrant's Board of Directors of the fair market value
of the Common Stock as of such date. Shares of Common Stock held by each
executive officer and director and by each person who owns 10% of more of the
outstanding Common Stock heave been excluded in that such persons may be deemed
to be affiliates. The determination of affiliate status is necessarily a
conclusive determination for other purposes. As of March 27, 2000, the
Registrant had 17,500,000 outstanding shares of Common Stock.

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<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                        1999 ANNUAL REPORT ON FORM 10-K

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
 <C>      <S>                                                              <C>
                                  PART I

 ITEM 1.  BUSINESS......................................................     3

 ITEM 2.  PROPERTIES....................................................    19

 ITEM 3.  LEGAL PROCEEDINGS.............................................    19

 ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........    19

                                 PART II

 ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
           MATTERS......................................................    20

 ITEM 6.  SELECTED FINANCIAL DATA.......................................    21

 ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS....................................    22

 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.....    33

 ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................    33

 ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
           AND FINANCIAL DISCLOSURE.....................................    33

                                 PART III

 ITEM 10. DIRECTOR AND EXECUTIVE OFFICERS OF THE REGISTRANT.............    34

 ITEM 11. EXECUTIVE COMPENSATION........................................    37

 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ..............    41

 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................    44

                                 PART IV

 ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES,
           AND REPORTS ON FORM 8-K .....................................    46

 SIGNATURES..............................................................   48
</TABLE>

                                       2
<PAGE>

                                     PART I

   This report contains certain forward-looking statements, including, without
limitation, statements containing the words "believes," "anticipates,"
"expects" and words of similar import. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, financial condition, performance or achievements of the
Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such factors include, among others, the following: the
early stage of the Company's development and uncertainties related to its
technology, the uncertainty of preclinical and clinical trials of potential
products, the Company's novel therapeutic approach, the Company's dependence on
collaborative partners, future capital needs and the uncertainty of additional
funding, the Company's prior operating losses and accumulated deficit and the
uncertainty of future profitability, the need for FDA approval and government
regulation of the Company's operations and potential products, dependence on
licenses, patents and proprietary technology, competition from other
biotechnology, chemical and pharmaceutical companies, attraction and retention
of technologically skilled employees, absence of sales and marketing experience
and limited manufacturing capabilities, risks of product liability and
limitations on insurance, dependence on third party reimbursement for potential
products, uncertainties relating to health care reform, risks of animal testing
and use of hazardous materials, Year 2000 compliance issues and other factors
referenced in this report. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such forward-looking statements
to reflect future events or developments.

ITEM 1. BUSINESS

Overview

   We are developing a novel class of small molecule pharmaceutical compounds
for the treatment of diseases involving the interruption and subsequent
restoration of blood supply, known as ischemia/reperfusion, and inflammation.
We believe that these disease processes create stress agents, and that these
agents activate a cascade of events in and around cells, which can lead to cell
damage and death. We believe that our compounds, which we refer to as NRTs, can
modify the cellular response to these stress agents and significantly reduce
the resulting cellular damage and death.

   Our most advanced programs target diseases affecting the brain such as acute
cerebral stroke, Parkinson's disease, AIDS dementia and Alzheimer's disease. In
collaboration with AstraZeneca PLC, a multinational pharmaceutical company
based in Europe, a Phase IIa clinical study of an NRT, which we refer to as
NXY-059, for the intravenous treatment of stroke has been completed in Europe.
We are also independently conducting Phase IIa clinical studies in the United
States of an orally administered NRT for the treatment of Parkinson's disease
and AIDS dementia. We are working with AstraZeneca to develop an orally active
lead compound for the treatment of Alzheimer's disease. We believe that the
cascade of events initiated by stress agents is important in all of these
diseases. Moreover, we believe that a broad range of other diseases involve
these same processes. To evaluate these other opportunities, we are conducting
preclinical programs to develop therapeutics for the treatment of arthritis and
inflammatory bowel disease. We have also established a research program to
evaluate the potential of NRTs to treat heart attacks.

Technology

   A wide variety of human diseases and disorders have been linked to cell
damage caused by the interruption and subsequent restoration of blood supply,
known as ischemia/reperfusion, and inflammation. These include acute conditions
associated with the temporary loss of blood supply such as stroke or heart
attacks and debilitating chronic diseases with which inflammation has been
associated such as Parkinson's disease, AIDS dementia, Alzheimer's disease,
arthritis and inflammatory bowel disease. We believe that the processes of
blood supply interruption/restoration and inflammation create stress agents,
such as free radicals

                                       3
<PAGE>

and inflammatory mediators, and that these agents activate a cascade of events
in and around cells which leads to cell damage and cell death. We believe that
our NRT compounds can modify the cellular response to these stress agents and
significantly reduce the resulting cellular damage and death.

   As people age, production of stress agents tends to increase and the ability
of the body to cope with these agents decreases. As a result, the damaging
effects of stress agents increase with age. The brain is especially sensitive
to stress agents because it cannot replace damaged neurons and it has
relatively weak defensive systems against stress agents. One of the
consequences of this is that the production and release of relatively low
levels of stress agents have an exaggerated effect on brain cells. Parkinson's
disease and Alzheimer's disease are examples of age-associated brain diseases
that involve the production of stress agents. In addition to brain diseases,
arthritis and heart attack are conditions that are generally more severe in
aged individuals.

   We believe that our NRTs reduce the cellular damage and cellular death
caused by stress agents by preventing or modulating the activation of
intracellular signaling cascades triggered by these agents, or by triggering or
modulating other intracellular pathways that inhibit the effect of these
agents. Signaling cascades within a cell determine which genes are activated at
any point in time. Since they control gene expression they are as fundamental
to the functioning of cells as the genes themselves. By modifying the
intracellular signals generated when cells are exposed to stress agents, we
believe that pathological responses can be controlled and the normal function
of cells maintained.

   We have identified several ways in which we believe that NRTs regulate
cells' response to stress agents, including:

  .  suppressing signals that cause cells to produce inflammation inducing
     agents,

  .  suppressing signals that cause cells to produce toxic agents that can
     damage or destroy cells, and

  .  altering cell signaling to favor cell survival.

   These properties may make it possible to treat acute conditions, like
stroke, by administering NRTs several hours after the initial incident. In
these circumstances, NRTs may be able to stop the escalating cascade of damage,
thus slowing the production of harmful agents and toxins and reducing
inflammation. Additionally, we believe that NRTs may be effective if given
chronically for the treatment of certain degenerative and inflammatory
conditions.

   Our technology is based on a proprietary library of small molecule
pharmaceutical compounds, known as NRTs. This technology emerged from research
begun in the 1980s by our scientific founders, Dr. John Carney, then at the
University of Oklahoma, and Dr. Robert Floyd at the Oklahoma Medical Research
Foundation, with PBN, a small organic molecule. Building on this foundation,
over the past eight years we have investigated several different families of
chemicals and synthesized hundreds of novel compounds, many of which have shown
therapeutic potential. This drug discovery process has involved the systematic
preclinical screening and modification of compounds to improve their safety and
efficacy, and drug absorption and distribution profile, using a variety of
screening methods and disease models.

   We view both acute and chronic conditions as attractive pharmaceutical
development targets. Most acute conditions require drugs that can be
administered through injection or intravenous solution in the ambulance or
hospital emergency room to achieve rapid effectiveness and that are swiftly
eliminated by the body after they have had their intended effect. Chronic
conditions usually require drugs that are orally active so that they can be
conveniently administered over a long period of treatment and preferably allow
once or twice daily dosing.

   We believe that our proprietary NRTs have the following characteristics that
may make them attractive as pharmaceutical candidates:

  .  Preclinical Efficacy Profile. NRTs have demonstrated therapeutic effects
     in recognized animal models for our target diseases.


                                       4
<PAGE>

  .  Toxicity Profile. NRTs have shown low toxicity in animal studies at
     dosage levels well above those that have demonstrated therapeutic
     effects in animal models of disease. NRTs have also been administered to
     human patients in Phase IIa clinical studies in stroke, Parkinson's
     disease and AIDS dementia, and no treatment-limiting side effects have
     been observed.

  .  Oral Or Intravenous Administration. We have engineered NRTs for either
     oral or intravenous administration depending on the target indication.

  .  Manufacturability. Because our NRTs are small organic compounds, they
     are relatively easy and inexpensive to manufacture compared to larger
     molecules.

  .  Compatibility With Existing Therapeutics. Based on limited testing to
     date, we have observed little or no interaction between our drugs and
     existing therapies, and believe that most NRT drug candidates will prove
     to be compatible and administrable with other drugs.

Business Strategy

   We plan to apply our proprietary NRT technology to develop new treatments
for a broad range of acute and chronic conditions associated with blood supply
interruption/restoration and inflammation. The principal elements of our
strategy are the following:

  .  TARGET LARGE MARKETS WITH UNMET MEDICAL NEEDS. In selecting therapeutic
     opportunities, we target large pharmaceutical markets that are not
     adequately served by existing therapies. We initially focused on
     diseases of the brain because of their substantial unmet market needs
     and the brain's high degree of vulnerability to stress agents. More
     recently, we have expanded our drug discovery efforts to include
     applications outside the brain where blood supply
     interruption/restoration and inflammation are believed to play major
     roles, such as arthritis, inflammatory bowel disease and heart attack.

  .  EMPHASIZE DRUG DISCOVERY AND EARLY STAGE DEVELOPMENT; PARTNER ACTIVITIES
     REQUIRING SUBSTANTIAL RESOURCES. We emphasize our research and early
     stage development capabilities, focusing on the discovery and screening
     of new drug candidates and the development of such candidates through
     early stage clinical trials. For later stage, larger and more complex
     clinical trials, and for worldwide marketing and distribution, we
     generally intend to seek strategic collaborations with large
     pharmaceutical companies, as we have established with AstraZeneca for
     stroke and Alzheimer's disease.

  .  PROTECT PROPRIETARY POSITION WITH BROAD PATENT COVERAGE. We are building
     a strong domestic and international patent position protecting our NRT
     technology. Our proprietary position includes ownership of, or license
     rights to, 36 United States patents, 38 United States patent
     applications, 58 foreign patents and 209 foreign patent applications,
     covering NRTs and their use in oxidative tissue damage, degenerative
     diseases, inflammatory conditions and the aging process. We have an
     active program of patent application and prosecution to protect and
     expand our proprietary position in NRT-based compounds and therapies.

  .  MAXIMIZE VALUE ADDED AND KNOW HOW THROUGH INTERNAL MANUFACTURING.
     Because NRTs can be produced by relatively simple manufacturing
     processes at relatively moderate cost, we have established, and are
     currently expanding, an internal manufacturing capability. We expect
     this capability to provide us with the ability to produce the volume of
     active ingredient of our product needed through the clinical trial
     process and early stage commercial sales, and positions us to realize
     manufacturing revenues. It also permits us to gain the knowledge and
     insights that come from developing and implementing production methods
     and affords us the potential to enhance our proprietary position.

                                       5
<PAGE>

Product Development Programs

   The table below summarizes the status of our principal product development
programs:

<TABLE>
<CAPTION>
                     Compound                          Commercialization
Indication             Name         Status(1)                Rights
----------           -------- ---------------------  ----------------------
<S>                  <C>      <C>                    <C>
Stroke               NXY-059  Phase IIa Completed(2) AstraZeneca/Centaur(3)
Parkinson's disease  CPI-1189 Phase IIa              Centaur
AIDS dementia        CPI-1189 Phase IIa              Centaur
Alzheimer's disease  N/A      Preclinical            AstraZeneca/Centaur(3)
Arthritis            N/A      Preclinical            Centaur
Inflammatory bowel
 disease             N/A      Preclinical            Centaur
</TABLE>
--------
(1) "Phase IIa Completed" means that we have completed a controlled clinical
    trial of the compound in patients with the targeted disease for purposes of
    testing safety and tolerability and to collect pilot data on stroke
    recovery. "Phase IIa" means that we have completed Phase I clinical trials
    of the compound, and have commenced a controlled clinical trial in patients
    with the targeted disease for purposes of testing safety and evaluating
    preliminary efficacy information. "Preclinical" refers to projects that
    have progressed to the point of intensive laboratory and/or animal
    screening designed to select a lead compound from potential candidates. See
    "--Government Regulation" for more detail regarding these classifications.

(2) Performed in Europe under the European equivalent of an Investigational New
    Drug application, or IND. A U.S. IND was not submitted. We expect to use
    the trial results to support Phase IIb/III regulatory filings in the United
    States and other countries. We believe that AstraZeneca will initiate the
    Phase IIb/III trials, consisting of two parallel trials totaling over 3,000
    patients in North America and Europe, in 2000.

(3) Our commercialization rights consist of worldwide manufacturing rights as
    to the active ingredient of our product and an option to acquire United
    States co-promotion rights. See "--AstraZeneca Alliance."

Clinical Programs

Stroke Program

   Stroke is classified into two major subtypes, ischemic and hemorrhagic.
Ischemic stroke, which is the more common form, results when blood supply to
the brain is interrupted by the blocking of a blood vessel. When the brain is
deprived of blood for more than a few minutes, brain cells begin a process
that, unless modified, will lead to their death. When blood supply is restored
to the affected area, either through clearing of the obstruction or through
collateral blood flow, it induces a cascade of stress agents that can
accelerate cell death and trigger an inflammatory response causing further
damage. This process can continue for many hours following blood restoration,
resulting in a spreading region of damaged and dead brain cells. Patients may
suffer loss of speech, muscle control and mental capacity and may become
paralyzed, comatose or die depending on which region of the brain is impaired
and the magnitude of the stroke. Hemorrhagic stroke is initiated by the rupture
of vessels supplying blood to the brain, which then causes a secondary ischemic
stroke. The resulting release of hemoglobin containing iron and other blood
factors into the brain can initiate and propagate damaging stress agents,
compounding the damage caused by the secondary ischemic stroke. As a result,
hemorrhagic strokes are often more severe than ischemic strokes.

   Until recently, stroke was considered untreatable. The condition was
monitored until the patient stabilized and rehabilitation was begun. In 1996, a
blood clot dissolving agent, tissue plasminogen activator (tPA), was approved
as a therapy for ischemic stroke in the United States. The use of tPA is
intended to restore blood supply to the brain as quickly as possible. While
early blood supply restoration has proven beneficial in ischemic stroke, it
exposes tissue to oxygenated blood, which we believe can lead to a cascade of
damaging stress agents. Other approaches under development by other companies
to treat stroke utilize neuroprotective agents such as N-methyl-D-aspartate, or
NMDA, ion-channel blockers, NMDA-receptor antagonists, calcium channel blockers
and substrates for rebuilding damaged cells. The effectiveness of most of these
approaches is

                                       6
<PAGE>

limited by the short window of time following the stroke during which they must
be administered, and some have serious side effects. In addition, a number of
prophylactic therapies for stroke are currently available, such as surgery to
enlarge narrowed blood vessels and the regular use of anticlotting agents such
as aspirin and ticlopidine.

   We believe that NRTs may prove effective in treating stroke by neutralizing
the damaging cascade initiated by stress agents, thereby protecting nerve cells
from the damage associated with stroke. Data from preclinical studies suggest
the therapeutic window of activity for NRTs may be significantly longer than
for most other neuroprotective agents. This would be a major advantage in a
disease in which patients may not arrive at the hospital for treatment for
several hours. We also believe that it may be possible to develop an orally
administered drug for prophylactic use by individuals considered at risk for
stroke.

   In collaboration with AstraZeneca, we are developing NXY-059 for intravenous
administration as a stroke drug. Preclinical studies in animal models indicate
that NXY-059 reduced neurological and behavioral consequences of permanent and
temporary blockages of blood vessels. Brain cell protection has been
demonstrated in both the core of the brain lesion and the expanding zone at
risk between the core and healthy tissue. Based on these animal studies, we
believe that NXY-059 may be efficacious in humans when used up to six or more
hours post-stroke. This compound yielded dose related brain cell protection at
doses substantially below those that show any toxicity in animal models.
Pursuant to the AstraZeneca agreement, AstraZeneca is to fund certain research,
product development and clinical studies of the drug candidate. AstraZeneca
conducted a Phase I clinical study of NXY-059 in Sweden for the purpose of
testing safety and to obtain a drug absorption and distribution profile in
healthy volunteers. This study, which included a total of 80 persons, was
completed in 1998, and no treatment-limiting side effects were observed.
AstraZeneca subsequently conducted a Phase IIa study of NXY-059 in Europe for
the purpose of testing safety and tolerability and to collect pilot data on
stroke recovery in acute stroke patients. No adverse side effects were observed
in this trial, for any category of stroke. No significant trends in stroke
recovery were observed. We believe, based on discussions with AstraZeneca, that
AstraZeneca will initiate Phase IIb/III trials of NXY-059 in 2000 to obtain
information about the efficacy of NXY-059, and to gather further information on
safety. We expect the trials to consist of two parallel trials totaling over
3,000 patients in North America and Europe. AstraZeneca is also currently
conducting an additional Phase I study to test safety and pharmaco-kinetics in
renally-impaired patients.

   Stroke is the third leading cause of death and the most common cause of
adult disability in the United States. There are approximately 500,000 new
stroke victims each year in the United States. Nearly 150,000 of these victims
die and over 100,000 suffer severe, permanent disability. Of the more than two
million stroke survivors in the United States, two-thirds have some type of
long term disability.

Parkinson's Diesease Program

   Parkinson's disease is a degenerative nervous system disorder caused by a
shortage of the chemical messenger dopamine, which is essential to movement
control. The disease results from the gradual depletion of dopamine producing
cells located in the region of the brain that coordinates movement, known as
the substantia nigra. Parkinson's disease symptoms generally begin later in
life after roughly 80% of the cells in this region stop functioning properly.
As these cells die, dopamine levels decline, and Parkinson's patients
experience increasing difficulty initiating and controlling movement. Symptoms
of Parkinson's disease include tremors, slowed movement, muscle rigidity and
decreased range of motion. Impaired motor control is often accompanied by
depression and/or dementia. Symptoms become progressively worse until the
patient is totally incapacitated, typically over a 10 to 15 year period. If the
patient does not die from other causes, Parkinson's disease eventually leads to
death from loss of respiratory muscle control.

   Although the exact cause of Parkinson's disease is unknown, the disease is
thought to arise from a combination of genetic susceptibility, long term
exposure to natural and man-made toxins and brain inflammation.

                                       7
<PAGE>

   Currently available therapeutics and many products currently under
development treat Parkinson's disease symptoms through dopamine replacement or
by prolonging the effectiveness of the dopamine produced by the brain. These
drugs elevate dopamine levels in the brain, but they do not address the
underlying causes of Parkinson's disease. Consequently, they only relieve the
symptoms of the disease, and, as the disease progresses, they tend to lose
their effectiveness and may have dose limiting side effects. A number of
companies are developing alternative therapeutic approaches. These approaches
include the use of nerve growth factors and similarly acting compounds,
compounds that promote the release of chemical messengers and dopamine cell
transplantation. We believe that NRTs may prove effective in treating
Parkinson's disease by protecting dopamine-producing cells from stress agents.

   We are developing an orally administered, once-a-day dose, neuroprotective
NRT designated CPI-1189 to treat patients with Parkinson's disease. We have
tested this compound in a number of preclinical models of brain inflammation
and Parkinson's disease, and the compound has provided protection to dopamine
producing cells. Drug distribution studies in animal models have demonstrated
brain penetration while producing little toxicity at administered doses. We
believe that CPI-1189's combination of positive effect in established animal
models of Parkinson's disease and its drug absorption and distribution profiles
suggest that it may prove effective in treating the progression of Parkinson's
disease, including both motor dysfunction and mental deficiency.

   We have completed Phase I clinical studies of CPI-1189, primarily in the
United States. The Phase I trial was designed to assess the compound's safety
and drug absorption and distribution in healthy volunteers. In studies
involving over 180 subjects, no treatment-limiting side effects were observed.
We are currently conducting a Phase IIa clinical trial in 36 Parkinson's
disease patients for the purpose of testing safety and evaluating preliminary
efficacy information.

   There are over 500,000 Parkinson's disease cases in the United States and
over four million worldwide. The onset of disease symptoms usually occurs
between ages 50 and 65, although about 15% of patients develop symptoms in
their 30s and 40s. We expect the number of Parkinson's disease cases to
continue to grow due to demographic trends and the possible earlier diagnosis
of the disease.

AIDS Dementia Program

   AIDS dementia refers to the debilitating neurological and cognitive
impairments frequently associated with acquired immune deficiency syndrome, or
AIDS. Symptoms of this condition include loss of memory, loss of motor control
and behavioral abnormalities. We believe that AIDS dementia is caused by toxins
and brain inflammation produced as a result of HIV infection. Some individuals
with AIDS dementia develop a condition resembling Parkinson's disease.

   No effective treatment for AIDS dementia currently exists. Antiretroviral
agents are sometimes used, but treatment response is frequently unsatisfactory.
We believe that two compounds targeted for AIDS dementia are in Phase II or III
clinical trials conducted by other companies.

   We are developing CPI-1189 for AIDS dementia because we believe that this
compound could delay the occurrence and/or slow the progression of this
disease. In laboratory tests using human brain cells, the compound has provided
protection to cells from injury caused by toxins implicated in AIDS dementia.
Further, CPI-1189 has provided protection to brain cells in animal models of
AIDS dementia. CPI-1189 does not appear to increase the viability of HIV based
on laboratory tests. In addition, it does not appear to suppress immune system
function, based on standard rodent model tests. We believe that this compound
may also be suitable for prophylactic use by HIV infected persons not yet
exhibiting AIDS dementia.

   We initiated an AIDS dementia Phase I clinical trial of CPI-1189 in the
United States in October 1997 in HIV infected individuals who were undergoing
treatment with reverse transcriptase and protease inhibitor therapies. This
trial is ongoing. No treatment-limiting side effects have been observed so far
in this trial, just as

                                       8
<PAGE>

none were observed when CPI-1189 was tested in our Parkinson's disease Phase I
clinical trials. See "--Parkinson's Disease Program." We commenced a Phase IIa
clinical trial in the fourth quarter of 1998 for the purpose of testing safety
and evaluating preliminary efficacy information in 60 AIDS dementia patients.
The Neuro AIDS Research Consortium, a group of eight hospitals that receives
funding from the U.S. National Institute of Mental Health, is providing a
substantial portion of the funding for this trial, and is playing a major role
in the design and management of the trial.

   Although we generally intend to attempt to establish collaborations with
larger pharmaceutical companies to develop and market our drug candidates, we
may not need to do so to develop CPI-1189 for AIDS dementia. This is because we
believe that the AIDS dementia market can be reached by a relatively small
sales force, because we believe that a significant portion of the patient
population tends to actively seek and adopt new treatments, and because we
believe that AIDS dementia drug candidates may qualify for faster than normal
regulatory consideration if clinical results are supportive. These factors
could allow us to commercialize CPI-1189 for AIDS dementia without requiring
the larger resources of a major pharmaceutical company.

   In the United States, over 750,000 individuals are infected with HIV,
approximately one-third of whom have AIDS. Historically, approximately one-
third of adults and one-half of children with AIDS developed neurological
complications associated with AIDS dementia. New AIDS therapies, such as the
use of protease inhibitors in combination with traditional reverse
transcriptase inhibitors, appear to be effective in extending the life span of
AIDS patients. It is not known whether the development of these new therapies
will affect the prevalence of AIDS dementia, and, if so, whether the effect
will be to increase the prevalence of the disease, due to the increase in the
life span of AIDS patients, or to decrease the prevalence of the disease, due
to the effect of the new therapies.

Pre-Clinical Programs

 Alzheimer's Disease Program

   Alzheimer's disease is a debilitating neurodegenerative disease which causes
progressive loss of memory, ability to communicate, time and space orientation,
and abstract thinking skills. Anxiety, depression and other changes in
personality are also common symptoms of the disease. Later stage symptoms
include loss of speech, loss of bladder control and total dependence on
caregivers. If patients do not die of other causes during the course of the
disease, Alzheimer's disease ultimately proves fatal. Several genetic factors
have been identified as risk factors for the onset of Alzheimer's disease. Many
hypotheses for the causes of neurodegeneration in Alzheimer's disease have been
proposed by medical researchers. Recent studies suggest that brain inflammation
is important to the onset and progression of Alzheimer's disease.

   Alzheimer's disease is distinguished from other dementias by the presence of
protein deposits, known as B-amyloid plaques, and by tangles in the brain. When
B-amyloid plaques comes into contact with brain tissue, they spontaneously
generate stress agents and also causes the formation of sugar by-products,
which produce additional stress agents. Brain inflammation occurs around the
plaques characteristic of Alzheimer's disease, and inflammatory cells and
mediators are typically found in brain regions affected by Alzheimer's disease.
Retrospective studies indicate that users of nonsteroidal anti-inflammatory
drugs such as ibuprofen have a lower incidence of Alzheimer's disease. Since
NRTs appear to have the ability to modify the damaging cascade caused by stress
agents, we believe that NRTs may prove to be effective in treating Alzheimer's
disease.

   No effective treatment to significantly slow the progression of Alzheimer's
disease is currently available. Treatments on the market and many of those
under development focus on increasing the level of the chemical messenger
acetylcholine in the brain. The only FDA approved pharmaceuticals to treat
Alzheimer's disease enhance acetylcholine activity by inhibiting
cholinesterase, an enzyme responsible for breaking down acetylcholine in the
brain. These medications provide only limited symptomatic relief, and their
side effects can be significant. A number of other products for the treatment
of Alzheimer's disease are in clinical trials being conducted by other
companies.

                                       9
<PAGE>

   Since there are no universally accepted models for Alzheimer's disease, we
utilize a battery of tests looking for candidate drugs that succeed in a
variety of disease models. Initial screens target compounds that prevent the
death of cultured brain cells caused by inflammatory mediators. Later stage
screens look for prevention of age-related decline in cognitive function in
animals. Our objective has been to identify safe compounds that protect brain
function. Several promising drug candidates have been identified, and further
preclinical drug optimization is underway. AstraZeneca supports the research
and the development of therapeutics for the treatment of Alzheimer's disease
under the AstraZeneca agreement, which funding obligation expires June 2000.
See "--AstraZeneca Alliance."

   Alzheimer's disease affects four million people in the United States. The
incidence of Alzheimer's disease increases steadily with age, affecting
approximately five percent of individuals aged 65 and over 40% of people at age
80. The elderly are the fastest growing population segment in the United
States.

 Arthritis Program

   Arthritis is a chronic inflammatory disease of the joints. Although there
are many forms of arthritis, most patients suffer from either rheumatoid
arthritis or osteoarthritis. Rheumatoid arthritis is an autoimmune disease that
most often affects the joints of the hands, wrists or feet. It results in
thickening and inflammation of the synovial membranes, and causes progressive
damage to the joint capsule, cartilage and bone. The onset of rheumatoid
arthritis is usually gradual, typically beginning between the ages of 25 and
50. The progress of the disease is unpredictable, with up to 50% of patients
developing severe functional incapacity within ten years of initial diagnosis
of the disease. Osteoarthritis, the more pervasive form, is an age-associated
condition that results in joint pain and stiffness.

   Most current arthritis medications, including aspirin and other nonsteroidal
anti-inflammatory drugs, decrease pain and swelling but do not prevent
cartilage and bone destruction. Four new anti-inflammatories have recently been
approved by the FDA. Two of these are members of a new family of drugs called
specific cyclooxygenase-2 inhibitors, which are reported to have fewer side
effects than earlier drugs. Other therapeutics for the treatment of joint
destruction in arthritis include compounds that suppress the body's immune
system, gold salts and compounds that block cell division, all of which can
produce significant side effects, such as reduced white blood cell count and
kidney and stomach damage. Many pharmaceutical and biotechnology firms have
programs aimed at developing new arthritis therapeutics. Several of the new
therapeutics under development are proteins intended to neutralize the effects
of inflammatory cytokines such as tumor necrosis factor.

   Based on preclinical studies in established animal models of rheumatoid
arthritis, we believe that our NRTs could prove to be effective therapeutics
that reduce swelling and slow disease progression. Lead compounds have been
identified and research toward the selection of a clinical candidate is
underway.

   It is estimated that approximately 2 million people in the United States
have rheumatoid arthritis and 16 million people in the United States, mostly
over 65 years old, have osteoarthritis.

 Inflammatory Bowel Disease Program

   Inflammatory bowel disease, or IBD, a term used to describe Crohn's disease
and ulcerative colitis, is a chronic inflammatory disorder of the
gastrointestinal tract. The cause of IBD is unknown. The onset of IBD can occur
at any age, but usually affects young adults, with women affected slightly more
often than men. Possible causes of IBD include infectious agents, autoimmunity
and inappropriate production of cytokines. The clinical symptoms of IBD include
diarrhea, bleeding, fever, cramping, abdominal pain, malaise and weight loss.
More severe symptoms may involve malnutrition, anemia, abscesses and other
extraintestinal lesions, in the case of Crohn's disease, and life threatening
complications such as acute dilatation of the colon, in the case of ulcerative
colitis. Up to 40% of patients with IBD are at increased risk for developing
gastrointestinal cancer.

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   IBD is a chronic illness with a clinical course characterized by intense
disease flares, periods of remission and then relapses. Therapeutically there
are only a few drugs capable of reducing the inflammatory processes in this
disorder, and most of these are severely limited by the frequency and severity
of side effects. Approximately 25% of patients with IBD will eventually require
surgical resection of the bowel. Even after surgery recurrence rates are high
and multiple surgeries, particularly in Crohn's disease, are common.

   Based on preclinical efficacy studies in established animal models, we
believe that our NRT technology could provide therapeutics that will slow IBD
progression and promote healing. Lead compounds have been identified and our
scientists are in the process of optimizing these compounds to identify a
clinical candidate. Our program in IBD is currently supported by a grant from
the U.S. National Institutes of Health.

   Approximately 1 million people in the United States suffer from IBD.

 Research Program

   We are also pursuing feasibility testing of proprietary NRTs as therapeutics
for other indications in which stress agents may be a factor. The most
extensive of these programs is for heart attack (myocardial infarction) and
associated conditions, where we are currently working to develop a lead
compound. Our research programs may receive increased government and
collaborative partner funding should promising data result from the research
underway at Centaur and in the laboratories of our sponsored academic
collaborators.

   In addition to these research programs, we periodically evaluate other
potential commercial applications of our NRT technology. We believe that many
of the wide range of diseases involving blood supply interruption/restoration
and inflammation may be treatable with compounds developed using our
technology.

   In evaluating new product opportunities, we often leverage the efforts of
our scientific staff with assistance from outside consultants, Scientific
Advisory Board members and contract research organizations. This enables us to
maintain a relatively small internal staff while evaluating a significant
number of product opportunities. We also utilize U.S. National Institutes of
Health Small Business Innovation Research grants to fund exploratory research.

AstraZeneca Alliance

   In June 1995, we entered into an agreement with AstraZeneca for the
research, development and marketing of certain drugs to treat Alzheimer's
disease, stroke, traumatic brain injury and multi-infarct dementia. We are
primarily responsible for research work under the AstraZeneca agreement, and
AstraZeneca is primarily responsible for development work, including clinical
trials. For a description of AstraZeneca's payment obligations to us, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Overview."

   AstraZeneca was granted exclusive worldwide marketing rights to any products
resulting from the alliance. We retain worldwide manufacturing rights for the
active ingredient of the products. AstraZeneca has agreed to buy all of its
requirements of such substance from us so long as we meet specified
obligations, subject to specified exceptions intended to permit AstraZeneca to
maintain a second source of supply. We also have an option to obtain co-
promotion rights in the United States for five years for products covered by
the AstraZeneca agreement. We and AstraZeneca have agreed to work exclusively
with each other in the field of treating Alzheimer's disease, stroke, traumatic
brain injury and multi-infarct dementia using specified technology related to
ours, subject to limited exceptions. In addition, we have provided AstraZeneca
with a right of first negotiation to enter into agreements with us in other
diseases of the central nervous system and have agreed not to commercialize
certain compounds covered by the AstraZeneca agreement outside of the field of
Alzheimer's disease, stroke, traumatic brain injury and multi-infarct dementia.

   Our agreement with AstraZeneca expires on the later of 15 years after the
first commercial sale of a licensed product, or the expiration of applicable
patents, on a country-by-country basis. Additionally,

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AstraZeneca can terminate the agreement either in whole or in part, without
cause, upon 12 months notice. AstraZeneca may also terminate its research
support obligations, and its obligation to purchase products from us, upon the
acquisition by a third party engaged in the manufacture and/or sale of
pharmaceutical products of more than 30% of our voting capital stock. In any
event, AstraZeneca's research payment obligations to us expire as of June 30,
2000.

   The interests and motivations of AstraZeneca may not be, or may not remain,
aligned with ours, AstraZeneca may not successfully perform its development,
regulatory compliance or marketing functions, and its collaboration with us may
not continue.

   Our strategy for the development, clinical trials and commercialization of
our products includes maintaining our collaborative arrangement with
AstraZeneca and establishing additional collaborations with partners,
licensors, licensees and others. To the extent that we are unable to maintain
or establish these collaborative arrangements, our research, development
efforts and business would be harmed.

Patents, Trade Secrets And Licenses

   Protection of our proprietary rights is important for us to maintain our
competitive position. We actively seek, when appropriate, protection for our
products and proprietary information through United States and foreign patents.
In addition, we rely upon trade secrets and contractual arrangements to protect
proprietary information.

   We own 13 United States patents, 30 United States patent applications, 11
foreign patents and 143 foreign patent applications related to NRTs and their
use as pharmaceuticals. We also hold exclusive license rights to 23 United
States patents, 8 United States patent applications, 47 foreign patents and 66
foreign patent applications related to NRTs and their use as pharmaceuticals.

   Several of the patents and patent applications we license from the
University of Kentucky Research Foundation and the Oklahoma Medical Research
Foundation, and certain related technology, were licensed pursuant to an
agreement among us, the University of Kentucky Research Foundation and the
Oklahoma Medical Research Foundation in 1992. The underlying technology was
primarily developed by our founders, Dr. John Carney, at the Universities of
Oklahoma and Kentucky, and Dr. Robert Floyd, at the Oklahoma Medical Research
Foundation. This agreement grants us exclusive worldwide rights to the covered
patents and technology, subject to very limited exceptions. In exchange, we
agreed to pay royalties and sublicense fees to the licensors, as well as pay
the patent costs related to the subject technology. This agreement requires us
to make minimum payments of $25,000 per year until a New Drug Application, or
an NDA, is approved by the FDA, and $100,000 per year thereafter. In connection
with this agreement, Drs. Carney and Floyd transferred 200,000 shares of our
common stock to the University of Kentucky Research Foundation and the Oklahoma
Medical Research Foundation, respectively.

   We are obligated by this agreement to use reasonable efforts to bring one or
more licensed products to market. The agreement expires on the later of July
2007 or the expiration of the last to expire patent. The University of Kentucky
Research Foundation and the Oklahoma Medical Research Foundation have entered
into a similar license with AstraZeneca that may be used only if this agreement
or our agreement with AstraZeneca is terminated under specified conditions,
including breach by us.

   In January 1998, we entered into an additional license agreement with the
Oklahoma Medical Research Foundation pursuant to which we received an exclusive
worldwide license to specified additional patents and technology, subject to
very limited exceptions. In exchange, we paid a license initiation fee to the
Oklahoma Medical Research Foundation and agreed to pay certain royalties. The
agreement requires us to make minimum royalty payments of $10,000 per year, as
well as specified milestone payments. We are obligated to use reasonable
efforts to bring one or more licensed products to market. The agreement expires
on the later of January 1, 2013 or the expiration of the last to expire patent.


                                       12
<PAGE>

   Much of our technology and many of our processes depend upon the knowledge,
experience and skills of our scientific and technical personnel. To protect our
rights to our proprietary know-how and technology, we require all employees,
consultants, advisors and collaborators to enter into confidentiality
agreements that prohibit the disclosure of confidential information to anyone
outside Centaur. These agreements also generally require disclosure and
assignment to us of ideas, developments, discoveries and inventions. These
agreements may not effectively prevent disclosure of our confidential
information or provide meaningful protection for our confidential information.
Furthermore, in the absence of patent protection, our business may be harmed by
competing technologies that others may independently develop.

   Our success will also depend in part on our not infringing patents issued to
others. If our product candidates are found to infringe upon the patents of
others, our development, manufacture and sale of such potential products could
be severely restricted or prohibited. In this regard, we have received
correspondence from the lawyer for an individual that alleges that certain of
our compositions and methodologies may fall within the scope of patents owned
by this individual. Although we do not believe that these patents seriously
harm our ability to develop and commercialize our products, we cannot be
certain of this. See "Factors That May Affect Future Results of Operations--We
may be subject to claims for infringement of the intellectual property of third
parties or for breach of the technology licenses upon which our products are
based which, with or without merit, could be costly and time consuming to
defend or settle, and if adversely decided could materially harm us."

Cutanix--Skin Care Affiliate

   Because of the anti-inflammatory properties of NRT compounds, we believe
that these compounds could be effective in treating various diseases and
disorders of the skin, including dermatitis, psoriasis and photoaging. In
January 1998, we exclusively licensed all of our current and future technology,
for use in the field of dermatology, cosmetics and other skin care
applications, to a newly formed company, Cutanix Corporation, which has
undertaken a research program to identify compounds which could be developed
into dermatological drugs or cosmetics. The license agreement provides that
either Centaur or Cutanix may obtain the exclusive right to use our compounds,
with some exceptions, by agreeing to take actions to develop the compound.
Accordingly, Cutanix could obtain exclusive rights to a compound that we might
otherwise choose to develop. In addition, we and Cutanix agreed that we would
be the exclusive supplier of NRT active compounds to Cutanix at a cost-based
purchase price. Each party has rights to terminate the exclusivity of this
supply relationship.

   As of December 31, 1999, we owned 48% of the outstanding stock of Cutanix.
We and two other principal stockholders of Cutanix have agreed to vote for one
representative of each on the Board, subject to certain limited exceptions, and
have also agreed that certain major corporate actions will require the approval
of 75% of the members of the Board of Directors, all for a period of ten years.
One of our directors, who is also our acting chief operating officer, is a
director and major stockholder, and the chief executive officer, of Cutanix.
See "Certain Relationships and Related Transactions--Other Transactions".

Research Collaborations

   We sponsor research at a number of institutions to augment our internal
resources. We have worked with scientists at the University of Kentucky and the
Oklahoma Medical Research Foundation through sponsored research contracts and
research collaborations since 1992. The research at the University of Kentucky
was conducted by Dr. Carney until he joined us as Chief Technical Officer in
June 1996. The ongoing research at the Oklahoma Medical Research Foundation is
conducted by Dr. Floyd, one of our directors, in the fields of free radical
chemistry and mechanisms of drug action.

   We sponsor a research program with the Neuroscience Institute of The Queen's
Medical Center in Honolulu, Hawaii. The research program is conducted under the
direction of Professor Bo Siesjo, M.D., Ph.D., and is aimed at understanding
the role of stress agents in neurodegeneration and neuroinflammation and the

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<PAGE>

neuroprotective mechanisms of NRT action. We previously sponsored a similar
research program with Dr. Siesjo while he was at the University of Lund in
Sweden. In addition, we have research collaborations with the Universite d'Aix
Marseille (medicinal chemistry); the Department of Ophthalmology and
Neuroscience Center-Louisiana State University (preclinical studies in NRT
mechanisms of action in arthritis and myocardial ischemia); the Department of
Chemistry-University of Florida (medicinal chemistry); the Department of
Pharmacology-University of North Texas Health Science Center (preclinical
studies in brain aging and cognition) and other academic research institutions.

Manufacturing

   We have completed the construction of a 30,000 square foot manufacturing
facility in Santa Clara, California. A portion of the facility is designed to
manufacture compounds for clinical trials and is licensed by the California
Department of Health Services and in production, while the remainder of the
facility is designed to manufacture compounds for commercial sale and is
currently undergoing the California licensing process. This facility is
expected to be sufficient to permit us to produce the volume of product needed
through the clinical trial process and for early commercial sales, and
positions us to realize manufacturing revenues. This facility also permits us
to gain the knowledge and insights about our products and technology that
result from developing and implementing the production methods, and affords us
the potential to enhance our proprietary position. In order to satisfy later
commercial needs, we will need to further expand our facilities, procure a
larger facility and/or enter into arrangements with third-party manufacturers.

Competition

   The pharmaceutical industry is subject to intense competition and rapid and
significant technological change. Our competitors are numerous in the United
States and abroad and include pharmaceutical and biotechnology companies,
universities and other research institutions. Many of these companies and
institutions are actively engaged in activities similar to ours, including
research and development of products for stroke, Parkinson's disease, AIDS
dementia, Alzheimer's disease and arthritis. While we believe that our products
will offer significant advantages over available products, currently marketed
products often have a significant competitive advantage over new entrants. If
regulatory approvals are received, some of our potential products will compete
with well-established, FDA approved proprietary and generic therapies that have
generated substantial sales over a number of years and which are reimbursed
from government health administration authorities and private health insurers.
Our products under development may not be able to compete successfully with
existing therapies or with products under development by our competitors. Many
of these competitors have substantially greater financial and technical
resources and production and marketing capabilities than us, and some of these
competitors may compete with us in establishing development and marketing
agreements with pharmaceutical companies. In addition, many of our competitors
have greater experience than us in conducting preclinical testing and human
clinical trials and obtaining FDA and other regulatory approvals. Our
competitors may succeed in obtaining FDA approval for products sooner than us.

Government Regulation

   The preclinical and clinical testing, manufacturing, labeling, distribution,
sales, marketing, promotion and advertising of our products and our research
and development activities are subject to extensive regulation by numerous
governmental authorities in the United States and other countries.
Pharmaceutical products intended for therapeutic use in humans are governed by
FDA and state regulations in the United States and by comparable requirements
in foreign countries. The process of completing clinical testing and obtaining
regulatory approval for a new human drug requires a number of years and the
expenditure of substantial resources.

   The steps required before new human pharmaceutical products may be marketed
in the United States include:

  .  preclinical laboratory and animal tests;

  .  submission to the FDA of an Investigational New Drug, or IND,
     application for clinical trials (i.e. testing in humans);

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<PAGE>

  .  successful completion of adequate and well-controlled human clinical
     trials establishing safety and efficacy;

  .  the submission to the FDA of a New Drug Application, or NDA; and

  .  FDA approval of the NDA.

   Pre-Clinical Studies. Preclinical studies are conducted in the laboratory
and in animal model systems to gain preliminary information on the drug's
efficacy and to identify safety issues. The results of these studies are
submitted to the FDA as part of the IND application.

   Human Clinical Studies. Testing in humans may commence 30 days after filing
of the IND unless the FDA objects, although companies typically wait for
approval from the FDA before commencing clinical trials. Human clinical trials
are designed to collect data and information relating to drug activity, safety
and effectiveness for intended uses and proper dosing and other conditions of
use. Clinical studies are generally conducted in three sequential phases,
Phases I, II and III.

   Phase I. Phase I clinical trials are typically not controlled and are
conducted with a small number of patients or healthy volunteers. Phase I trials
are designed to determine the metabolic and pharmacologic activities of the
product, to test its safety and, if possible, to gain early evidence of its
effectiveness.

   Phase II. Phase II clinical trials generally involve controlled studies in a
limited number of patients to evaluate the efficacy of the product for specific
targeted indications, to determine dosage tolerance and optimal dosage, and to
determine the common short term side effects and risks associated with the
product.

   Phase III. Phase III clinical trials are controlled studies conducted to
more conclusively evaluate clinical efficacy and safety within an expanded
patient population. Phase III clinical trials often involve a substantial
number of patients in multiple study centers and may include chronic
administration of the product to assess the overall benefit-risk relationship
of the product.

   A given clinical trial may combine the elements of more than one phase, and
typically two or more Phase III studies are required. The designation of a
clinical trial as being of a particular phase does not necessarily mean that
the trial will yield results sufficient to justify the continuation of clinical
testing. For example, a Phase III clinical trial may not be sufficient to
support an NDA without further clinical trials. The FDA monitors the progress
of each of the three phases of clinical testing and may alter, suspend or
terminate the trials based on the data that have been accumulated to that point
and its assessment of the risk-benefit ratio to the patient. Typical estimates
of the total time required to complete clinical testing under ordinary
circumstances vary between four and ten years.

   NDA Submission. Upon completion of clinical testing which demonstrates that
the product is safe and effective for a specific indication, an NDA may be
filed with the FDA. This application includes detailed information pertaining
to product chemistry, manufacturing and quality control procedures, pre-
clinical and clinical safety and efficacy data and proposed labeling. FDA
approval of the NDA is required before the applicant may market the new
product. The FDA may or may not conclude that the NDA contains adequate data
and information pertaining to chemistry, manufacturing and quality control
procedures, and pre-clinical and clinical safety and efficacy data, to justify
approval of the NDA, and the FDA could require the generation and submission of
additional data and information prior to approving the NDA. The FDA could also
impose significant limitations on the approved conditions of use of a product
as a condition for approval. Applicants must pay substantial user fees to the
FDA at the time an NDA is filed, and the FDA is generally obligated to issue an
action letter pertaining to the NDA within 12 months after its receipt.

   Post-Approval FDA Regulation. Even after initial FDA approval has been
obtained, further studies may be required to provide additional data on safety.
Further, separate approval in the form of a supplemental NDA or a new NDA is
required for the marketing of a product as a treatment in clinical indications
other than those

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<PAGE>

for which the product was initially tested. Also, the FDA may require post-
marketing testing and surveillance programs to monitor the drug's effects. Side
effects resulting from the use of pharmaceutical products may require the
adoption of restrictive or precautionary labeling and could result in the NDA
being withdrawn according to established procedures. Further, the FDA actively
monitors and regulates the labeling and advertising of approved prescription
drugs to assure that the copy is consistent with the scope of the approval and
is not otherwise false or misleading.

   Regulation of Manufacturing. In addition to obtaining FDA approval for each
product, each United States and foreign drug manufacturing establishment must
be registered with the FDA and, if applicable, licensed by the State of
California or other states. Manufacturing establishments providing drug for use
in the United States are subject to inspections by the FDA every two years, and
must comply with FDA-mandated Good Manufacturing Practices, or GMP. The failure
to adhere to GMP can result in suspension of manufacturing until substantial
compliance with GMP is achieved, the recall of previously distributed products,
the imposition of the equitable remedies of disgorgement or restitution in the
case of medically necessary products and, ultimately, in the withdrawal of the
NDA.

   Other U.S. Regulation. In addition to regulations enforced by the FDA, we
are also subject to regulation under the Occupational Safety and Health Act,
federal environmental protection statutes, the Toxic Substances Control Act,
the Resource Conservation and Recovery Act and other present and future
federal, state and local regulations. Failure to comply with applicable
regulatory requirements can, among other things, result in fines, suspensions
and/or withdrawals of regulatory approvals, product recalls, prohibitions
against manufacture, distribution, sales and/or marketing and criminal
prosecution of a company and/or its officers and employees. We believe that we
are in compliance with applicable environmental regulations, and we do not
expect future costs associated with maintaining our current facilities in
compliance to have a significant impact on our financial position. However, the
cost of environmental compliance could significantly increase the cost of
constructing additional manufacturing capacity in the future.

   Regulation Outside the U.S. For distribution outside the United States, we
will be subject to FDA export requirements and foreign regulatory requirements
governing human clinical trials and marketing approval for drugs. The
requirements relating to the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country.

   As noted above, Centaur and AstraZeneca have conducted Phase I and IIa
clinical trials of our stroke compound in Europe. These trials were not
conducted pursuant to an FDA IND. See "--Stroke Program." In general, the FDA
accepts foreign studies to support clinical investigations in the United States
or marketing approval so long as such studies are well designed, well-
conducted, performed by qualified investigators and conducted in accordance
with ethical principles acceptable to the world community. Foreign studies
would not typically be sufficient to form the sole basis for marketing approval
in the United States, and clinical studies would typically need to be conducted
in the United States as well. See "Factors That May Affect Future Results of
Operations--Clinical studies for our stroke drug candidate were conducted
outside the United States and may not be accepted to support regulatory filings
in the United States."

   If some of our proprietary compounds are eventually marketed in the United
States, we may be required to manufacture the drug substance for such sales in
the United States pursuant to the provisions of our NIH grants.

Scientific Advisory Board

   We have established a Scientific Advisory Board composed of individuals with
expertise in free radical chemistry, drug discovery model development, drug
screening, clinical pharmacology and clinical medicine. Scientific Advisory
Board members assist us in identifying scientific and product development
opportunities, review with management the progress of our projects and assist
in the recruitment and evaluation of our scientific staff. Scientific Advisory
Board members receive compensation for the services they provide to us. Most
Scientific Advisory Board members have substantial commitments to third
parties, which commitments

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<PAGE>

may conflict or compete with their obligation to us. Accordingly, they devote
only a small portion of their time to matters related to us. Dr. Floyd, one of
our directors, is Chairman of the Scientific Advisory Board.

   The following individuals are members of our Scientific Advisory Board:

General Advisors

   Bruce Ames, Ph.D. Dr. Ames is Professor of Biochemistry and Molecular
Biology and Director of the National Institute of Environmental Health Sciences
Center at the University of California, Berkeley. Dr. Ames is a member of the
National Academy of Sciences and has published extensively on the detection of
free radical damage to DNA in biological tissue and the role of antioxidants,
vitamins and enzymes in aging. Dr. Ames consults with us in the areas of
oxidative stress agents biochemistry and the role of antioxidants in
mitochondrial function and aging.

   Nicholas Bazan, M.D., Ph.D. Dr. Bazan is Professor of Ophthalmology,
Biochemistry and Molecular Biology, and Neurology and Director of the
Neurosciences Program at Louisiana University Medical School in New Orleans,
Louisiana. Dr. Bazan is an internationally recognized neuroscientist,
ophthalmologist and lipid biochemist and has published over 300 peer reviewed
papers in the area of inflammatory processes and the role of cyclooxygenase-2
and platelet activating factor. Dr. Bazan consults with us in the areas of
inflammatory mechanisms, ophthalmology and arthritis.

   M. Flint Beal, M.D. Dr. Beal is Professor and Chair of Neurology at Cornell
University Medical School in New York, New York. Dr. Beal has published over
200 peer reviewed papers on the preclinical and clinical importance of
metabolically derived oxidative stress agents in aging and disease. Dr. Beal is
recognized for his research in the roles of mitochondrial dysfunction and free
radical-induced damage in neurodegeneration. Dr. Beal consults with us in the
areas of neurodegeneration mechanisms and Parkinson's disease therapeutics.

   Ronald Mason, Ph.D. Dr. Mason is Head, Free Radical Metabolite Section,
Laboratory of Pharmacology and Chemistry, National Institute of Environmental
Health Sciences, National Institute of Health, Research Triangle Park, North
Carolina. Dr. Mason has published more than 200 peer reviewed articles on the
chemistry of free radicals and the mechanism of action of antioxidants. Dr.
Mason consults with us in the areas of disease mechanisms and the mechanism of
NRT action.

   Bo Siesjo, M.D., Ph.D. Dr. Siesjo is Director of Research at the
Neuroscience Institute of the Queen's Medical Center, Honolulu, Hawaii. Dr.
Siesjo is the former Chairman of the Experimental Brain Research Center, Lund
University Hospital, University of Lund, Sweden. He has published over 500 peer
reviewed articles on the biochemistry of stroke and metabolic neurodegenerative
conditions. His research into the role of calcium in mitochondrial dysfunction
in stroke and epilepsy is internationally recognized. He consults with us in
the areas of neurodegenerative processes and stroke and trauma therapeutics.

   Earl Stadtman, Ph.D. Dr. Stadtman is Chief, Section on Enzymes, Laboratory
of Biochemistry, National Heart, Blood and Lung Institute, at the National
Institutes of Health in Bethesda, Maryland. Dr. Stadtman is a member of the
National Academy of Science and has published over 200 peer reviewed articles
on the biochemistry of free radicals, free radical damage to proteins and
lipids and the mechanisms of action for antioxidants. Dr. Stadtman consults
with us in the areas of free radical biochemistry and NRT mechanism of action.

Specific Therapeutic Program Advisors

 Stroke and Trauma

   Lars Hillered, M.D., Ph.D. Dr. Hillered is Professor of Neuroscience at
Uppsala University Medical Center, Uppsala, Sweden. Dr. Hillered has published
more than 100 peer reviewed articles on the neurochemistry and treatment of
stroke and trauma. He consults with us in the areas of mechanisms of brain
damage and NRT mechanism of action in stroke.

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 Parkinson's Disease

   J. William Langston, M.D. Dr. Langston is President of the Parkinson's
Institute in Sunnyvale, California. Previously, Dr. Langston was Senior
Scientist and Director of the Parkinson's Disease Research Program for the
Institute of Medical Research in San Jose, California. In addition to his
clinical research background in Parkinson's disease, Dr. Langston co-
discovered the toxin MPTP and its mechanism of producing Parkinson-like
neurodegeneration, which is used as a model of Parkinson's disease. Dr.
Langston consults with us in the area of preclinical and clinical Parkinson's
disease research.

   C. Warren Olanow, M.D. Dr. Olanow is Professor and Chairman of the
Department of Neurology of Mount Sinai School of Medicine, Mount Sinai Medical
Center, New York, New York. Dr. Olanow has published extensively on the
biochemistry of Parkinson's disease development and progression. He consults
with us in the area of Parkinson's disease treatment.

 Alzheimer's Disease

   Konrad Beyreuther, Ph.D. Dr. Beyreuther is Professor of Molecular Biology at
the Zentrum fur Molekulare Biologie, Heidelberg University, Heidelberg,
Germany. Dr. Beyreuther has published extensively on the mechanism of amyloid
plaque formation and the etiology of Alzheimer's disease. Dr. Beyreuther
consults with us in the area of Alzheimer's disease therapeutics.

   Albert Dresse, M.D., Ph.D. Dr. Dresse is Professor of Pharmacology at the
University of Liege Medical School, Liege, Belgium. Dr. Dresse's fields of
expertise include neurodegeneration, electrophysiology and molecular biology of
learning, memory and aging. Dr. Dresse consults with us in the area of
Alzheimer's disease.

   Zaven Khachaturian, Ph.D. Dr. Khachaturian is Director of the Ronald and
Nancy Reagan Institute for Alzheimer's Research. He is the former Program
Director of the Neuroscience and Neurology of Aging Division of the National
Institute of Aging. He consults with us in the area of Alzheimer's disease
therapeutics.

   William Markesbery, M.D. Dr. Markesbery is Professor of Pathology and
Neurology at the University of Kentucky College of Medicine and Director of the
Sanders-Brown Center on Aging. In addition, he is the Director and Principal
Investigator of the Alzheimer's Disease Research Center. Dr. Markesbery has
particular expertise in Alzheimer's disease and served on the U.S.
Congressional advisory panel on dementing illnesses. Dr. Markesbery has
published over 250 articles on brain pathology and Alzheimer's disease. He
consults with us in the area of Alzheimer's disease mechanisms and clinical
trial design.

   Communication with many members of the Scientific Advisory Board takes place
on a regular basis. In accordance with consulting agreements we have with these
advisors, discoveries made as part of the consulting activity are generally our
property. Should scientific discoveries be made by a member of the Scientific
Advisory Board in conjunction with other research at another institution rather
than while acting as a consultant to us, that discovery would generally be
owned by the researcher or that institution. If such a discovery were deemed to
be helpful in our own research, we would have to enter into a license agreement
in order to utilize the discovery. We rely on our scientific advisors to assist
us in formulating our research and development strategy. Retaining and
attracting qualified advisors will be critical to our success.

Employees

   As of December 31, 1999, we had 95 full-time employees of which 26 have
Ph.D. and/or M.D. degrees. Of our full time employees, 60 work in research and
development, 15 work in manufacturing, product development and quality
assurance/quality control and 20 work in finance and administration. We had 87
employees on December 31, 1997 and 86 employees on December 31, 1998. Our
employees are not represented by any collective bargaining unit, we have never
experienced a work stoppage, and we believe that our employee relations are
good.

                                       18
<PAGE>

ITEM 2. PROPERTIES

   We lease approximately 31,000 square feet of laboratory and office space in
a facility in Sunnyvale, California. The lease expires in 2001. We also lease a
77,000 square foot facility in Santa Clara, California, in which we have
constructed a 30,000 square foot manufacturing plant that is designed to comply
with GMP. A portion of the Santa Clara facility, designed to manufacture
compounds for clinical trials, is licensed by the California Department of
Health Services and is in production, while the remainder of the facility,
which is designed to manufacture compounds for commercial sale, is currently
undergoing the California licensing process. This lease expires in 2004. While
we believe that our existing facilities are sufficient to produce the volume of
product needed for clinical trials and early commercial sales, we expect that
larger facilities will be needed for any later stage commercial sales. We may
not be able to obtain such space on commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

   We are not a party to any material legal proceedings.

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

   There were no matters submitted to a vote of security holders in the fourth
quarter of 1999.

                                       19
<PAGE>

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Market for Registrant's Common Equity

   Centaur's Common Stock may be traded from time to time in the Swiss over-
the-counter market. This market consists of negotiated transactions from time
to time between investors, who may act through banks or brokers. Trading of our
common stock in the Swiss over-the-counter market is expected to be very
limited. While indications of the price at which investors might be willing to
buy or sell shares of common stock may be available from time to time to banks,
brokers and other financial institutions over electronic media, and may be
available through Bank Vontobel, this information will not otherwise be
available to the public. In addition, this information may not be indicative of
the price at which shares of common stock would actually be purchased or sold.
Information as to the price and volume of actual transactions in the common
stock in the Swiss over-the-counter market is not publicly reported or
available in any printed or electronic media. Furthermore, the Swiss over-the-
counter market is not subject to specific regulation or regulatory oversight.
The high and low sales prices of our common stock in the Swiss over-the-counter
market were $9.07 and $9.98 in the fourth quarter of 1998, $8.74 and $9.42 in
the first quarter of 1999, $8.70 and $10.31 in the second quarter of 1999 and
$9.66 and $10.66 in the third quarter of 1999. There were no sales of our
common stock in the Swiss over-the-counter market in the fourth quarter of
1999.

Dividend Policy

   We have never paid any cash dividends on our capital stock. We currently
anticipate that we will retain any future earnings for use in our business and
do not anticipate paying any cash dividends in the foreseeable future.

Use of Proceeds

   The Company's registration statement (the "1998 S-1") on Form S-1,
registering the offer and sale of an aggregate of up to 1,500,000 shares of the
Company's Common Stock in connection with the Company's underwritten offering
(Securities and Exchange Commission File No. 333-57165) was declared effective
by the Securities and Exchange Commission on October 13, 1998, the offering
date for the underwritten offering. The aggregate net offering proceeds to the
Company from the underwritten offering after deducting expenses were
approximately $13.6 million. The Company has used, and expects to continue to
use, the net proceeds of the offering to fund its research and development
programs not covered by AstraZeneca, for capital expenditures, and for general
corporate purposes, including working capital. From the effective date of the
1998 S-1 to December 31, 1999, the Company estimates that it has used a portion
of the net proceeds of the offering as follows:

  (i) Temporary investment in marketable securities, $3.9 million

  (ii) Working capital, $9.7 million.

                                       20
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

   The selected financial data set forth below with respect to the Company's
statement of operations for each of the three years in the period ended
December 31, 1999 and the balance sheet data at December 31, 1997, 1998 and
1999, are derived from the audited financial statements of the Company, which
are included elsewhere in this report. The statement of operations data and the
balance sheet data for the years ended December 31, 1995 and 1996 have been
derived from our audited financial statements not included in this report. The
selected financial data set forth below should be read in conjunction with Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Item 8, "Financial Statements and Supplemental Data."

<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                  --------------------------------------------
                                   1995    1996     1997      1998      1999
                                  ------  -------  -------  --------  --------
                                   (in thousands, except per share data)
<S>                               <C>     <C>      <C>      <C>       <C>
Statement of Operations Data:
  Net revenue.................... $7,875  $12,743  $ 9,573  $  6,663  $  7,429
Operating expenses:
  Research and development.......  5,490    7,854   15,646    13,629    16,176
  General and administrative.....  1,385    2,306    2,266     3,494     4,089
                                  ------  -------  -------  --------  --------
    Total operating expenses.....  6,875   10,160   17,912    17,123    20,265
                                  ------  -------  -------  --------  --------
  Income (loss) from operations..  1,000    2,583   (8,339)  (10,460)  (12,836)
  Share of losses in affiliate...                               (305)     (319)
  Interest and other income,
   net...........................    491      362    1,107        80      (130)
                                  ------  -------  -------  --------  --------
    Net income (loss)............ $1,491  $ 2,945  $(7,232) $(10,685) $(13,285)
                                  ======  =======  =======  ========  ========
Net income (loss) per share:
  Basic.......................... $ 0.62  $  1.15  $ (2.64) $  (1.90) $  (0.85)
  Diluted........................ $ 0.13  $  0.24  $ (2.64) $  (1.90) $  (0.85)
Shares used in computing net
 income (loss) per share:
  Basic..........................  2,403    2,551    2,742     5,614    15,549
  Diluted........................ 11,602   12,514    2,742     5,614    15,549

<CAPTION>
                                                December 31,
                                  --------------------------------------------
                                   1995    1996     1997      1998      1999
                                  ------  -------  -------  --------  --------
                                               (in thousands)
<S>                               <C>     <C>      <C>      <C>       <C>
Balance Sheet Data:
  Cash, cash equivalents and
   short term investments........ $8,699  $10,966  $13,633  $ 18,534  $ 12,576
  Working capital................  8,199   10,234   11,300    15,160     8,877
  Total assets................... 11,058   15,407   24,243    37,233    23,395
  Long-term portion of
   obligations, net of current
   portion.......................    343      210      --      5,802     3,470
  Redeemable convertible
   preferred stock............... 11,698   11,698   28,105       --        --
  Accumulated deficit............ (3,264)    (319)  (7,551)  (18,236)  (31,521)
    Total stockholders' equity
     (net capital deficiency).... (3,196)    (245)  (7,035)   25,978    13,750
</TABLE>

   For an explanation of the determination of shares used in computing basic
and diluted net income (loss) per share, see note 1 of notes to financial
statements. Shares of redeemable convertible preferred stock converted to
common stock on October 13, 1998, upon the completion of our underwritten
offering of 1,500,000 shares of common stock. See note 9 of notes to financial
statements.

                                       21
<PAGE>

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

   The following discussion of our financial condition and results of
operations should be read together with the financial statements and related
notes included elsewhere in this report. This discussion contains forward-
looking statements that involve risks and uncertainties. Our actual results may
differ from those anticipated in these forward-looking statements as a result
of many factors. Factors that may cause such a difference include, but are not
limited to, those set forth under "Factors That May Affect Future Results of
Operations."

Overview

   We were incorporated in March 1992 and have devoted substantially all of our
resources since that time to the research and development of proprietary, small
molecule pharmaceutical compounds for the treatment of diseases involving the
interruption and subsequent restoration of blood supply and inflammation. From
our inception through December 31, 1999, we recognized cumulative revenues from
collaborative research and development agreements and grants of $44.4 million.
We do not anticipate revenues from product sales or collaborative agreement
royalties for at least several years. Our sources of potential revenue for the
next several years will be payments under existing and possible future
collaborative arrangements, U.S. government research grants and possible
manufacturing revenue from collaborators for the manufacture of bulk drug
product for use in clinical testing. We have incurred cumulative losses through
December 31, 1999 of $31.5 million. We expect to incur additional significant
operating losses over at least the next several years as we continue our
clinical trial programs and expand our research and preclinical development. We
may never be able to achieve or sustain profitability in the future. Our
results of operations may vary significantly from quarter to quarter.

   In June 1995, we entered into a collaborative agreement with AstraZeneca for
the research, development and marketing of NRT drugs to treat stroke,
Alzheimer's disease, traumatic brain injury and multi-infarct dementia.
AstraZeneca paid us $4.0 million upon execution of this agreement as
reimbursement for some previously incurred costs. Under the terms of this
agreement, AstraZeneca has agreed to make payments to us for development
milestones and to pay up to $6.0 million per year for five years primarily as
reimbursement for our project related research, subject to specified
limitations. Additionally, AstraZeneca bears substantially all other costs of
development work under the agreement. The $6.0 million annual research
reimbursement provision will expire in June 2000. AstraZeneca is also obligated
to reimburse us for the manufacture of bulk drug product for use in clinical
testing, and to pay royalties to us on product sales covered by the agreement.
The milestone payments potentially available to us under the AstraZeneca
agreement total $34 million, allocated among 21 separate milestones, of which
two milestones representing $3 million in total had been achieved by us as of
December 31, 1999. We may not achieve any of the remaining milestones.
AstraZeneca received exclusive worldwide marketing rights to any
pharmaceuticals resulting from the collaboration. We retain worldwide
manufacturing rights for the active ingredients of the product and an option to
obtain specified co-promotion rights in the United States for five years.
Through December 31, 1999, we recognized $35.6 million of revenue under the
AstraZeneca agreement. See "Business--AstraZeneca Alliance" for additional
information regarding our relationship with AstraZeneca.

   In October 1996, we entered into a research and development collaboration
with H. Lundbeck A/S to jointly commercialize our proprietary drug compound for
Parkinson's disease. Under this agreement, we and Lundbeck jointly funded
research, development, regulatory and other nonresearch activities. Upon
achievement of specified drug development milestones, Lundbeck was to make
milestone payments. From the inception of the Lundbeck collaboration to March
1998, we had recognized $6.0 million of revenue, of which $4.3 million has been
paid in cash and $1.7 million was satisfied by the provision of services by
Lundbeck. In March 1998, Lundbeck terminated its agreement with us based
primarily on a claim that we had breached the agreement by commencing clinical
trials for AIDS dementia, using the same compound as is being used in our
Parkinson's disease clinical trials, without obtaining consent from Lundbeck.
We disputed this claim. In July 1998, we and Lundbeck entered into an agreement
releasing each party from any further obligations or claims under this
agreement.

                                       22
<PAGE>

Results of Operations

 Years Ended December 31, 1997, 1998 and 1999

   Revenues. Net revenues were $9.6 million in 1997, $6.7 million in 1998 and
$7.4 million in 1999. These amounts include revenues from the AstraZeneca
agreement of $7.1 million in 1997, $6.4 million in 1998 and $6.1 million in
1999, revenues from the Lundbeck agreement of $2.1 million in 1997 and none in
1998 and 1999 and NIH grant revenue of $364,000 in 1997, $217,000 in 1998 and
$1.3 million in 1999. In 1997, revenues included recognition of milestone
revenue of $1.0 million related to the AstraZeneca agreement and no milestone
revenue related to the Lundbeck agreement. Revenues decreased in 1998 compared
to 1997 as no milestone payments were earned from either AstraZeneca or
Lundbeck in 1998 and due to termination of the Lundbeck agreement in March
1998. The financial impact of the decreased revenue was partially offset by a
decrease in research and development costs related to the Lundbeck
collaboration. In 1999, revenue consisted primarily of research support from
AstraZeneca and research grants from the NIH. There were no signing or
milestone payments recognized during 1999. The increase in revenues for the
year ended December 31, 1999 compared to the same period in 1998 was primarily
due to increased NIH grant revenue. This increase was partially offset by
decreased manufacturing revenue earned in 1999 from AstraZeneca as our
manufacturing of drug compound for the stroke Phase IIa clinical studies was
completed in 1998 and we did not begin manufacturing of drug compound for the
contemplated stroke Phase IIb/III clinical studies until late 1999.

   Research and development expenses. Research and development expenses
decreased from $15.6 million in 1997 to $13.6 million in 1998 and increased to
$16.2 million in 1999. The decrease in 1998 was primarily due to a decrease in
research and development expenses related to the Parkinson's project as joint
development expenses were reduced following termination of the Lundbeck
agreement, partially offset by increased payroll and personnel expenses
resulting from the hiring of additional personnel for internal research and
development and associated increased purchases of laboratory supplies and
chemicals and by increased equipment depreciation and facilities expenses. In
addition, during 1998, we expanded our funding of work at outside research
institutions. The increase in expenses for the year ended December 31, 1999
compared to the same period in 1998 is primarily due to increased external
clinical study costs in 1999 resulting from the initiation of Phase IIa
clinical studies of our compound for AIDS dementia in the fourth quarter of
1998. Additionally, the November 1998 completion of the Santa Clara, California
manufacturing facility resulted in increased depreciation, amortization and
facility related expenses in 1999. We expect our research and development
expenses to increase as we undertake new clinical programs and commence more
advanced phases of our Parkinson's disease and AIDS dementia clinical trials.
We are seeking to enter into additional collaborative research and development
agreements to help fund these additional expenses. However, new collaborators
may not be found and total collaborative research revenue may not be sufficient
to offset the anticipated increase in expenses.

   General and administrative expenses. General and administrative expenses
increased from $2.3 million in 1997 to $3.5 million in 1998 and increased to
$4.1 million in 1999. The increase in 1998 was primarily attributable to
increased legal, patent and deferred compensation costs, as well as costs
related to our October 1998 equity financing. The increase in 1999 expenses was
primarily due to increased expenses of operating as a public reporting company
beginning in October 1998 and increased patent activity. The additional costs
of public reporting included public relations, legal, accounting and financial
printing costs. We expect that general and administrative expenses will
increase in the future as a result of our increased corporate development
activity and the addition of personnel and facilities required to support
growth in our research and development activities. In addition, if we are
successful in commercializing one or more drugs, we will incur substantial
general, selling and administrative expenses in connection with the marketing
and sales effort. However, we cannot assure you that we will be able to
commercialize any of our drug candidates.

   Interest and other income, net. Interest and other income, net, decreased
from $1.1 million in 1997 to $80,000 in 1998, due primarily to interest expense
of $859,000 related to our debt financing in June 1998, offset in part by
increased interest earned on the proceeds of our 1997and 1998 equity financing.
In 1999, interest and other expense, net, increased from interest income, net,
of $80,000 in 1998 to interest expense, net,

                                       23
<PAGE>

of $130,000 primarily due to interest expense of $1.0 million related to our
debt financing in June 1998, offset in part by increased interest earned on the
proceeds of our October 1998 equity financing.

   Deferred compensation. We recorded aggregate deferred compensation of $2.3
million in 1997, $2.2 million in 1998 and none in 1999, in connection with
certain stock options and warrants that we granted in those periods. The
amortization amounts were allocated primarily to research and development
expenses, and, to a lesser extent, general and administrative expenses. See
note 9 of notes to financial statements.

   Net income. We reported a net loss of $7.2 million in 1997, $10.7 million in
1998 and $13.3 million in 1999.

Liquidity and Capital Resources

   From inception through December 31, 1999, we have financed our operations
primarily through $41.7 million received from private placements and
underwritten offerings of equity securities, $41.5 million generated from
corporate collaborations, $8.9 million net from a debt financing and $2.8
million from NIH grant funding. As of December 31, 1999, we had approximately
$12.6 million in cash and investment securities. We had debt obligations
totaling $5.8 million at that date, bearing interest at 14.8% per annum. The
debt obligations are secured by equipment and leasehold rights and
improvements, and are payable in monthly installments through 2002. See note 8
of notes to financial statements. In addition, on March 10, 2000, the Company
closed an underwritten offering of 1,904,169 shares of its Common Stock at a
price of $11.50 per share. The net proceeds to the Company after deduction of
underwriting discounts and commissions and offering expenses was approximately
$20.1 million.

   Our operations used cash of $6.2 million in 1997, $7.1 million in 1998 and
$9.1 million in 1999. These uses of cash primarily reflect our net loss for
these periods, as adjusted for changes in our current assets and liabilities
and deferred revenue.

   Our use of cash in investing activities reflects our purchase of property
and equipment, together with purchases and sales of securities in which we had
invested our cash prior to use. Additions to property and equipment were $7.5
million in 1997, $3.5 million in 1998 and $562,000 in 1999. The decreased
spending in 1998 compared to 1997 was primarily due to completing a substantial
portion of our Santa Clara, California manufacturing facility in mid 1998. Of
the $15.0 million additions to property and equipment since the beginning of
1995, we invested approximately $9.5 million in our Santa Clara facility and
approximately $5.5 million in our Sunnyvale facility. We anticipate incurring
capital expenditures of at least $20 million over the next several years to
establish a commercial scale pharmaceutical manufacturing plant and to expand
our research, development, and administrative facilities and equipment in our
Santa Clara facility. However, these expenditures have not yet been approved by
our Board of Directors, and the amount and timing of our capital expenditures
will depend on the success of clinical trials for our products and on the
further development of plans for commercial production. We plan to fund a
significant portion of our capital expenditures through loans and government
grants. However, this funding may not be available.

   We believe that our current resources will be sufficient to meet our capital
requirements for at least the next twelve to eighteen months. We anticipate
that following this period we will need to raise substantial additional funds
for research, development, expansion of manufacturing and administrative
facilities and other expenses, through equity or debt financings, research and
development financings, collaborative relationships or otherwise, prior to the
commercialization of any of our products. Our capital requirements depend on
numerous factors, including:

  .  the progress of our research and development programs, including
     clinical trials;

  .  the status of our existing collaborative relationship;

  .  the establishment of additional collaborative relationships, if any;

  .  the cost and pace of establishing and expanding our manufacturing
     capabilities;

  .  the development of sales and marketing activities, if undertaken by us;

                                       24
<PAGE>

  .  the cost of preparing, prosecuting, defending and enforcing patent
     claims and other intellectual property rights and

  .  competing technological and market developments.

   If we are not able to complete future offerings, or other future funding
transactions, we will be required to significantly curtail our operations and
non-core research and development programs, including reductions in our
staffing levels and related expenses. Additional funding may not be available
to us on reasonable terms. Any additional financing may result in dilution to
existing stockholders. Any transactions to raise additional funds may require
that we enter into arrangements that may require us to relinquish material
rights to our potential products on terms that we might otherwise find
unacceptable.

Recent Accounting Pronouncements

   In September 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Financial Instruments and for Hedging Activities" ("SFAS 133") which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. In June 1999, FASB issued statement of
Financial Accounting Standard No. 137, which defers the effective date of SFAS
133 to years beginning after June 15, 2000. The Company does not expect SFAS
133 to have an impact on the Company's results of operations or financial
condition when adopted.

   In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101") which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective the
first quarter of fiscal years beginning after December 15, 1999, with
implementation provisions delayed until the second quarter of 2000, and
requires companies to report any changes in revenue recognition as a cumulative
change in accounting principle as of the first quarter, at the time of
implementation in accordance with APB Opinion No. 20, "Accounting Changes." The
Company is currently evaluating SAB 101 to determine whether it would have any
material impact on the Company. Should the Company determine that a change in
its accounting policy is necessary, such a change will be made effective
January 1, 2000.

Year 2000 Compliance

   As of the date of this report, we are not aware of any Year 2000 compliance
problems relating to our operations that would seriously harm our business. We
did not experience any significant problems associated with Year 2000 issues,
and we are not aware that any of our vendors, outside suppliers or service
providers experienced any such problems.

   We recognize the need to ensure our operations will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using dates beginning with the
Year 2000 are a known risk. We have established procedures for evaluating and
managing the internal risks and costs associated with this problem and have
substantially completed any upgrade or replacement of software that is not Year
2000 compliant.

   We have assessed the possible effect on our operations of the Year 2000
readiness of critical third-parties, such as our collaborative partner and our
suppliers of products and services. For instance, we have contacted our
collaborative partner and they have confirmed that they have an active Year
2000 compliance program. We have contacted the contract research organizations,
or CROs, that conduct our clinical studies to assess their state of readiness
with Year 2000 compliance. Our CROs have informed us that they have implemented
Year 2000 compliance programs. Should our CROs experience problems related to
Year 2000, there could be delays in clinical trials and issues with the
validity of trial results. This could seriously harm our business and results
of operations. We have completed contingency plans to identify alternative
vendors should significant third parties fail to adequately address Year 2000
issues. These plans may not fully mitigate any such failures or problems.
Furthermore, there may be certain critical third parties, such as collaborative
partners, CROs, utilities, telecommunication companies, or material vendors
where alternative arrangements or sources are limited or unavailable.

                                       25
<PAGE>

   We have incurred approximately $80,000 through December 31, 1999 on
implementing a Year 2000 compliance plan. A significant portion of our total
Year 2000 project expenses is represented by existing staff that has been
redeployed onto this project. We do not believe that the redeployment of
existing staff has harmed our business or results of operations. In addition,
we do not expect incremental expenses related to the Year 2000 project to
significantly impact its operating results in any one future period.

   A substantial portion of our Year 2000 compliance issues are software or
information technology, or IT, issues, which have been resolved by either by
upgrading or replacing non-Year 2000 compliant software. We have evaluated the
non-IT issues, which are not significant. We believe Year 2000 noncompliance by
our critical third-party relationships, such as our collaborative partner,
CROs, utilities, and others may be the most reasonably likely worst case
scenario. We have completed our assessment of the nature and level of this
risk, and have developed a comprehensive contingency plan to address situations
that may result if outside suppliers and service providers are unable to
achieve Year 2000 readiness.

   Although we are not aware of any material operational issues associated with
preparing our internal systems for the Year 2000, or material issues with
respect to the adequacy of critical third-party systems, we still may
experience serious unanticipated negative consequences and/or significant costs
caused by undetected errors or defects in these systems or by our failure to
adequately prepare for the results of these errors or defects, including costs
of any related litigation. These consequences could seriously harm our business
and operations.

Factors That May Affect Future Results of Operations

We are in the development stage and the viability of our products is subject to
significant uncertainties; if we are unable to produce any commercially viable
products, we are unlikely to generate significant revenues or be profitable

   We were incorporated in March 1992. All of our potential products are in
research or development, and no revenues have been generated from the sale of
our products. We do not expect any products resulting from our research and
development efforts to be commercially available for at least several years.
Our potential products will require substantial additional research and
development, preclinical and clinical testing and regulatory approval prior to
commercialization. Our product development efforts may not progress as
expected, if at all. In addition, an investor must consider the risks of
failure inherent in the development of pharmaceutical products based on new
technologies.

   As a result, we may not be able to produce any commercially viable products,
and therefore may be unable to generate revenues or achieve profitability.

Many of our disease targets do not have widely accepted models; the results of
our preclinical trials may not be indicative of the results from our clinical
trials; our clinical trials may not adequately demonstrate the safety and
efficacy of our products; we do not have any evidence of the efficacy of our
potential products in human clinical trials

   Most of the diseases and disorders that we are targeting are highly complex.
Their causes are not fully known, and there are no widely accepted models of
such diseases and disorders. We test potential compounds in a number of models
that we believe provide useful information about the compound, but it is
possible that any or all of these models may not be valid predictors of the
activity of the compound in humans. Data received from tests conducted in these
models can be subject to different interpretations, and our interpretation may
not be correct. Some of our lead compounds have failed to demonstrate efficacy
in at least one of the numerous models in which they have been tested. The
results of preclinical and early clinical studies may not be predictive of
results that will be obtained in later stage testing. Our ongoing clinical
trials may not be completed, and clinical trials of our products under
development may not be permitted, or if permitted, may not be completed. In
addition, clinical trials may not demonstrate the safety and efficacy of any
products to the extent necessary to obtain regulatory approvals for marketing
and may not result in marketable products. Our

                                       26
<PAGE>

potential products could prove to have undesirable side effects or other
characteristics that may prevent or limit their commercial use. No evidence of
the efficacy of our potential products in human clinical trials has been
attained to date. The failure to adequately demonstrate the safety and efficacy
of a therapeutic product under development would delay or prevent regulatory
approval of the product and could seriously harm us.

Our products are based on a novel therapeutic approach and if this approach is
not successful, we may be unable to develop commercially viable products

   Our product development efforts center around our family of NRTs that we
believe protect against some of the damaging effects of blood supply
interruption/restoration and inflammation. Our novel approach has not been
widely studied, the mechanisms of action of our technology and compounds are
not well understood, and many of the diseases we are targeting do not have
widely accepted models. If our approach, technologies or product candidates are
not successful, we may be unable to develop commercially viable products.

We will need to enroll patients in our clinical trials that meet the required
criteria for these trials, and if we are unable or delayed in doing so, our
business would be seriously harmed

   The ability to undertake and complete clinical trials in a timely manner
depends on the enrollment of patients that meet the required criteria of the
clinical trial. Patient accrual is a function of many factors, including the
size of the patient population, the proximity of patients to clinical sites,
the eligibility criteria for the study and the existence of competitive
clinical studies. We have previously experienced some delays in enrolling
patients in some of our clinical trials. Further delays in planned patient
enrollment in clinical trials may result in increased costs, program delays or
both, which could seriously harm us.

We rely on third parties to develop, market, distribute and sell our potential
products and if these third parties do not perform, we may be delayed or unable
to introduce commercial products or may incur additional costs in doing so

   Our strategy for the development and commercialization of our products
requires that we maintain and enter into collaborations with corporate
partners, licensors, licensees and others. We may not be able to enter into any
new collaborative arrangements, and our current and any future collaborative
arrangements may not be successful. To the extent that we are not able to
maintain or establish these arrangements, we would be required to undertake
such activities at our own expense, which would significantly increase our
capital requirements and limit the programs that we are able to pursue. In
addition, we may encounter significant delays in introducing our products into
specific markets or find that the development, manufacture or sale of our
products in these markets is adversely affected by the absence of such
collaborative agreements. We cannot control the amount and timing of resources
that our collaborative partners devote to our programs or potential products,
which can vary because of factors unrelated to the potential product.
Collaborative participation will depend on each collaborator's own financial,
competitive, marketing and strategic considerations, which are outside our
control.

   We currently have a collaborative arrangement with AstraZeneca for the
research, development and marketing of drugs for the treatment of stroke,
Alzheimer's disease, traumatic brain injury and multi-infarct dementia. The
interests and motivations of AstraZeneca may not be, or may not remain, aligned
with our interests and motivations. AstraZeneca may not successfully perform
its development, regulatory compliance or marketing functions, and this
collaboration may not continue. Astra has recently completed a merger with
Zeneca Group PLC to form AstraZeneca PLC. It is possible that this merger could
affect AstraZeneca's product development priorities and its relationship with
us. Our revenues to date have consisted primarily of research and development
support from AstraZeneca.

   AstraZeneca has the right to terminate its agreement with us, upon twelve
months notice, and can terminate research funding and our manufacturing rights
under the agreement if more than 30% of our voting capital stock is acquired by
a company engaged in the manufacture and/or sale of pharmaceutical products. In

                                       27
<PAGE>

any event, AstraZeneca's obligation to provide us with research funding
terminates as of June 30, 2000. AstraZeneca's research funding to us
represented 89% of our revenue for 1998 and 79% of our revenue for the year
ended December 31, 1999. Additionally, there can be no assurance that
AstraZeneca will proceed with Phase IIb/III trials of NYX-059, our stroke
compound. If AstraZeneca does not proceed with such trials, the prospects for
such compound, and for the Company, would be seriously harmed.

   If AstraZeneca or any future collaborative partner breaches or terminates
their agreements with us or otherwise fails to conduct their collaborative
activities in a timely manner, the preclinical or clinical development or
commercialization of product candidates or research programs will be delayed,
and we will be required to devote additional resources to product development
and commercialization or terminate certain development programs. For example,
in March 1998, Lundbeck terminated its agreement with us for the development
and marketing of drugs to treat Parkinson's disease.

We will need to obtain additional financing to fund our operations, and if we
fail to obtain such financing our product development programs may be
significantly curtailed or ended

   We have generated no product revenue, and none is expected for at least
several years. We believe that our current resources will be sufficient to meet
our capital requirements for at least the next twelve to eighteen months. We
anticipate that in the future, we will need to raise substantial additional
funds for research, development, expansion of manufacturing and administrative
facilities and other expenses, through equity or debt financings, research and
development grants, collaborative relationships or otherwise, prior to the
commercialization of any of our products. Our capital requirements depend on
numerous factors, including:

  .  the progress of our research and development programs, including
     clinical trials;

  .  the status of our existing collaborative relationship;

  .  the establishment of additional collaborative relationships, if any;

  .  the cost and pace of establishing and expanding our manufacturing
     capabilities;

  .  the development of sales and marketing activities, if undertaken by us;

  .  the cost of preparing, prosecuting, defending and enforcing any patent
     claims and other intellectual property rights; and

  .  competing technological and market developments.

   Additional funding may not be available to us on reasonable terms. Any
additional financing may result in dilution to existing stockholders. If
adequate funds are not available, we may be required to significantly curtail
our research and development programs, including clinical trials, or enter into
arrangements that may require us to relinquish certain material rights to our
potential products on terms that we might otherwise find unacceptable.

We have a history of operating losses and may never be profitable

   We have incurred losses since our inception and as of December 31, 1999 had
an accumulated deficit of $31.5 million. We may never achieve significant
revenues or profitable operations. Substantially all of our revenues to date
have been derived from funding from AstraZeneca and, to a significantly lesser
extent, from U.S. government research grants and our now terminated agreement
with Lundbeck. Revenues from product sales and collaborative agreement
royalties are not expected for at least several years, if at all.

We need to hire additional executive officers, including a chief executive
officer; if we fail to attract additional qualified officers and other
employees, or to retain key management and technical personnel, we may be
delayed or unable to conduct our clinical trials and other product development
efforts

   Effective as of December 31, 1999, our previous chief executive officer,
Brian D. Frenzel, resigned. In the interim we have appointed Steinar J.
Engelsen, our chairman of the board, as acting chief executive officer, and

                                       28
<PAGE>

Charles R. Engles, one of our directors, as acting chief operating officer. We
have commenced a search for a permanent chief executive officer. We do not know
how long it will take to hire such person. If we are unable to hire such person
within a reasonable period of time, it could delay our plans for future
financing, product development and other activities.

   We are highly dependent on key members of our management and scientific
staff. In addition, we rely on key consultants and advisors. The loss of one or
more of these key personnel could have a material adverse effect on our
research, development and product marketing efforts. In addition, we believe
that our future success will depend upon our ability to attract and retain
highly skilled scientific and managerial personnel, particularly as we expand
our activities in clinical trials and the regulatory approval process. We face
significant competition for such personnel from other companies, research and
academic institutions, government entities and other organizations. We may not
be successful in hiring or retaining the personnel we need for continued
growth. If we are unable to hire and retain these personnel, we may be delayed
or unable to conduct our clinical trials and product development efforts.

We need to obtain regulatory approval to commercially manufacture or sell our
products, and if we are unable to obtain this approval, or if approval is
delayed, we will be unable to generate, or be delayed in generating, revenue
from the sale of our products

   Our research, development, manufacturing, preclinical and clinical testing,
labeling, distribution, advertising, marketing, promotion and sales activities,
as well as the operations of our current and any future collaborators, are
subject to extensive regulation by numerous government authorities in the
United States and other countries. Our potential products require governmental
approvals for commercialization, which have not yet been obtained. We do not
expect that applications for FDA approval for the marketing and sale of any of
our products will be submitted to the FDA for at least several years. The
approval process, which includes preclinical and clinical testing to establish
safety and efficacy of the product, can take many years and requires the
expenditure of substantial funds and other resources. We have had only limited
experience in conducting preclinical testing and human clinical trials and
obtaining FDA and other regulatory approvals for investigations, and no
experience in obtaining FDA and other regulatory approvals for marketing. Data
obtained from preclinical and clinical activities are susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval. In
addition, delays or rejection may be encountered based upon changes in
regulatory policies for drug approval during the period of product development
and regulatory review. Delays in obtaining such approvals could adversely
affect the marketing of products developed by us and our ability to generate
commercial product revenues.

Clinical studies for our stroke drug candidate were conducted outside the
United States and may not be accepted to support regulatory filings in the
United States

   The Phase I and IIa clinical studies for our stroke drug candidate were
conducted by AstraZeneca in Europe. These studies were not required to be and
were not conducted under an FDA Investigational New Drug application. The FDA
may not accept the studies to support regulatory filings in the United States.

Our facilities and any products we are able to bring to commercial market will
be subject to continual review and regulation, and any failure to comply could
cause us to be subject to fines, suspensions or withdrawals of regulatory
approvals, product recalls, operating prohibition or restrictions or criminal
prosecution

   Any marketed products we may develop, and our manufacturing facilities, will
be subject to continual review and periodic inspections. Discovery of
previously unknown problems with a product or our facilities may result in
restrictions, including withdrawal of the product from the market. If we fail
to comply with applicable regulatory requirements we may be subject to, among
other things, fines, suspensions and/or withdrawals of regulatory approvals,
product recalls, prohibitions against manufacture, distribution, sales and/or
marketing, operating restrictions, the equitable remedies of disgorgement and
restitution and criminal

                                       29
<PAGE>

prosecution. We are also subject to numerous environmental, health and
workplace safety laws and regulations, including those governing laboratory
procedures and the handling of hazardous materials. Any violations of, and cost
of compliance with, these laws and regulations could seriously harm us.

We are very dependent on our patents and other intellectual property; if our
intellectual property protection proves inadequate, our business could be
materially harmed

   Our success will depend to a significant degree on our ability to obtain,
maintain and enforce patent protection for our products and manufacturing
processes or license rights to applicable patents, as well as to preserve our
trade secrets and operate without infringing the proprietary rights of third
parties both in the United States and other countries. The degree of patent
protection afforded to pharmaceutical and biomedical inventions is uncertain
and involves complex legal and factual questions. As a result, the breadth of
claims allowed in pharmaceutical and biomedical patents cannot be predicted.
Patent applications relating to our potential products or technology may not
result in patents being issued. Our current patents, as well as any that may be
issued in the future, may not afford adequate protection to us, and may not
provide a competitive advantage. In addition, any of our patents may be
challenged, invalidated or infringed. Furthermore, others may independently
develop similar products or processes, duplicate any of our products or, if
patents are issued to us, design around such patents. Litigation, which would
result in substantial cost to us, may be necessary to enforce any patents
issued or licensed to us or to determine the scope and validity of the
proprietary rights of third parties. In some cases, we depend on third parties
to prosecute patents and patent applications for technology that we license,
such as the core technology related to our NRTs licensed from the University of
Kentucky Research Foundation and the Oklahoma Medical Research Foundation.
Failure of these third parties to effectively prosecute these patents could
seriously harm us.

   We also seek to protect our proprietary technology by confidentiality
agreements and, if applicable, invention assignment agreements with our
collaborators, advisors, employees and consultants. These agreements may be
breached, we may not have adequate remedies for any breach, and our trade
secrets may otherwise be disclosed to, or discovered by, competitors.

We may be subject to claims for infringement of the intellectual property of
third parties or for breach of the technology licenses upon which our products
are based which, with or without merit, could be costly and time consuming to
defend or settle, and if adversely decided could materially harm us

   Our success will also depend on our not infringing patents issued to others
and not breaching the technology licenses upon which our products are based.
Any claims of infringement or breach of technology licenses, with or without
merit, could be time consuming to defend, result in costly litigation and
divert management attention and resources. If our product candidates are found
to infringe upon the patents of others, or otherwise impermissibly utilize the
intellectual property of others, our development, manufacture and sale of such
potential products could be severely restricted or prohibited. In such event,
we may be required to obtain licenses to patents or other proprietary rights of
third parties. Such licenses may not be available on terms acceptable to us, if
at all. If we do not obtain licenses, we could encounter significant delays in
product market introductions while we attempt to design around such patents or
other rights, or we may be unable to develop, manufacture or sell such
products. In addition, the breach of an existing or future license may
seriously harm us.

   We have received correspondence from the lawyers for an individual who has
obtained certain patents related to the use of phenyl butyl nitrone or PBN, and
related compounds, and which include claims related to specified reactions of
these compounds with a type of stress agent known as free radicals. PBN is a
commercially available material that is known to react with free radicals in
certain environments. Our founders used PBN in their early research. The
correspondence alleges that certain of our compositions and methodologies may
fall within the scope of this individual's patents, and that the practice of
such by us would constitute willful infringement. Subsequent discussions and
correspondence between this individual and us have not resulted in a resolution
of this matter. We do not believe that these patents seriously harm our ability
to develop and commercialize our products. If, however, we are required to
defend against charges of patent

                                       30
<PAGE>

infringement, we may incur substantial costs, and if we are found to have
infringed a third party patent, we could lose the right to develop or market
certain products and/or enforce certain patents.

It is difficult to predict the time at which patent applications may be issued
as patents to us or to our competitors, and proceedings or litigation to
determine the priority of our inventions could be costly

   Our competitors may have filed patent applications, may have been issued
patents or may obtain additional patents and proprietary rights relating to
products or processes competitive with ours. There is a substantial backlog of
pharmaceutical and biomedical patent applications at the U.S. Patent and
Trademark Office, or PTO. Accordingly, we cannot predict the time at which
patent applications may issue as patents to us or to our competitors. Patent
applications in the United States are maintained in secrecy until patents
issue, and publication of discoveries in scientific or patent literature often
lag behind the actual discoveries. Thus, we cannot be certain that we have been
or will be the first to discover the subject matter covered by our patent
applications or patents or that we were the first to file patent applications
for such inventions. We may, therefore, have to participate in interference
proceedings declared by the PTO or litigation to determine priority of
inventions, either of which could result in substantial cost to us.

The pharmaceutical industry is subject to intense competition and, if we are
unable to compete successfully, we may not generate revenues from products we
may develop that are sufficient to offset product development costs

   The pharmaceutical industry is subject to intense competition and rapid and
significant technological change. If we are unable to compete successfully, we
may not generate revenues from products we may develop sufficient to offset the
costs of developing those products. Our competitors in the United States and
abroad are numerous and include pharmaceutical and biotechnology companies,
universities and other research institutions. Many of these companies and
institutions are actively engaged in activities similar to ours, including
research and development of products for stroke, Parkinson's disease, AIDS
dementia, Alzheimer's disease and arthritis. While we believe that our products
may offer significant advantages over available products, currently marketed
products often have a significant competitive advantage over new entrants. If
regulatory approvals are received, a number of our potential products will
compete with well-established, FDA approved proprietary and generic therapies
that have generated substantial sales over a number of years and which are
reimbursed from government health administration authorities and private health
insurers. Our products under development may not be able to compete
successfully with existing therapies or with products under development by our
competitors. Many of our competitors have substantially greater financial and
technical resources and production and marketing capabilities than us, and
certain of these competitors may compete with us in establishing development
and marketing agreements with pharmaceutical companies. In addition, many of
our competitors have greater experience than us in conducting preclinical
testing and human clinical trials and obtaining FDA and other regulatory
approvals. Our competitors may succeed in obtaining FDA approval for products
sooner than us.

We have no sales and marketing experience and expect to rely on third parties
to provide significant sales and marketing support; if we are unable to obtain
third party support or provide sales and marketing support directly, we may be
unable to successfully sell the products we may develop

   We have no experience in product sales, marketing or distribution. We have
entered into a marketing agreement with AstraZeneca for stroke, Alzheimer's
disease, traumatic brain injury and multi-infarct dementia indications and
intend to establish marketing arrangements with other pharmaceutical companies
with effective distribution capabilities in order to market other product
candidates. We may not be successful in entering into such arrangements. Sales
of our products will depend heavily upon the efforts of AstraZeneca and
possibly other third parties, and their efforts may not be successful. We also
may need to acquire our own direct sales force for some products, and we may
not be able to recruit and retain adequate sales, marketing and distribution
personnel. In addition, our direct marketing efforts may not be able to compete
successfully in the pharmaceutical market.

                                       31
<PAGE>

We have limited manufacturing capabilities and experience, and if we are unable
to achieve or maintain sufficient manufacturing capacity, our competitive
position and our ability to achieve regulatory approval and/or profitability
would be seriously harmed

   The manufacturing of sufficient quantities of new drugs is a time consuming,
complex and difficult process. If we are unable to fully develop our own
manufacturing capabilities or obtain and maintain third-party manufacturing
arrangements on acceptable terms, our competitive position and our ability to
achieve regulatory approval and/or profitability would be seriously harmed. In
1998, we completed construction of a 30,000 square foot manufacturing facility
in Santa Clara, California. We are in the process of licensing the facility
with the California Department of Health Services. To date, only a small
portion of the facility has been licensed and is in production. As this portion
of the facility has been in production only a relatively short period of time,
we may still encounter problems with it. Additionally, the remainder of the
facility may not receive the necessary regulatory approvals or be
satisfactorily put into production in a timely manner. In any event, we do not
expect that the Santa Clara facility will be capable of producing the quantity
of our products that may be needed for later stage commercial sales.
Accordingly, we expect to need to develop substantial additional capacity by
expanding our current facilities or building new facilities. To meet projected
time schedules, we may commence construction and/or otherwise commit ourselves
to additional capacity prior to FDA or other regulatory approval of the
products to be manufactured at the new facility. The cost of any new facility
would be substantial, and such facility could ultimately prove to be
unnecessary if the required approvals are not obtained or market demand is
insufficient. Additionally, we may not be able to construct a large scale
manufacturing facility, and we may not be able to operate it in an efficient
and cost-effective manner and in compliance with applicable regulatory
requirements. If we are unable to manufacture our own products, we will need to
seek third-party manufacturers. We may not be able to enter into such
arrangements on favorable terms. Additionally, if we are unable to
satisfactorily manufacture and deliver the compounds required under our
agreement with AstraZeneca, we could lose some or all of our manufacturing
rights under that agreement.

We have exposure to product liability claims as a result of our clinical trials
and will have substantial exposure if we begin to manufacture, market and sell
products, and our insurance may not be adequate to cover losses resulting from
these claims

   The testing, manufacturing, marketing and sale of human therapeutics
involves product liability risks. The use of our product candidates in clinical
trials will also expose us to product liability claims. A product liability
claim could seriously harm us. We currently have limited product liability
insurance coverage for the clinical research use of our product candidates. We
may not be able to maintain this coverage on acceptable terms, and it may not
be adequate to cover product liability claims if they arise. We do not have
product liability coverage for the commercial sale of our products but intend
to obtain this coverage if our products are approved for commercial use.
However, this coverage is expensive, and we may not be able to obtain it on
acceptable terms or in sufficient amounts, if at all. Even if a product
liability claim is covered by insurance, we could be seriously harmed by the
adverse publicity that it could cause.

If third-party payors will not reimburse patients for our products, any
products we develop may not be accepted by the market

   Our ability to commercialize our products will depend in part on the
availability of reimbursement from third-party payors, such as government
health administration authorities, private health insurers and other
organizations. Third-party payors frequently challenge the price and cost
effectiveness of medical products and significant uncertainty exists as to the
reimbursement status of newly approved health care products. Our potential
products may not be considered cost effective, and adequate third-party
reimbursement may not be available to enable us to maintain price levels
sufficient to realize an attractive return on our investment in product
development. In addition, for international sales of our products, we and our
collaborators will be required to seek reimbursement on a country by country
basis. In some foreign countries, our potential products may be subject to
governmentally mandated prices that are artificially low. If adequate coverage
and reimbursement levels are not provided by the government and other third-
party payors for uses of our

                                       32
<PAGE>

therapeutic products, the market acceptance of these products could be
seriously harmed. Additionally, healthcare reform is receiving significant
attention both in the United States and abroad, and legislation and regulations
affecting the pricing of and reimbursement for pharmaceuticals may adversely
change before our products are approved for commercial use.

Our animal testing and our use of hazardous materials could subject us to
regulatory scrutiny and adverse publicity

   Much of our research and development involves the testing of compounds on
laboratory animals. We may be harmed by changes in laws and regulations or by
social pressures that would restrict the use of animals in testing. We may also
be harmed by actions against us or our collaborators by groups of individuals
opposed to this testing. In addition, research and development processes
sponsored by us involve the controlled use of hazardous materials. We and our
collaborators are subject to various international, federal, state and local
laws governing the use, manufacture, storage, handling and disposal of
hazardous materials. We cannot completely eliminate the risk of accidental
contamination or injury. Such an event could result in our being held liable
for damages, which could seriously harm our operations.

   We contract with third parties to remove hazardous wastes generated by us.
The disposal of such waste, third-party waste disposal companies with which we
contract, and their disposal sites are regulated by the Environmental
Protection Agency. Any actions initiated by the EPA against us, our third-party
waste disposal companies or their disposal sites could seriously harm our
operations if we or any of our third-party waste disposal companies were to be
held liable in whole or in part for any clean up costs.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest Rate Risk

   Our exposure to interest risk relates primarily to our investment portfolio
and our long-term debt obligation.

   The fair market value of our investments in fixed rate securities and debt
may be adversely impacted by fluctuations in interest rates. Our investments in
floating rate securities and debt expose our interest income and expense to
changes in interest rates.

   The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
To achieve this objective, we invest our excess cash in debt instruments of the
U.S. Government and its agencies and high-quality corporate issuers, and, by
policy, restrict our exposure to any single corporate issuer by imposing
concentration limits. The average duration of all our investments in 1999 was
less than one year. Due to the short term nature of these investments, we
believe we have no material exposure to interest rate risk arising from our
investments.

   At December 31, 1999, we had outstanding debt financing of $5.8 million
which bear interest at a fixed rate of 14.8% per annum. We have determined that
there is no material exposure to interest rate risk from the debt financing.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The index to Centaur's Financial Statements, Financial Schedules, and the
Report of the Independent Auditors appears in Part IV of this annual report on
Form 10-K.

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

   Not Applicable

                                       33
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

 Executive Officers, Directors and Key Employees

   Our executive officers, directors and key employees are as follows:

<TABLE>
<CAPTION>
   Name                                     Age             Position
   ----                                     ---             --------
   <C>                                      <C> <S>
   Steinar J. Engelsen, M.Sc., M.D.(2)(5)..  49 Acting Chief Executive Officer
                                                and Chairman of the
                                                Board of Directors
   Charles R. Engles(1)....................  52 Acting Chief Operating Officer
                                                and Director
   John M. Carney, Ph.D.(1)(2).............  53 Chief Technical Officer and
                                                Director
   Lucy O. Day.............................  41 Vice President, Finance, Chief
                                                Financial Officer,
                                                Treasurer and Secretary
   William A. Garland, Ph.D. ..............  55 Executive Vice President,
                                                Pharmaceutical Development
   Paul L. Wood, Ph.D. ....................  51 Senior Vice President, Research
   Kirk R. Maples, Ph.D. ..................  41 Vice President, Pharmaceutical
                                                Discovery
   John J. Vajda...........................  60 Vice President, Operations
   Graham K. Crooke, MB.BS.(2)(3)(5).......  41 Director
   Robert A. Floyd, Ph.D.(5)...............  59 Director
   Selvi Vescovi(3)(4)(5)..................  69 Director
</TABLE>
--------
(1)  Member of the Intellectual Property Oversight Committee.
(2)  Member of the Regulatory Oversight Committee.
(3)  Member of the Compensation Committee.
(4)  Member of the Finance and Audit Committee.
(5)  Member of the Nominating Committee.

   Steinar J. Engelsen, M.Sc., M.D. Dr. Engelsen was appointed Acting Chief
Executive Officer effective January 1, 2000, and has been a director of Centaur
and member of the Regulatory Oversight Committee since June 1998 and a member
of the Nominating Committee since September 1999. He was elected Chairman of
the Board of Directors in February 1999. Dr. Engelsen has been a consultant to
Centaur since February 1999. Since November 1996, Dr. Engelsen has been a
partner of Teknoinvest Management AS, a venture capital firm based in Norway.
From 1989 until September 1996, Dr. Engelsen held various management positions
within Hafslund Nycomed AS, a pharmaceutical company based in Europe, and
affiliated companies. He was responsible for therapeutic research and
development, most recently serving as Senior Vice President, Research and
Development of Nycomed Pharma AS from January 1994 until September 1996. Dr.
Engelsen received an M.Sc. in nuclear chemistry and an M.D. from the University
of Oslo, and is a Certified European Financial Analyst. Dr. Engelsen is a
director of several privately-held companies.

   Charles R. Engles. Mr. Engles was appointed Acting Chief Operating Officer
effective December 15, 1999, and has been a director of Centaur and a member of
the Intellectual Property Oversight Committee since June 1998. Since November
1997, Mr. Engles has been President and Chief Executive Officer of Cutanix, an
affiliate of Centaur engaged in development of products for dermatology,
cosmetics and other skin care applications. From October 1994 until March 1997,
Mr. Engles was Chairman and Chief Executive Officer of Stillwater Mining Co., a
platinum and palladium mining and processing company. From May 1989 until
October 1994, Mr. Engles was Senior Vice President of Johns Manville Corp., a
building materials company, where he was responsible for mining operations and
corporate development. Mr. Engles received a B.A. in electrical engineering
from Rice University, an M.Sc. in management from the University of Warwick and
a Ph.D. in operations research from Stanford University. Mr. Engles also
studied as a Rhodes scholar at Oxford University.

                                       34
<PAGE>

   John M. Carney, Ph.D. Dr. Carney is a co-founder of Centaur and has been a
director since its inception in March 1992. Dr. Carney has been a member of the
Intellectual Property Oversight Committee since May 1998 and the management
representative to the Regulatory Oversight Committee since June 1998. Dr.
Carney was President of Centaur from March 1992 until October 1992 and Chairman
of the Board of Directors from October 1992 until July 1996. After four years
as a scientific consultant to Centaur, Dr. Carney joined Centaur as its full
time Chief Technical Officer in June 1996. From 1987 until June 1996, Dr.
Carney was an Associate Professor of Pharmacology at the University of Kentucky
College of Medicine. He has published over 100 papers in the fields of
pharmacology and neurophysiology. Dr. Carney received a B.S. in biology from
St. Mary's College, an M.S. in vertebrate zoology from San Diego State
University, and a Ph.D. in pharmacology from the University of Michigan at Ann
Arbor.

   Lucy O. Day, CPA. Ms. Day joined Centaur as Controller in February 1994. She
was appointed Director of Finance in February 1997, Director of Finance and
Administration in February 1998, Vice President, Finance, Chief Financial
Officer and Treasurer in February 1999, and Secretary in September 1999. Prior
to joining Centaur, Ms. Day worked at Bank of America NT&SA from 1990 to
January 1994, most recently as Vice President, Financial Consolidation and
Reporting from January 1993 to January 1994. Ms. Day received a B.A. in
political economies of industrial societies from the University of California
at Berkeley and is a Certified Public Accountant in the State of California.

   William A. Garland, Ph.D. Dr. Garland joined Centaur as Vice President,
Pharmaceutical Development in August 1994 and became Executive Vice President,
Pharmaceutical Development in February 1997. Prior to joining Centaur, Dr.
Garland spent 20 years with Hoffmann-La Roche Inc., a pharmaceutical company,
most recently as Senior Director and U.S. Head of International Project
Management from March 1991 until July 1994. Dr. Garland received a B.S. in
chemistry from the University of San Francisco and a Ph.D. in medicinal
chemistry from the University of Washington School of Pharmacy.

   Paul L. Wood, Ph.D. Dr. Wood joined Centaur as Senior Vice-President,
Research in January 2000. Prior to joining Centaur, Dr. Wood worked at Elan
Pharmaceuticals from 1997 to January 2000, most recently as Sr. Vice President,
Research & Preclinical Development. From 1993 to 1997, Dr. Wood was Vice-
President, Preclinical Drug Development of CoCensys Inc. Dr. Wood received a
B.Sc in biology/biochemistry from Trent University at Ontario, Canada and a
Ph.D. in pharmacology from Queen's University at Ontario, Canada.

   Kirk R. Maples, Ph.D. Dr. Maples joined Centaur as Director of Biochemistry
in May 1993. He became Senior Director and Group Project Leader in February
1995 and Vice President, Pharmaceutical Discovery in February 1996. Prior to
joining Centaur, Dr. Maples was an Associate Scientist at the Inhalation
Toxicology Research Institute from 1989 to April 1993 and was a Clinical
Assistant Professor at the University of New Mexico College of Pharmacy from
August 1991 to April 1993. Dr. Maples received a B.S. in chemistry from the
University of Missouri at Kansas City and a Ph.D. in inorganic chemistry from
Duke University.

   John J. Vajda. Mr. Vajda joined Centaur in January 1997 as Director of
Operations and became Vice President, Operations in charge of facilities,
manufacturing and process development in February 1998. Prior to joining
Centaur, Mr. Vajda was General Manager at Biostride, Inc., an in vitro
diagnostic product company, from October 1995 to October 1996. From February
1993 to October 1995, Mr. Vajda was Director of Operations of OCULEX
Pharmaceuticals, Inc., a manufacturer of pharmaceuticals for eye care. Mr.
Vajda has attended New York University in biology and chemistry.

   Graham K. Crooke, MB.BS. Dr. Crooke has been a director of Centaur since
September 1995, a member of the Compensation Committee since November 1995 and
a member of the Regulatory Oversight Committee since June 1998 and a member of
the Nominating Committee since September 1999. Dr. Crooke is a consultant to
Ticonderoga Capital, Inc., a venture capital firm. From September 1997 to March
2000, Dr. Crooke was a principal of Ticonderoga Capital, Inc. (formerly Dillon
Read Venture Capital) which provides management services to Concord Partners
II, L.P., a principal stockholder of Centaur. From April 1992 to September
1997, Dr. Crooke held various positions with Dillon Read Venture Capital, most
recently as Vice

                                       35
<PAGE>

President. Dr. Crooke is a director of several privately held companies. He
earned his medical degree from the University of Western Australia and an
M.B.A. from the Stanford Graduate School of Business.

   Robert A. Floyd, Ph.D. Dr. Floyd is a co-founder of Centaur and has been a
director of Centaur since March 1999 and a member of the Nominating Committee
since September 1999. Dr. Floyd has been head of the Free Radical Biology and
Aging Program at the Oklahoma Medical Research Foundation and Professor of
Biochemistry and Molecular Biology at the University of Oklahoma Medical School
in Oklahoma City, Oklahoma since 1987. Dr. Floyd has published over 200 peer-
reviewed papers on the identification and quantification of free radicals in
biological systems, their roles in aging and disease, and related subjects.
Dr. Floyd received a B.S. and M.S. in agronomy and agriculture from the
University of Kentucky and a Ph.D. in agronomy from Purdue University. Dr.
Floyd is Chairman of our Scientific Advisory Board and a consultant to Centaur.

   Selvi Vescovi. Mr. Vescovi has been a director of Centaur since May 1996 and
a member of the Finance and Audit Committee and Compensation Committee since
May 1998 and a member of the Nominating Committee since September 1999. Since
1988, Mr. Vescovi has been a consultant to the pharmaceutical industry. Prior
to 1988, Mr. Vescovi spent 35 years with Upjohn Company, a pharmaceutical
company, serving in a variety of senior positions, including President and
General Manager of the International Division. From May 1992 until June 1996,
Mr. Vescovi was Chairman of the Board of Carrington Laboratories, Inc., a
research-based pharmaceutical and medical device company. Mr. Vescovi currently
is a director of Carrington Laboratories, Inc. and one privately held company.
Mr. Vescovi received a B.S. in biology from the College of William and Mary.

   Our current authorized Board size is six directors. Directors are elected at
each annual meeting of stockholders to serve until the next annual meeting of
stockholders, or until their successors are elected and qualified. A director's
term may end earlier if he or she dies, resigns or is removed.

BOARD COMMITTEES

   Finance and Audit Committee. The Finance and Audit Committee of the Board
consists of Mr. Vescovi and one open position. The Finance and Audit Committee
reviews our financial statements and accounting practices, makes
recommendations to the Board regarding the selection of independent auditors
and reviews the results and scope of the audit and other services provided by
our independent auditors.

   Compensation Committee. The Compensation Committee of the Board consists of
Dr. Crooke and Mr. Vescovi. The Compensation Committee makes recommendations to
the Board concerning salaries and incentive compensation for our officers and
employees and administers our employee benefit plans.

   Regulatory Oversight Committee. The Regulatory Oversight Committee of the
Board consists of Drs. Engelsen and Crooke. The Regulatory Oversight Committee
oversees our regulatory compliance and clinical trial activities.

   Intellectual Property Oversight Committee. The Intellectual Property
Oversight Committee consists of Dr. Carney and Mr. Engles. The Intellectual
Property Oversight Committee makes recommendations to the Board regarding our
intellectual property portfolio and reviews our policies and procedures for
protecting our intellectual property rights.

   Nominating Committee. The Nominating Committee consists of Dr. Engelsen, Dr.
Crooke, Dr. Floyd and Mr. Vescovi. The Nominating Committee identifies, screens
and recommends to the Board qualified candidates for Board vacancies.

                                       36
<PAGE>

Compensation Committee Interlocks and Insider Participation

   None of the members of the Compensation Committee of the Board was an
officer or employee of Centaur during 1998. No executive officer of Centaur
serves as a member of the board of directors or compensation committee of any
for-profit entity that has one or more executive officers serving on our Board
or Compensation Committee, except that Mr. Frenzel, a former executive officer,
served on the Board of Directors of Cutanix in 1999. The chief executive
officer and a director of Cutanix, Mr. Engles, is a director and acting chief
operating officer of Centaur.

ITEM 11. EXECUTIVE COMPENSATION

Director Compensation

   Effective January 1999, each of our outside directors (including the
Chairman of the Board of Directors) receives cash compensation for his services
and reimbursement for reasonable expenses in attending Board and Board
committee meetings. Cash compensation consists of a $1,500 per quarter
retainer, $1,500 per Board meeting attended in person, $500 per Board meeting
attended by telephone, and $500 per Board committee meeting attended. In
addition, each year, each outside director receives options to purchase 5,000
shares of our common stock under the Directors Plan, as described below. New
outside directors receive prorated option grants under the Directors Plan when
they join the Board. The Chairman of the Board of Directors also receives
$1,500 per day for consulting services rendered on-site outside of Board
meetings and options to purchase 15,000 shares of our common stock per year at
fair market value under a consulting agreement.

   Prior to 1999, our directors did not receive cash compensation for their
services as directors (other than Mr. Vescovi, who received a fee of $1,000 per
month). However, we did reimburse directors for their reasonable expenses in
attending Board meetings and grant them equity incentives. In February 1998,
Dr. Crooke and Mr. Vescovi each received a nonqualified stock option under our
1993 Equity Incentive Plan to purchase 5,000 shares of common stock at $4.00
per share, expiring in 2008. Also in February 1998, Dr. Engelsen, who became a
director of Centaur in June 1998, received a warrant to purchase 5,000 shares
of common stock at $4.00 per share. This warrant vests monthly over 36 months
as long as Dr. Engelsen is a consultant and/or director. In connection with his
June 1998 appointment as a director of Centaur, Mr. Engles received a
nonqualified stock option to purchase 5,000 shares of common stock at $6.50 per
share, expiring in 2008.

   In June 1998, the Board adopted the Directors Plan, which became effective
on October 13, 1998. As of December 31, 1999, 125,000 shares of common stock
were reserved for issuance under the Directors Plan and options to purchase
41,111 shares of common stock at an exercise price of $11.00 per share were
outstanding. Only Board members who are not our employees are eligible to
participate in the Directors Plan. Each eligible director who first becomes a
member of the Board is automatically granted an initial option for a number of
shares equal to 417 shares multiplied by the number of full and partial
calendar months between the date he or she first becomes a director and the
following May 1. On May 1 of each year, each eligible director is automatically
granted an additional option to purchase 5,000 shares if the director has been
a member of the Board continuously since the date of grant of the director's
initial option, or if the director did not receive an initial option, he or she
has served continuously as a Board member since the prior May 1. All options
granted under the Directors Plan will vest monthly over a three-year period,
with one thirty-sixth of the shares vesting each month, provided that the
optionee continues to be a member of the Board or a consultant to Centaur. The
exercise price of all options granted under the Directors Plan will be the fair
market value of the common stock on the date of grant, as determined by our
Board.

                                       37
<PAGE>

Executive Compensation

   The following table shows all compensation awarded to, earned by or paid for
services rendered to us in all capacities during 1997, 1998 and 1999 by our
chief executive officer and our other executive officers or former executive
officers who earned at least $100,000 in 1999.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                 Long-term
                                                            Compensation Awards
                                                            -------------------
                                                  Annual        Securities
                                               Compensation      Underlying
   Name and Principal Positions           Year    Salary         Options(#)
   ----------------------------           ---- ------------     ----------
   <S>                                    <C>  <C>          <C>
   Brian D. Frenzel*..................... 1999   $255,331         15,600
    Former President and Chief Executive  1998    232,514         20,000
    Officer                               1997    218,877         15,000


   John M. Carney, Ph.D.................. 1999   $202,732         10,125
    Chief Technical Officer               1998    192,933         15,000
                                          1997    157,219          6,250


   Lucy O. Day........................... 1999   $125,792         25,075
    Chief Financial Officer               1998    100,673         11,400
                                          1997     90,305          6,000


   William A. Garland, Ph.D.............. 1999   $210,934         25,280
    Executive Vice President,             1998    198,711         20,000
    Pharmaceutical Development            1997    187,056         20,000


   Kirk R. Maples, Ph.D.................. 1999   $130,729          7,605
    Vice President, Pharmaceutical        1998    121,357          7,500
    Discovery                             1997    126,403         10,000
</TABLE>
--------
* Mr. Frenzel resigned from his positions as Centaur's President and Chief
  Executive Officer, effective December 31, 1999. Steinar J. Engelsen was
  appointed Acting Chief Executive Officer effective January 1, 2000 and his
  annual compensation in the form of payment under a consulting agreement was
  $28,500 in 1999.

   The following table shows information about each option grant during 1999 to
the executive officers named in the Summary Compensation Table above. According
to Securities and Exchange Commission rules, the table shows the hypothetical
gains or "option spreads" for each option at the end of its ten-year term.
These gains are based on assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the option was granted to the end of
the option term.

                              OPTIONS TO PURCHASE
                             OPTION GRANTS IN 1999

<TABLE>
<CAPTION>
                                       Individual Grants
                         ---------------------------------------------
                                                                        Potential Realizable
                                                                       Value at Assumed Annual
                         Number of   Percent of                         Rates of Stock Price
                         Securities Total Options                      Appreciation for Option
                         Underlying  Granted to   Exercise                      Term
                          Options   Employees in  Price per Expiration ------------------------
Name                      Granted       1999        Share      Date         5%         10%
----                     ---------- ------------- --------- ---------- ----------- ------------
<S>                      <C>        <C>           <C>       <C>        <C>         <C>
Brian D. Frenzel........   15,600        5.0%      $11.00    2/26/09   $   107,918 $   273,486
John M. Carney, Ph.D....   10,125        3.2        11.00    2/26/09        70,043     177,503
Lucy O. Day.............   25,075        8.0        11.00    2/26/09       173,465     439,594
William A. Garland,
 Ph.D...................   25,280        8.1        11.00    2/26/09       174,883     443,188
Kirk R. Maples, Ph.D....    7,605        2.4        11.00    2/26/09        52,610     133,325
</TABLE>

   The 5% and 10% assumed annual compound rates of stock price appreciation in
the table above are required by the rules of the Securities and Exchange
Commission and do not represent our estimates or projections of future common
stock prices.

                                       38
<PAGE>

   All the options shown in the above table are incentive stock options to
purchase shares of common stock. Options vest monthly over a four-year period,
with one forty-eighth of the shares vesting each month, provided that the
optionee continues to render services to us. The options were granted at an
exercise price equal to the fair market value of our common stock on the date
of grant, as determined by our Board.

   The following table provides information about stock options exercises by
each of the executive officers named in the Summary Compensation Table above
during the fiscal year ended December 31, 1999. It also provides information
about unexercised stock options held by these officers as of December 31, 1999,
and values of "in-the-money" options that represent the positive spread between
the respective exercise prices of outstanding stock options and the fair market
value of our common stock as of December 31, 1999. The value of in-the-money
options is based on a value of $11.00 per share, the fair market value of our
common stock as of December 31, 1999, as determined by our Board of Directors.

                       AGGREGATE OPTION EXERCISES IN 1999
                              AND YEAR-END VALUES

<TABLE>
<S>                      <C>         <C>          <C>         <C>           <C>         <C>
<CAPTION>
                                                    Number of Securities
                                                   Underlying Unexercised     Value of Unexercised
                                                   Options at Fiscal Year-   In-the-Money Options at
                           Shares                            end                 Fiscal Year-end
                         Acquired on    Value     ------------------------- -------------------------
                          Exercise   Realized ($) Exercisable Unexercisable Exercisable Unexercisable
                         ----------- ------------ ----------- ------------- ----------- -------------
<S>                      <C>         <C>          <C>         <C>           <C>         <C>
Brian D. Frenzel........        0      $    --      137,115      27,235     $1,377,381    $115,120
John M. Carney, Ph.D....        0           --       23,855      17,520        191,899      71,276
Lucy O. Day.............        0           --       80,103      27,372        770,726      55,374
William A. Garland,
 Ph.D...................        0           --       67,711      35,790        598,581     123,982
Kirk R. Maples, Ph.D....   25,500       276,675      88,800      12,845        912,086      54,182
</TABLE>

Employment Agreement

   We entered into an employment agreement with Mr. Frenzel, effective as of
December 1, 1993, in connection with Mr. Frenzel's service as our President and
Chief Executive Officer. The employment agreement had an initial term of four
years and provided that Mr. Frenzel would receive an initial minimum salary of
$175,000 as a full-time employee. The employment agreement renewed
automatically for successive one-year terms on the same terms and conditions,
unless either party notified the other of its intention to terminate at least
90 days before the expiration of the applicable term. The employment agreement
provides that we may terminate Mr. Frenzel's employment with or without cause,
or that Mr. Frenzel may terminate his employment voluntarily. If we terminate
the employment agreement with cause, or if Mr. Frenzel terminates the
employment agreement voluntarily, we are only obligated to pay Mr. Frenzel
compensation and benefits he would otherwise have received through the
effective date of his termination. If we terminate the employment agreement
without cause, we must pay Mr. Frenzel a severance payment equal to six months'
salary, payable on our normal payroll dates during that period. However, if Mr.
Frenzel obtains other full-time employment during the six-month period, we will
pay him one half of the amount we would have been obligated to pay from the
date he obtains other employment until the end of the six-month period.

   Under the terms of the employment agreement, we granted Mr. Frenzel an
incentive stock option to purchase up to 300,000 shares of common stock at a
price of $0.15 per share. This option was fully vested on July 1, 1998. To
date, Mr. Frenzel has purchased 221,250 shares of common stock upon exercise of
the option.

   In connection with Mr. Frenzel's resignation as an officer and director of
Centaur effective December 31, 1999, we currently anticipate entering into a
transitional employment and consulting agreement with Mr. Frenzel. It is
expected that such agreement will have the following general terms:

  .  From January 1, 2000 to December 31, 2000, Mr. Frenzel will be a part-
     time employee of Centaur reporting to the Chairman of the Board and/or
     Chief Executive Officer.

                                       39
<PAGE>

  .  During this period, Mr. Frenzel will continue to receive his current
     salary and benefits, and his options will continue to vest.

  .  From January 1, 2001 to December 31, 2003, Mr. Frenzel will be a part-
     time consultant to Centaur reporting to the Chairman of the Board and/or
     CEO.

  .  During this period Mr. Frenzel will be paid $125 per hour for his
     consulting services, as requested by the Company, and his options would
     continue to vest.

  .  Centaur and Mr. Frenzel would enter into a mutual release and
     indemnification provisions.

   The arrangements with Mr. Frenzel have not been finalized, and accordingly
there can be no assurance that the parties will enter into this agreement.

Employee Benefit Plans

   1993 Equity Incentive Plan. As of December 31, 1999, under our 1993 Equity
Incentive Plan, options to purchase 1,416,147 shares of common stock at
exercise prices from $0.10 to $10.00 per share were outstanding and options to
purchase 738,038 shares of common stock had been exercised. No further options
may be granted under the 1993 Incentive Plan, which has been terminated and
replaced by our 1998 Equity Incentive Plan. Options granted under the 1993
Incentive Plan before its termination remain outstanding in accordance with
their terms. Generally, options granted under the 1993 Incentive Plan are
subject to the terms described below for options granted under the 1998
Incentive Plan.

   1998 Equity Incentive Plan. Our 1998 Equity Incentive Plan became effective
on October 13, 1998 and is the successor equity incentive program to our 1993
Incentive Plan. As of December 31, 1999, options granted pursuant to our 1998
Incentive Plan to purchase 318,247 shares of common stock at an exercise price
of $11.00 were outstanding, 83 shares of common stock had been exercised, and
926,935 shares of common stock were available for grant in connection with
options, stock bonuses and restricted stock awards. In addition, the following
shares will be available for grant and issuance in connection with future
awards under the 1998 Incentive Plan:

  .  Shares subject to issuance upon exercise of an option granted under the
     1993 Incentive Plan or the 1998 Incentive Plan that cease to be subject
     to that option for any reason other than exercise of the option,

  .  Shares subject to an award granted under the 1998 Incentive Plan that
     are subsequently repurchased by us at the original issue price, and

  .  Shares subject to an award that otherwise terminates without shares
     being issued.

   The 1998 Incentive Plan allows us to grant stock options and stock bonuses
and to issue restricted stock to our employees, officers, directors,
consultants, independent contractors and advisers. The 1998 Incentive Plan is
administered by the Compensation Committee of the Board, currently consisting
of Dr. Crooke and Mr. Vescovi. The Compensation Committee may grant options
that are either incentive stock options or nonqualified stock options, and may
determine the terms of the options, including vesting, subject to certain
limitations. The exercise price of incentive stock options must be 100% of the
fair market value of our common stock on the date of grant, and the exercise
price of nonqualified stock options may not be less than 85% of the fair market
value of our common stock on the date of grant. The Compensation Committee may
also grant participants stock bonus awards and restricted stock awards to
purchase common stock for not less than 85% of its fair market value at the
time of grant. The other terms of bonus and restricted stock awards may be
determined by the Compensation Committee. The 1998 Incentive Plan will
terminate in 2008, unless terminated earlier in accordance with its provisions.

   1998 Employee Stock Purchase Plan. In June 1998, the Board adopted our 1998
Employee Stock Purchase Plan, although we have not yet begun offering shares of
common stock under this plan. As of December 31, 1999, 125,000 shares of common
stock were reserved for issuance under the Stock Purchase

                                       40
<PAGE>

Plan. On each subsequent January 1, the number of shares reserved for issuance
under the Stock Purchase Plan increases automatically by a number of shares
equal to one quarter of one percent of the total outstanding shares of common
stock outstanding on the immediately preceding December 31, limited to a
maximum of 200,000 shares per year. Under the Stock Purchase Plan, once the
first offering period commence, eligible employees may acquire shares of our
common stock through payroll deductions. Except for the initial offering under
the Stock Purchase Plan, each offering under the Stock Purchase Plan will be
for a period of eighteen months, consisting of three six-month purchase
periods. Except for the first offering period, offering periods will begin on
February 1 and August 1 of each year. The Board has the authority to determine
the date the first offering period will begin and its length. The Board has the
power to set the beginning of any offering period, to terminate any offering
period under certain circumstances and to change the length of offering periods
without stockholder approval, provided that the change is announced at least 15
days before the scheduled beginning of the first offering period to be
affected. Eligible employees may select a payroll deduction rate of between
2.0% and 10.0% of their compensation, up to a maximum total payroll deduction
of $25,000 in any calendar year. The purchase price for common stock purchased
under the Stock Purchase Plan is 85% of the lesser of the fair market value of
our common stock on the first day of the offering period or on the last day of
the applicable purchase period.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The following table shows information about the beneficial ownership of our
common stock as of March 27, 2000:

  .  each person we know to be the beneficial owner of more than five percent
     of our common stock,

  .  each of our directors,

  .  each of our executive officers listed in the Summary Compensation Table
     above, and

  .  all of our current executive officers and directors as a group.

   Percentage ownership is based on 17,500,000 shares outstanding as of March
27, 2000. Unless otherwise indicated below, the persons and entities named in
the table have sole voting and sole investment power for all shares
beneficially owned, subject to community property laws where applicable. Shares
of common stock subject to options or warrants that were exercisable as of
March 27, 2000 or would become exercisable within 60 days after March 27, 2000
are considered outstanding and beneficially owned by the holder of the options
or warrants to compute that person's percentage ownership. However, they are
not treated as outstanding to compute the percentage ownership of any other
person.

<TABLE>
<CAPTION>
                                                     Number of    Percentage
                                                       Shares     of Shares
5% Stockholders, Directors and Named Executive      Beneficially Beneficially
Officers                                               Owned        Owned
----------------------------------------------      ------------ ------------
<S>                                                 <C>          <C>
Graham K. Crooke, MB.BS. and
Concord Partners II, L.P.(1).......................  1,612,772       9.2%
 535 Madison Avenue, 36th Floor
 New York, New York 10022

Paul F. Glenn(2)...................................  1,389,979       7.9
 c/o Glenn Foundation
 1250 Coast Village Road, Suite K
 Santa Barbara, California 93108

Menlo Ventures IV, L.P.(3).........................  1,290,692       7.4
 3000 Sand Hill Road, Bldg. 4, Ste. 100
 Menlo Park, California 94025
</TABLE>


                                       41
<PAGE>

<TABLE>
<CAPTION>
                                                      Number of    Percentage
                                                        Shares     of Shares
5% Stockholders, Directors and Named Executive       Beneficially Beneficially
Officers                                                Owned        Owned
----------------------------------------------       ------------ ------------
<S>                                                  <C>          <C>
Bismuth Investments Limited(4)......................  1,142,857        6.5
 Suite 922C
 Europort, Gibraltar

Charter Ventures, a California limited
 partnership(5).....................................  1,053,637        6.0
 525 University Avenue, Suite 1500
 Palo Alto, California 94301

Neuroscience Partners Limited Partnership(6)........    990,475        5.7
 100 International Boulevard
 Etobicoke, Ontario,
 Canada M9W 6J6

Brian D. Frenzel(7).................................    940,033        5.3
 c/o Centaur Pharmaceuticals, Inc.
 484 Oakmead Parkway
 Sunnyvale, California 94086

Robert A. Floyd, Ph.D.(8)...........................    812,290        4.6
 c/o Oklahoma Medical Research Foundation
 825 North East 13th Street
 Oklahoma City, OK 73104

John M. Carney, Ph.D.(9)............................    616,481        3.5

William A. Garland, Ph.D.(10).......................    148,100          *

Lucy O. Day(11).....................................     83,914          *

Charles R. Engles(12)...............................     41,235          *

Steinar J. Engelsen, M.D.(13).......................     26,917          *

Selvi Vescovi(14)...................................     23,228          *

All executive officers and directors as a group (9
 persons)(15).......................................  3,372,749       19.0%
</TABLE>
--------
  * Less than 1% of our outstanding common stock
 (1) Represents 11,041 shares of common stock that may be acquired upon
     exercise of stock options held by Dr. Crooke that are exercisable within
     60 days after December 31, 1999, 17,316 shares of common stock
     beneficially owned by Dr. Crooke and 1,584,415 shares held of record by
     Concord Partners II, L.P. Of the 17,316 shares beneficially owned by Dr.
     Crooke, 10,129 shares are held by Dillon, Read & Co. Inc., as agent, which
     shares investment control with respect to the shares with Dr. Crooke. The
     investment policies and affairs of Concord Partners II, L.P. are managed
     by its general partner, Venture Associates II, L.P. CPML Associates, Inc.
     is the managing general partner of Venture Associates II, L.P. Dr. Crooke,
     one of our directors, is a general partner of Venture Associates and a
     consultant to CPML.

 (2) Represents 1,300,812 shares held of record by Paul F. Glenn, Trustee, Paul
     F. Glenn Revocable Trust and 89,167 shares held of record by Glenn
     Foundation. Mr. Glenn is President and a member of the Board of Directors
     of Glenn Foundation.

 (3) MV Management IV, L.P., a California limited partnership, is the sole
     general partner of Menlo Ventures IV, L.P. and is deemed to have voting
     and investment power with respect to the shares held by Menlo Ventures IV,
     L.P.

 (4) Bismuth Investments Limited is a British Virgin Islands corporation.
     Bismuth's Board of Directors has voting and investment control of the
     shares held by Bismuth.

                                       42
<PAGE>

 (5) Represents 440,000 shares held of record by Charter Ventures II L.P. and
     613,637 shares held of record by Charter Ventures, a California limited
     partnership. Mr. A. Barr Dolan and Chavencap, Limited, a British Virgin
     Islands corporation, are each general partners of Charter Ventures and
     each may be deemed to have voting and investment power with respect to the
     shares held by Charter Ventures. The Managing Director of Chavencap,
     Limited is Mr. Johnson Cha.

 (6) MDS Associes-Neuroscience Inc., a Canada corporation, is the sole general
     partner of Neuroscience Partners Limited Partnership and is deemed to have
     voting and investment power with respect to the shares held by
     Neuroscience Partners Limited Partnership.

 (7) Represents 797,971 shares held of record by Mr. Frenzel and his wife and
     142,062 shares of common stock that may be acquired upon exercise of stock
     options that are exercisable within 60 days after March 27, 2000. Does not
     include 27,998 shares held of record by a former director on behalf of the
     Frenzels' minor children. Also does not include 89,167 shares held of
     record by Glenn Foundation, of which Mr. Frenzel serves as a member of the
     Board of Directors. See footnote (2). Mr. Frenzel is a former President,
     Chief Executive Officer and director.

 (8) Represents 800,000 shares held of record by Dr. Floyd and/or Mrs. Floyd as
     trustee(s) of certain trusts for the benefit of Dr. and Mrs. Floyd and
     members of their family and 12,290 shares of common stock that may be
     acquired upon exercise of stock options that are exercisable within 60
     days after March 27, 2000. Dr. Floyd is Chairman of our Scientific
     Advisory Board and a consultant to us.

 (9) Represents 589,802 shares held of record by Dr. Carney and his wife as
     joint tenants and 26,679 shares that may be acquired upon exercise of
     stock options that are exercisable within 60 days after March 27, 2000.
     Does not include 60,000 shares held of record by a former director as
     custodian for the Carney's minor children. Dr. Carney is our Chief
     Technical Officer and one of our directors.

(10) Represents 74,279 shares held of record by Dr. Garland and his wife and
     73,821 shares of common stock that may be acquired upon exercise of stock
     options that are exercisable within 60 days after March 27, 2000. Dr.
     Garland is our Executive Vice President, Pharmaceutical Development.

(11) Represents shares of common stock that may be acquired upon exercise of
     stock options that are exercisable within 60 days after March 27, 2000.

(12) Represents 26,514 shares held of record by Mr. Engles, 10,000 shares
     beneficially owned by Mr. Engles and 4,721 shares that may be acquired
     upon exercise of stock options that are exercisable within 60 days after
     March 27, 2000. Mr. Engles is one of our directors and our acting chief
     operating officer.

(13) Represents 3,611 shares of common stock that may be acquired upon exercise
     of a warrant to the extent that such warrant is exercisable within 60 days
     after March 27, 2000 and 6,666 shares that may be acquired upon exercise
     of stock options that are exercisable within 60 days after March 27, 2000.
     Also includes 11,920 shares owned of record by Eiken Invest 97 and 4,720
     shares held of record by Eiken Invest 98. Dr. Engelsen shares voting and
     dispositive power with respect to shares held by Eiken Invest '97 and
     Eiken Invest '98 but disclaims any beneficial ownership. Dr. Engelsen is
     the Chairman of our Board of Directors, our acting chief executive officer
     and a consultant.

(14) Represents 5,000 shares held of record by Mr. Vescovi and 18,228 shares of
     common stock that may be acquired upon exercise of stock options that are
     exercisable within 60 days after March 27, 2000. Mr. Vescovi is one of our
     directors.

(15) Includes 248,783 shares of common stock that may be acquired upon exercise
     of stock options and warrants that are exercisable within 60 days after
     March 27, 2000, and 1,584,415 shares held of record by Concord Partners
     II. L.P. See footnote (1). Excludes 940,333 shares of common stock, and
     stock options that are exercisable within 60 days after March 27, 2000,
     held by Brian D. Frenzel as Mr. Frenzel resigned from his positions as
     Centaur's President and Chief Executive Officer, effective December 31,
     1999. See footnote (7).

                                       43
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   Since January 1, 1996, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party in which the amount involved exceeds $60,000 and in which any director,
executive officer or holder of more than five percent of our common stock or
will have a direct or indirect material interest other than compensation
arrangements, which are described where required under "Directors and Executive
Officers of Registrant," and the transactions described below.

Securities Issuances

   From February through October 1997, we sold 2,200,000 shares of our Series D
Preferred Stock to 60 individual and institutional investors at $7.50 per
share, for a total price of $16,500,000, paid in cash. The investors listed
below, who were our executive officers, directors or their affiliates, five
percent stockholders and/or members of a five percent stockholder group at the
time of the purchase, bought shares in the offering on the same terms as other
investors:

  .  Paul F. Glenn, Trustee, Paul F. Glenn Revocable Trust (66,667 shares),
     and the Glenn Foundation (33,334 shares), members of a five percent
     stockholder group;

  .  Brian D. Frenzel, Former President, Chief Executive Officer and director
     and a five percent stockholder (10,000 shares);

  .  Selvi Vescovi, a director (5,000 shares);

  .  Charter Ventures II, L.P. (40,000 shares), member of a five percent
     stockholder group;

  .  Menlo Ventures IV, L.P. (66,666 shares), a five percent stockholder; and

  .  Oklahoma Medical Research Foundation (20,000 shares), of which an
     executive officer and trustee was then a director of Centaur.

   In October 1998, we sold 1,500,000 shares of common stock in an underwritten
private offering, primarily to individual and institutional investors in
Europe. The price was 14.65 Swiss francs (CHF) per share, which, using the
exchange rate prevailing at the time of the transaction, approximated $11.00
per share. We received aggregate gross proceeds of $16,500,000 before deducting
underwriting discounts and commissions and other offering expenses. Eiken
Invest 98 AS, an investment fund, purchased 4,720 shares, and Charles R. Engles
purchased 10,000 shares, of common stock in this offering on the same terms as
other investors. Dr. Engelsen, one of our directors and our Acting Chief
Executive Officer, has shared voting and dispositive power over the shares
purchased by Invest 98 AS, but disclaims beneficial ownership.


   From January 1, 1996 to December 31, 1999, we issued warrants to purchase
45,000 shares of common stock to our consultants as compensation. The exercise
prices of the warrants ranged from $3.00 to $11.00 per share. Of these, a
warrant to purchase 5,000 shares of common stock at $4.00 per share was issued
to Dr. Engelsen in February 1998. Dr. Engelsen was a consultant to Centaur
before joining our Board in September 1998.

   From January 1, 1996 to December 31, 1999, we granted the following options
to purchase shares of common stock:

  .  options to purchase 1,207,229 shares to employees, officers, directors
     and consultants, at exercise prices from $0.30 to $10.00, under the 1993
     Incentive Plan;

  .  options to purchase 334,367 shares to employees, officers and
     consultants, at an exercise price of $11.00, under the 1998 Incentive
     Plan; and

  .  options to purchase 45,834 shares to directors, at an exercise price of
     $11.00, under the Directors Plan.

                                       44
<PAGE>

   From January 1, 1996 to December 31, 1999, we issued 738,121 shares of
common stock to employees, directors and consultants, at exercise prices from
$0.10 to $11.00, under the 1998 Stock Plan and, prior to October 13, 1998, the
1993 Incentive Plan.

Indebtedness Of Management

   In January 1998, we made a short-term relocation loan to Joseph L. Turner,
who was then our Chief Financial Officer and Treasurer. The principal amount of
$371,322 accrued interest at an annual rate of 6%. Mr. Turner repaid the
balance of $342,679 (net of expenses we paid) and $1,997 in accrued interest in
February 1998. Mr. Turner resigned from his positions as Chief Financial
Officer and Treasurer, effective February 12, 1999.

Other Transactions

   Mr. Engles, one of our directors and our acting chief operating officer, is
the chief executive officer and a director and major stockholder of Cutanix, a
corporation formed in November 1997 to develop dermatological drugs and
cosmetics. We currently own 48% of the outstanding stock of Cutanix, and Mr.
Engles currently owns 17.2% of its outstanding stock. In January 1998, we
exclusively licensed to Cutanix all of our current and future technology for
the fields of dermatology, cosmetics and other skin care applications. The
license agreement also provides that either we or Cutanix may obtain the
exclusive right to use our compounds, with some exceptions, by agreeing to take
specified actions to develop the compound. Accordingly, Cutanix could obtain
exclusive rights to a compound that we might otherwise choose to develop. We
and Cutanix also entered into a services and supply agreement in January 1998
under which we agreed to provide certain administrative
and other services to Cutanix at cost. In addition, we and Cutanix agreed that
we would be the exclusive supplier of NRT active compounds to Cutanix (subject
to specified rights of each party to terminate this exclusivity) at a cost-
based purchase price. We provided approximately $260,000 in cash and services
to Cutanix under this agreement. This amount was subsequently converted to
stock. We, Mr. Engles and another stockholder of Cutanix have agreed to vote
for one representative of each on the Board, subject to some limited
exceptions, and have also agreed that specified major corporate actions will
require the approval of 75% of the members of the Board of Directors, all for a
period of ten years. In October 1998, a trust affiliated with Paul Glenn, and
an investment fund managed by an entity of which Steinar Engelsen is a partner,
each invested $275,000 in Cutanix. Paul Glenn is a significant stockholder of
ours, and Steinar Engelsen is our Chairman of the Board and our acting chief
executive officer. See "Business--Cutanix--Skin Care Affiliate" and note 2 of
notes to financial statements.

   Dr. Floyd, who is the Chairman of our Scientific Advisory Board and a
director, also provides consulting services to us from time to time under a
consulting agreement. From January 1996 to December 31, 1999, we paid Dr. Floyd
$169,000 as compensation for consulting services. Separately, Dr. Floyd
received an option to purchase 10,000 shares of common stock at a purchase
price of $0.50 per share in May of 1996 in connection with his service as a
Scientific Advisory Board member and consultant. We also fund research in Dr.
Floyd's laboratory at the Oklahoma Medical Research Center on the evaluation of
NRTs that may be useful as pharmaceuticals. Since January 1, 1996, we paid the
Oklahoma Medical Research Center $336,000 under a research contract for work
done in Dr. Floyd's laboratory.

   Dr. Engelsen, who is Chairman of our Board of Directors and our acting chief
executive officer, also provides consulting services to us under a consulting
agreement. The agreement provides for a fee of $1,500 per day for consulting
services rendered on site outside of Board meetings and options to purchase
15,000 shares of common stock per year at fair market value.




                                       45
<PAGE>

                                    PART IV

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

   (a)(1) Financial Statements. Centaur's financial statements filed herewith
are as follows:

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Auditors............................................. F-2

Balance Sheets............................................................. F-3

Statements of Operations................................................... F-4

Statements of Stockholders' Equity......................................... F-5

Statement of Cash Flows.................................................... F-6

Notes to Financial Statements.............................................. F-7
</TABLE>

   (a)(2) Financial Statement Schedules.

   Financial Statement Schedules are omitted because the information called for
is not required or is shown either in the financials statements or the notes
thereto.

   (a)(3) Exhibits.

<TABLE>
<CAPTION>
 Exhibit
 Number                               Exhibit Title
 -------                              -------------
 <C>     <S>
  3.01   Registrant's Amended and Restated Certificate of Incorporation.
          Incorporated by reference to Exhibit 3.02 to the Registrant's
          Registration Statement on Form S-1 (File No. 333-57165) declared
          effective by the Securities and Exchange Commission on October 13,
          1998 (the "1998 S-1").

  3.02   Registrant's Bylaws. Incorporated by reference to Exhibit 3.03 to the
          1998 S-1.

  4.01   Form of Specimen Certificate for Registrant's Common Stock.
          Incorporated by reference to Exhibit 4.01 to the 1998 S-1.

  4.02   Third Amended and Restated Investors' Rights Agreement, dated as of
          February 14, 1997. Incorporated by reference to Exhibit 4.02 to the
          1998 S-1.

  4.03   Amendment to Third Amended and Restated Investors' Rights Agreement,
          dated as of September 23, 1998. Incorporated by reference to Exhibit
          4.03 to the 1998 S-1.

 10.01   Registrant's 1993 Equity Incentive Plan, as amended. Incorporated by
          reference to Exhibit 10.01 to the 1998 S-1.

 10.02   Registrant's 1998 Equity Incentive Plan. Incorporated by reference to
          Exhibit 10.02 to the 1998 S-1.

 10.03   Registrant's 1998 Directors Stock Option Plan. Incorporated by
          reference to Exhibit 10.03 to the 1998 S-1.

 10.04   Registrant's 1998 Employee Stock Purchase Plan. Incorporated by
          reference to Exhibit 10.04 to the 1998 S-1.

 10.05   Form of Indemnification Agreement entered into by Registrant with each
          of its directors and executive officers. Incorporated by reference to
          Exhibit 10.05 to the 1998 S-1.

 10.06   Master Loan and Security Agreement between the Registrant and Finova
          Technology Finance, Inc., dated as of November 3, 1997; Loan and
          Security Agreement No. 1 dated April 22, 1998 between the Registrant
          and Finova Technology Finance, Inc.; Commitment Letter between the
          Registrant and Finova Technology Finance, Inc., dated as of October
          7, 1997 (as revised on December 23, 1997), as amended April 20, 1998;
          Leasehold Deeds of Trust dated November 3, 1997 executed by the
          Registrant; Promissory Note dated April 22, 1998 executed by
          Registrant. Incorporated by reference to Exhibit 10.06 to the 1998 S-
          1.
</TABLE>


                                       46
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number  Exhibit Title
 ------- -------------
 <C>     <S>
 10.07   Lease for 484 Oakmead Parkway, Sunnyvale, CA dated February 25, 1993,
          as amended August 18, 1995. Incorporated by reference to Exhibit
          10.07 to the 1998 S-1.

 10.08   Sublease for additional space at 484 Oakmead Parkway, Sunnyvale, CA
          dated March 22, 1995. Incorporated by reference to Exhibit 10.08 to
          the 1998 S-1.

 10.09   Lease for 1220 Memorex Drive, Suite 100, Santa Clara, CA dated
          February 12, 1997. Incorporated by reference to Exhibit 10.09 to the
          1998 S-1.

 10.10   Lease for 1220 Memorex Drive, Suites 200 and 300, Santa Clara, CA
          dated September 12, 1997. Incorporated by reference to Exhibit 10.10
          to the 1998 S-1.

 10.11   License with UKRF and OMRF dated July 15, 1992. Incorporated by
          reference to Exhibit 10.11 to the 1998 S-1.*

 10.12   First Amendment to License with UKRF and OMRF dated September 29,
          1995. Incorporated by reference to Exhibit 10.12 to the 1998 S-1.*

 10.13   Development, License and Marketing Agreement with Astra AB dated
          September 26, 1995. Incorporated by reference to Exhibit 10.13 to the
          1998 S-1.*

 10.14   Supply Agreement with Astra AB dated September 26, 1995. Incorporated
          by reference to Exhibit 10.14 to the 1998 S-1.*

 10.15   Amendments to Development, License and Marketing Agreement with Astra
          AB dated July 8, 1997 and October 7, 1997. Incorporated by reference
          to Exhibit 10.15 to the 1998 S-1.

 10.16   Development, Patent and Trademark/Know-How Licensing and Supply
          Agreement--CPI-1189 with H. Lundbeck A/S dated October 31, 1996, as
          amended as of October 31, 1996. Incorporated by reference to Exhibit
          10.16 to the 1998 S-1.*

 10.17   Employment Agreement with Brian D. Frenzel dated December 1, 1993, and
          associated Stock Option Agreements. Incorporated by reference to
          Exhibit 10.17 to the 1998 S-1.

 10.18   License Agreement dated January 15, 1998 between Registrant and
          Cutanix Corporation. Incorporated by reference to Exhibit 10.18 to
          the 1998 S-1.*

 10.19   Services and Supply Agreement dated January 15, 1998 between
          Registrant and Cutanix Corporation. Incorporated by reference to
          Exhibit 10.19 to the 1998 S-1.*

 10.20   Stockholders' Agreement dated January 15, 1998 by and among Cutanix
          Corporation and certain stockholders of Cutanix Corporation.
          Incorporated by reference to Exhibit 10.20 to the 1998 S-1.

 10.21   License Agreement dated January 1, 1998 by and among OMRF and
          Registrant. Incorporated by reference to Exhibit 10.21 to the 1998 S-
          1.*

 10.22   Separation Agreement and General Release effective January 15, 1999
          between the Registrant and Joseph L. Turner. Incorporated by
          reference to Exhibit 10.22 of the Registrant's Annual Report on Form
          10-K405 filed with the Securities and Exchange Commission on March
          31, 1999.

 10.23   Letter of Engagement between Registrant and Bank Vontobel.
          Incorporated by reference to Exhibit 1.02 to the Registrant's
          Registration Statement on Form S-1 (File No. 333-96053) declared
          effective by the Securities and Exchange Commission on March 8, 2000.

 23.01   Consent of Ernst & Young LLP, independent auditors.

 27.01   Financial Data Schedule.
</TABLE>
--------
*  Confidential treatment has been granted for certain portions of this
   document pursuant to an application for confidential treatment sent to the
   Securities and Exchange Commission.

(b) Reports on Form 8-K

  No reports on Form 8-K were filed during the quarter ended December 31,
     1999.

                                       47
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                          CENTAUR PHARMACEUTICALS, INC.

                                                    /s/ Lucy O. Day
Dated: March 29, 2000                     By: _________________________________
                                                        Lucy O. Day
                                                  Chief Financial Officer,
                                                  Treasurer and Secretary

                               POWER OF ATTORNEY

   Each person whose signature appears below constitutes and appoints Lucy O.
Day his or her true and attorney-in-fact, with the power of substitution, for
him or her in any and all capacities, to sign amendments to this Report on Form
10-K, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact, or her substitute, may
do or cause to be done by virtue hereof.

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                Name                             Title                   Date
                ----                             -----                   ----

Principal Executive Officer:

<S>                                  <C>                            <C>
    /s/ Steinar J. Engelsen          Acting Chief Executive Officer March 29, 2000
____________________________________  and a Director
        Steinar J. Engelsen

Principal Financial Officer and
Principal Accounting Officer:

        /s/ Lucy O. Day              Chief Financial Officer,       March 29, 2000
____________________________________  Treasurer and Secretary
            Lucy O. Day

Additional Directors:

                                     Director
____________________________________
           John M. Carney

      /s/ Graham K. Crooke           Director                       March 29, 2000
____________________________________
          Graham K. Crooke

     /s/ Charles R. Engles           Director                       March 29, 2000
____________________________________
         Charles R. Engles

      /s/ Robert A. Floyd            Director                       March 29, 2000
____________________________________
          Robert A. Floyd

       /s/ Selvi Vescovi             Director                       March 29, 2000
____________________________________
           Selvi Vescovi
</TABLE>

                                       48
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                              FINANCIAL STATEMENTS

         Each of the three years in the period ended December 31, 1999

                                    Contents

<TABLE>
<S>                                                                          <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2

Financial Statements

Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Equity (Net Capital Deficiency)................. F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>

                                      F-1
<PAGE>

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

                               ERNST & YOUNG LLP
                             1451 CALIFORNIA AVENUE
                       PALO ALTO, CALIFORNIA U.S.A. 94304

The Board of Directors and Stockholders
Centaur Pharmaceuticals, Inc.

   We have audited the accompanying balance sheets of Centaur Pharmaceuticals,
Inc. as of December 31, 1997, 1998 and 1999, and the related statements of
operations, stockholders' equity (net capital deficiency), and cash flows for
each of the three years in the period ended December 31, 1999. 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 in accordance with generally accepted auditing
standards of the United States of America. Those standards 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Centaur Pharmaceuticals,
Inc. at December 31, 1997, 1998 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999 in conformity with generally accepted accounting principles of the United
States of America.

                                          /s/ Ernst & Young LLP

Palo Alto, California, U.S.A.
February 21, 2000

                                      F-2
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                                 BALANCE SHEETS
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                         December 31,
                                                   ---------------------------
                                                    1997      1998      1999
                                                   -------  --------  --------
<S>                                                <C>      <C>       <C>
Assets
Current assets:
  Cash and cash equivalents......................  $ 1,469  $  5,628  $  5,197
  Short-term investments.........................   12,164    12,906     7,379
  Contract revenue receivable....................       84         7       --
  Prepaid expenses...............................      343       128       457
  Other current assets...........................      329       444       520
                                                   -------  --------  --------
    Total current assets.........................   14,389    19,113    13,553
Long-term investments............................      --      5,579       --
Property and equipment, net......................    9,635    11,665     9,287
Investment in affiliates.........................      --        695       376
Other assets, net of accumulated amortization of
 $47 as of December 31, 1997 and none as of
 December 31, 1998 and 1999......................      219       181       179
                                                   -------  --------  --------
                                                   $24,243  $ 37,233  $ 23,395
                                                   =======  ========  ========
Liabilities and stockholders' equity (net capital
 deficiency)
Current liabilities:
  Accounts payable...............................  $ 1,675  $    568  $    888
  Accrued compensation...........................      169       203       305
  Other accrued liabilities......................    1,062     1,126     1,175
  Short-term portion of obligations under capital
   lease.........................................      183        89       --
  Current portion of long-term debt..............      --      1,967     2,308
                                                   -------  --------  --------
    Total current liabilities....................    3,089     3,953     4,676
Deferred revenue.................................       84     1,500     1,499
Long-term debt...................................      --      5,802     3,470
Commitments and contingencies
Redeemable convertible preferred stock, $0.001
 par value; 10,922,735 shares authorized;
 issuable in series; 10,922,735 shares issued and
 outstanding at December 31, 1997, and none
 outstanding at December 31, 1998 and December
 31, 1999, aggregate redemption value of
 $28,310,242 at December 31, 1997 and none at
 December 31, 1998 and December 31, 1999.........   28,105       --        --
Stockholders' equity (net capital deficiency):
  Preferred stock, $0.001 par value, none
   authorized, issued and outstanding at December
   31, 1997 and 3,000,000 shares authorized, none
   issued and outstanding at December 31, 1998
   and December 31, 1999.........................      --        --        --
  Common stock, $0.001 par value; 18,200,000
   shares authorized; 2,901,336 shares issued and
   outstanding at December 31, 1997, and
   33,000,000 shares authorized, 15,441,663 and
   15,595,831 issued and outstanding at December
   31, 1998 and December 31, 1999, respectively..        3        15        16
  Additional paid-in capital.....................    2,457    47,221    46,527
  Deferred compensation..........................   (1,945)   (2,970)   (1,265)
  Accumulated other comprehensive income (loss)..        1       (52)       (7)
  Accumulated deficit............................   (7,551)  (18,236)  (31,521)
                                                   -------  --------  --------
    Total stockholders' equity (net capital
     deficiency).................................   (7,035)   25,978    13,750
                                                   -------  --------  --------
                                                   $24,243  $ 37,233  $ 23,395
                                                   =======  ========  ========
</TABLE>

                See accompanying notes to financial statements.

                                      F-3
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                            STATEMENTS OF OPERATIONS
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                  Years ended December 31,
                                                  ---------------------------
                                                   1997      1998      1999
                                                  -------  --------  --------
<S>                                               <C>      <C>       <C>
Net revenue from collaborative agreements and
 grants.......................................... $ 9,573  $  6,663  $  7,429
Operating expenses:
  Research and development.......................  15,646    13,629    16,176
  General and administrative.....................   2,266     3,494     4,089
                                                  -------  --------  --------
    Total operating expenses.....................  17,912    17,123    20,265
                                                  -------  --------  --------
Loss from operations.............................  (8,339)  (10,460)  (12,836)
Share of losses in affiliate.....................     --       (305)     (319)
Interest and other income........................   1,145       939       917
Interest and other expense.......................     (38)     (859)   (1,047)
                                                  -------  --------  --------
Net loss......................................... $(7,232) $(10,685) $(13,285)
                                                  =======  ========  ========
Net loss per share, basic and diluted............ $ (2.64) $  (1.90) $  (0.85)
                                                  =======  ========  ========
Shares used in computing net loss per share,
 basic and diluted...............................   2,742     5,614    15,549
                                                  =======  ========  ========
</TABLE>


                See accompanying notes to financial statements.

                                      F-4
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

           STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                  Total
                                                                     Accumulated              Stockholders'
                            Common Stock    Additional                  Other                  Equity (Net
                          -----------------  Paid-In     Deferred   Comprehensive Accumulated    Capital
                            Shares   Amount  Capital   Compensation    Income       Deficit    Deficiency)
                          ---------- ------ ---------- ------------ ------------- ----------- -------------
<S>                       <C>        <C>    <C>        <C>          <C>           <C>         <C>
Balance at December 31,
 1996...................   2,649,303  $ 3    $   114     $   (42)       $ (1)      $   (319)    $   (245)
Unrealized gain on
 available-for-sale
 securities of $1, net
 of reclassification
 adjustment for gains
 included in net loss of
 $1.....................         --   --         --          --            2            --             2
Net loss for the year
 ended December 31,
 1997...................         --   --         --          --          --          (7,232)      (7,232)
                                                                                                --------
Comprehensive loss......         --   --         --          --          --             --        (7,230)
                                                                                                --------
Issuance of common stock
 on exercise of stock
 options by employees,
 former employees and a
 board of directors
 member.................     252,033  --          50         --          --             --            50
Deferred compensation
 related to certain
 options and warrants
 granted to employees
 and consultants........         --   --       2,293      (2,293)        --             --           --
Amortization of deferred
 compensation...........         --   --         --          390         --             --           390
                          ----------  ---    -------     -------        ----       --------     --------
Balance at December 31,
 1997...................   2,901,336    3      2,457      (1,945)          1         (7,551)      (7,035)
Unrealized loss on
 available for sale
 securities of $53, net
 of $0 reclassification
 adjustment for gains
 included in net
 income.................         --   --         --          --          (53)           --           (53)
Net loss for the year
 ended December 31,
 1998...................         --   --         --          --          --         (10,685)     (10,685)
                                                                                                --------
Comprehensive loss......         --   --         --          --          --             --       (10,738)
                                                                                                --------
Conversion of redeemable
 convertible preferred
 stock to common stock
 immediately prior to
 the underwritten
 offering...............  10,922,735   11     28,094         --          --             --        28,105
Sale of common stock,
 net of issuance costs..   1,500,000    1     13,621         --          --             --        13,622
Issuance of common stock
 on exercise of stock
 options................      85,347  --          37         --          --             --            37
Issuance of common stock
 on exercise of
 warrants...............      32,245  --          62         --          --             --            62
Gain on issuance of
 stock by affiliate.....         --   --         739         --          --             --           739
Deferred compensation
 related to certain
 options and warrants
 granted to employees
 and consultants........         --   --       2,211      (2,211)        --             --           --
Amortization of deferred
 compensation...........         --   --         --        1,186         --             --         1,186
                          ----------  ---    -------     -------        ----       --------     --------
Balance at December 31,
 1998...................  15,441,663   15     47,221      (2,970)        (52)       (18,236)      25,978
Unrealized gain on
 available-for-sale
 securities of $45, net
 of reclassification
 adjustment for
 gains/losses included
 in net loss of $0......         --   --         --          --           45            --            45
Net loss for the year
 ended December 31,
 1999...................         --   --         --          --          --         (13,285)     (13,285)
                                                                                                --------
Comprehensive loss......         --   --         --          --          --             --       (13,240)
                                                                                                --------
Issuances of common
 stock on exercise of
 stock options..........     154,168    1        181         --          --             --           182
Adjustment to deferred
 compensation for
 cancellation of
 options................         --   --        (875)        875         --             --           --
Amortization of deferred
 compensation...........         --   --         --          830         --             --           830
                          ----------  ---    -------     -------        ----       --------     --------
Balance at December 31,
 1999...................  15,595,831  $16    $46,527     $(1,265)       $ (7)      $(31,521)    $ 13,750
                          ==========  ===    =======     =======        ====       ========     ========
</TABLE>

                See accompanying notes to financial statements.

                                      F-5
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                            STATEMENTS OF CASH FLOWS
                Increase (decrease) in cash and cash equivalents
                                 (in thousands)

<TABLE>
<CAPTION>
                                                   Years ended December 31,
                                                  ----------------------------
                                                    1997      1998      1999
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Operating activities
Net loss........................................  $ (7,232) $(10,685) $(13,285)
Adjustments to reconcile net loss to net cash
 used in operating activities:
  Depreciation and amortization.................     1,060     1,446     2,940
  Amortization of deferred compensation.........       390     1,186       830
  Share of losses in affiliate..................       --        305       319
  Changes in assets and liabilities:
    Contract revenue receivable, net of
     allowance..................................       892        77         7
    Prepaid expenses and other current assets...      (424)      100      (405)
    Other assets................................      (154)       32         2
    Accounts payable............................     1,300    (1,107)      320
    Accrued compensation........................        70        34       102
    Other accrued liabilities...................      (302)       64        49
    Deferred revenue............................    (1,704)    1,416        (1)
    Long-term liabilities.......................       (69)      --        --
                                                  --------  --------  --------
Net cash used in operating activities...........    (6,173)   (7,132)   (9,122)
                                                  --------  --------  --------
Investing activities
Purchase of property and equipment..............    (7,542)   (3,471)     (562)
Purchase of available-for-sale securities.......   (34,219)  (21,439)   (2,749)
Maturity and sale of available-for-sale
 securities.....................................    27,322    15,065    13,900
Cash contributions to affiliate.................       --       (260)      --
                                                  --------  --------  --------
Net cash (used in) provided by investing
 activities.....................................   (14,439)  (10,105)   10,589
                                                  --------  --------  --------
Financing activities
Proceeds from issuances of common stock.........        50    13,721       182
Net proceeds from issuance of preferred stock...    16,407       --        --
Principal payments on asset financing
 arrangements...................................       (75)      (94)      (89)
Proceeds from debt financing....................       --      9,159       --
Principal repayments on debt financing..........       --     (1,390)   (1,991)
                                                  --------  --------  --------
Net cash provided by (used in) financing
 activities.....................................    16,382    21,396    (1,898)
                                                  --------  --------  --------
Net (decrease) increase in cash and cash
 equivalents....................................    (4,230)    4,159      (431)
Cash and cash equivalents at beginning of
 period.........................................     5,699     1,469     5,628
                                                  --------  --------  --------
Cash and cash equivalents at end of period......  $  1,469  $  5,628  $  5,197
                                                  ========  ========  ========
Supplemental disclosure of cash flow information
  Interest paid.................................  $     38  $    848  $  1,024
                                                  ========  ========  ========
  Income taxes paid (refund)....................  $    515  $   (498) $    --
                                                  ========  ========  ========
</TABLE>

                See accompanying notes to financial statements.

                                      F-6
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                         NOTES TO FINANCIAL STATEMENTS

                               December 31, 1999

1. Summary of Significant Accounting Policies

 Organization and Basis of Presentation

   Centaur Pharmaceuticals, Inc. (the "Company") was incorporated in the State
of Delaware on March 17, 1992. The Company was founded to commercialize
proprietary pharmaceutical technology with broad potential applications in
neurodegenerative diseases and other disorders.

   The financial statements have been prepared in accordance with generally
accepted accounting principles of the United States of America ("U.S.") and are
stated in U.S. dollars ("$").

   The Company's current operating plans anticipates that the Company will
require additional capital to fund its operations and continue its research and
development programs. To date, the Company has financed its operations mainly
with research support funding from its collaboration with AstraZeneca PLC (for
which funding will end in June 2000), proceeds from the sale of its common
stock and long-term debt financing. The Company is currently seeking additional
financing through an offering to sell approximately 1 million shares of its
common stock. This offering is expected to raise net proceeds of approximately
$11 million which would provide the Company with funds for its operations
through at least the end of December 31, 2000. Should the Company fail to close
this financing it will be required to reduce its operations through cut-backs
in its expenditures, including reductions in headcount and also by eliminating
one or more of its non-core research and development programs (see Note 10).

 Use of Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

 Cash and Cash Equivalents

   The Company considers all highly liquid investments with remaining
maturities of three months or less at the date of purchase to be cash
equivalents. Investments with maturities of less than one year from the balance
sheet date and with remaining maturities greater than three months at the date
of purchase are considered short-term investments. At December 31, 1997, 1998
and 1999, cash equivalents consisted of money market accounts. The Company
invests its excess cash balances in marketable securities with maturities of
two years or less. These investments primarily consist of corporate debt
securities.

   Management determines the appropriate classification of debt securities in
accordance with Statement of Financial Accounting Standard No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," at the time of purchase
and reevaluates such designation as of each balance sheet date. In the periods
presented, all investments were classified as available-for-sale securities and
are carried at fair value, with the unrealized gains and losses reported as a
component of accumulated other comprehensive income in stockholders' equity. At
December 31, 1997, 1998 and 1999, the fair value of investments approximates
cost. The amortized cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income or expense and have been immaterial
in all periods presented. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest.

                                      F-7
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                               December 31, 1999


 Concentrations of Credit Risk

   Cash, cash equivalents and available for-sale investments are financial
instruments which potentially subject the Company to concentrations of risk.
Company policy limits, among other things, the amount of credit exposure to any
one issuer and to any one type of investment, other than securities issued or
guaranteed by the U.S. government.

   The net revenue from collaborative agreements and the related contract
revenue receivable at December 31, 1997 and 1998 are earned primarily under two
collaborative arrangements the Company has entered into. One of these
collaborations was terminated in March 1998 and net revenue in 1999 was derived
principally from the collaboration with AstraZeneca PLC (see note 3).

 Revenue Recognition

   Revenue under research collaborations is recorded as earned based on the
performance requirements of the contracts. All payments received under the
collaborations are nonrefundable and no payments are reimbursable if the
research effort is unsuccessful. Signing payments related to precontract
performance by the Company are recognized as revenue when received. Signing and
milestone payments that are not dependent on future performance are recognized
when the funding party agrees the contract requirements have been met. Research
and development support payments are recognized ratably as the work is
performed. Deferred revenue represents amounts received in advance of
recognition.

 Research and Development Costs

   Research and development costs are charged to operations as incurred.

 Stock-Based Compensation

   As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has elected
to continue to account for stock issued or options granted to employees under
its option plans in accordance with the provisions of Accounting Principles
Board No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations. For issuances or grants to all others, stock-based
compensation expense is measured using the fair value method described in SFAS
123 and recorded in the accompanying financial statements. Pro forma
disclosures as required by SFAS 123 are included in Note 9.

 Investment in Affiliates

   Investment in affiliates in which the Company has a 20%-50% ownership
interest and exercises significant influence are accounted for using the equity
method. Gains and losses arising from stock issuances by affiliates are
accounted for as capital transactions and recorded in stockholders' equity.

   At December 31, 1999, the Company had a 48% interest in Cutanix Corporation
("Cutanix").

 Property and Equipment

   Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method over the five year estimated useful lives of the
assets. Equipment held under capital leases is amortized using the straight-
line method over the shorter of the lease term or estimated useful life of the
asset. Leasehold

                                      F-8
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                               December 31, 1999

improvements are amortized using the straight-line method over the estimated
useful lives of the assets or the term of the lease, whichever is shorter.

 Net Loss Per Share

   Basic net loss per share has been calculated using the weighted-average
common shares outstanding during the periods. Diluted loss per share gives
effect to the dilutive effect of common stock equivalents consisting of stock
options and warrants calculated using the treasury stock method. For the
periods presented, diluted loss per share is the same as basic net loss per
share as the Company is in a net loss position.

   The following outstanding options and warrants (prior to the application of
the treasury stock method), and convertible redeemable preferred stock (on an
as converted basis) were excluded from the computation of diluted net loss per
share as they had an anti-dilutive effect (in thousands):

<TABLE>
<CAPTION>
                                                                 Years ended
                                                                 December 31,
                                                              ------------------
                                                               1997  1998  1999
                                                              ------ ----- -----
     <S>                                                      <C>    <C>   <C>
     Options and warrants....................................  1,584 1,736 1,821
     Convertible redeemable preferred stock.................. 10,923   --    --
</TABLE>

 Impairment of Long-Lived Assets

   In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121"), the Company reviews long-
lived assets, including property and equipment, for impairment whenever events
or changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. Under SFAS 121, an impairment loss would
be recognized when estimated undiscounted future cash flows expected to result
from the use of the asset and its eventual disposition is less than its
carrying amount. Impairment, if any, is assessed using discounted cash flows.
Through December 31, 1999, there have been no such losses.

 Comprehensive Income

   As of January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules
for the reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's results
of operations or financial condition. SFAS 130 requires unrealized gains or
losses on the Company's available-for-sale securities to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS 130.

 Segmental Reporting

   Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
The Company has determined that it operates in only one segment. Accordingly,
the adoption of this Statement had no impact on the Company's financial
statements.

                                      F-9
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                               December 31, 1999


 Recent Accounting Pronouncements

   In September 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Financial Instruments and for Hedging Activities" ("SFAS 133") which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. In June 1999, FASB issued Statement of
Financial Accounting Standard No. 137, which defers the effective date of SFAS
133 to years beginning after June 15, 2000. The Company does not expect SFAS
133 to have an impact on the Company's results of operations or financial
condition when adopted.

   In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101") which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective the
first quarter of fiscal years beginning after December 15, 1999, with
implementation provisions delayed until the second quarter of 2000, and
requires companies to report any changes in revenue recognition as a cumulative
change in accounting principle as of the first quarter, at the time of
implementation in accordance with APB Opinion No. 20, "Accounting Changes." The
Company is currently evaluating SAB 101 to determine whether it would have any
material impact on the Company. Should the Company determine that a change in
its accounting policy is necessary, such a change will be made effective
January 1, 2000.

2. Investment in Cutanix

   Cutanix was founded to commercialize novel chemical entities for the
treatment and prevention of dysfunctions and diseases of the skin. Since its
incorporation in 1997, Cutanix's activities have consisted principally of
raising capital, acquiring licensing rights, recruiting personnel and
commencing research and development efforts. In January 1998, the Company
entered into a License Agreement and a Services and Supply Agreement with
Cutanix. The License Agreement provided that Cutanix may obtain the exclusive
rights to use Company compounds, with certain exceptions, by agreeing to take
certain actions to develop the compound for use in the field of dermatology,
cosmetics and other skin care applications. Under the terms of the Service and
Supply Agreement, the Company agrees to provide certain administrative services
to Cutanix at cost and to supply certain compounds at a specified percentage
above costs.

   In October 1998, Cutanix completed a private placement of 399,600 shares of
convertible preferred stock at $5.00 per share, resulting in gross proceeds of
$1,998,000, of which $1,555,000 was received in cash while the remainder was
used to satisfy outstanding obligations. The Company participated in the
private placement through the conversion of amounts due from Cutanix of
approximately $260,000 into 52,000 shares of the preferred stock. The private
placement reduced the Company's interest in Cutanix from 63% to 48% and the
Company recorded the gain from the issue of Cutanix equity securities through
its stockholders' equity.

   The Company's transactions with Cutanix have not been material through
December 31, 1999. During the years ended December 31, 1998 and 1999, the
Company's share of losses in Cutanix were $305,000 and $319,000, respectively.

3. Research and Development Arrangements

   In June 1995, the Company entered into a research and development
collaboration with AstraZeneca PLC ("AstraZeneca") to develop new drugs to
treat Alzheimer's disease, stroke, traumatic brain injury and multi-infarct
dementia. Under the terms of the agreement, AstraZeneca provides funding of up
to $6,000,000 per year for five years for research and development work,
subject to certain limitations and for AstraZeneca to bear the costs of its
development work. In addition, payments are made to the Company based on
achievement of certain drug development milestones. In return, AstraZeneca was
granted exclusive worldwide marketing rights

                                      F-10
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                               December 31, 1999

to any products resulting from this collaboration. The agreement also provides
for the Company to receive a royalty on sales under the collaboration. During
the years ended December 31, 1997, 1998 and 1999, the Company recognized net
revenue of $7,113,000, $6,439,000 and $6,157,000, respectively, in connection
with this collaboration. Costs associated with this contract, including
allocated general and administrative costs, approximate the revenue recorded
(exclusive of signing and milestone fees). This agreement expires on the later
of 15 years after the first commercial sale of a licensed product or the
expiration of applicable patents. The $6 million annual research funding is due
to expire in June 2000. AstraZeneca has the right to terminate all or certain
portions of this agreement upon 12 month's notice. AstraZeneca can also
terminate the research funding and manufacturing rights if more than 30% of the
Company's voting capital stock is acquired by a company engaged in the
manufacture and/or sale of pharmaceutical products.

   In October 1996, the Company entered into a four-year research and
development collaboration with H. Lundbeck A/S ("Lundbeck") to jointly
commercialize the Company's proprietary drug compound for Parkinson's disease.
This collaboration was terminated in March 1998. Under the terms of this
agreement, Lundbeck jointly funded research, development, regulatory, and other
nonresearch activities with the Company. In addition, nonrefundable payments
were made to the Company based on achievement of certain drug development
milestones. During the year ended December 31, 1997, the Company recognized net
revenue of $2,090,000 (none in the years ended December 31, 1998 and 1999), in
connection with this collaboration. Costs associated with this contract
including allocated general and administrative costs approximate the revenue
recorded (exclusive of signing and milestone fees). In July 1998, the Company
and Lundbeck entered into an agreement releasing each party from any further
obligations or claims under the research and development collaboration and
providing the Company with an option to use certain production processes and
other intellectual property of Lundbeck in exchange for certain limited royalty
payments in the event Centaur exercises such option.

   During the years ended December 31, 1997, 1998 and 1999, the Company was
awarded several National Institutes of Health grants to further its research
efforts related to its proprietary technology. During the years ended December
31, 1997, 1998 and 1999, the Company recognized $364,000, $217,000 and
$1,268,000, respectively, as revenue for work completed under these grants.
Costs associated with these grants approximate the revenues recorded.

   Contract revenue receivable is net of allowances for doubtful accounts of
$1,600,000 at December 31, 1997 (none at December 31, 1998 and 1999).

4. Investments

   The following is a summary of available-for-sale securities at December 31,
1997, 1998 and 1999 (in thousands):

<TABLE>
<CAPTION>
                                                  Gross      Gross    Estimated
                                                Unrealized Unrealized   Fair
                                         Cost     Losses     Gains      Value
                                        ------- ---------- ---------- ---------
   <S>                                  <C>     <C>        <C>        <C>
   U.S. corporate securities........... $11,163    $ (2)      $  3     $11,164
   U.S. government securities..........   1,000     --         --        1,000
                                        -------    ----       ----     -------
   Total as of December 31, 1997....... $12,163    $ (2)      $  3     $12,164
                                        =======    ====       ====     =======
   U.S. corporate securities........... $18,537    $(56)      $  4     $18,485
                                        -------    ----       ----     -------
   Total as of December 31, 1998....... $18,537    $(56)      $  4     $18,485
                                        =======    ====       ====     =======
   U.S. corporate securities........... $ 7,386    $ (7)      $  0     $ 7,379
                                        -------    ----       ----     -------
   Total as of December 31, 1999....... $ 7,386    $ (7)      $  0     $ 7,379
                                        =======    ====       ====     =======
</TABLE>

                                      F-11
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                               December 31, 1999


   All of the above securities are included in the balance sheet as short-term
investments at December 31, 1997 and 1999. At December 31, 1998, $12,906,000 of
the above securities were classified as short-term investments, and the balance
of $5,579,000 was classified as long-term investments.

   There were no material gross realized gains or losses in 1997, 1998 and
1999.

   As of December 31, 1999, the average remaining maturity of the portfolio was
approximately 2 months, and the longest individual contractual maturity was 4
months.

5. Property and Equipment

   Property and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                          December 31,
                                                     -------------------------
                                                      1997     1998     1999
                                                     -------  -------  -------
   <S>                                               <C>      <C>      <C>
   Laboratory and office equipment.................. $ 4,430  $ 6,506  $ 6,555
   Leasehold improvements...........................   1,065    8,802    8,847
   Construction in-process..........................   6,342      --       --
                                                     -------  -------  -------
                                                      11,837   15,308   15,402
   Less accumulated depreciation and amortization...  (2,202)  (3,643)  (6,115)
                                                     -------  -------  -------
   Property and equipment, net...................... $ 9,635  $11,665  $ 9,287
                                                     =======  =======  =======
</TABLE>

   As of December 31, 1997 and 1998, laboratory and office equipment held under
capital leases totaled $593,000, with related accumulated amortization of
$512,000 and $593,000, respectively. As of December 31, 1999 there was no
laboratory and office equipment held under capital leases.

6. Other Accrued Liabilities

   Other accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                December 31,
                                                            --------------------
                                                             1997   1998   1999
                                                            ------ ------ ------
   <S>                                                      <C>    <C>    <C>
   Clinical trials......................................... $  250 $  450 $  550
   Patent accruals.........................................    289    150    100
   Professional fees.......................................    340    300    350
   Other...................................................    183    226    175
                                                            ------ ------ ------
                                                            $1,062 $1,126 $1,175
                                                            ====== ====== ======
</TABLE>

7. Commitments

   In September 1994, the Company entered into a $750,000 capital lease
agreement. As of December 31, 1997, 1998, and 1999, lease obligations under
this agreement totaled $183,000, $89,000 and none, respectively. The lease
obligations bore interest at 15.2%, were secured by the related equipment and
the final installment of $89,000 was paid in January 1999.

                                      F-12
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

                               December 31, 1999


   The Company leases certain research and manufacturing facilities under
operating leases that expire in 2001 and 2004. Future minimum lease payments
under such noncancelable operating leases are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                       Operating
                                                                        Leases
                                                                       ---------
   <S>                                                                 <C>
   Year ended December 31,
   2000...............................................................  $  892
   2001...............................................................     541
   2002...............................................................     437
   2003...............................................................     459
   2004...............................................................     156
   Thereafter.........................................................       0
                                                                        ------
     Total minimum payment required...................................  $2,485
                                                                        ======
</TABLE>

   Rent expense was approximately $640,000, $844,000 and $816,000 in 1997,
1998 and 1999, respectively.

   In connection with the Company's research and development activities,
primarily clinical studies and sponsored research and development agreements,
the Company has total noncancelable commitments of approximately $1,148,000 at
December 31, 1999 payable over the next 12 months.

8. Debt Financing

   In March 1998, the Company entered into a debt financing arrangement for up
to $10,000,000. At December 31, 1998 and 1999, the total obligation due under
this arrangement was $7,769,000 and $5,778,000, respectively. The debt bears
interest at 14.8% per annum and is secured by certain equipment and leasehold
rights and improvements. The debt is repayable in 48 monthly installments
through 2002. The annual maturities at December 31, 1999 were $2,308,000 in
2000, $2,675,000 in 2001 and $795,000 in 2002.

9. Common Stock and Stockholders' Equity

 Redeemable Convertible Preferred Stock

   Through December 31, 1997, the Company had sold a total of 10,922,735
shares of Series A, B, C and D redeemable convertible preferred stock
("preferred stock") for total net proceeds of $28,105,000.

   The authorized and outstanding shares of Series A, B, C and D preferred
stock were as follows at December 31, 1997:

<TABLE>
<CAPTION>
                                                                      Aggregate
                                              Authorized   Shares    Redemption
                                                Shares   Outstanding    Value
                                              ---------- ----------- -----------
   <S>                                        <C>        <C>         <C>
   Series A..................................  2,000,000  2,000,000  $ 1,000,000
   Series B..................................  2,545,454  2,545,454    3,500,000
   Series C..................................  4,177,281  4,177,281    7,310,242
   Series D..................................  2,200,000  2,200,000   16,500,000
                                              ---------- ----------  -----------
                                              10,922,735 10,922,735  $28,310,242
                                              ========== ==========  ===========
</TABLE>

   On October 13, 1998, the Company closed an underwritten offering of
1,500,000 shares of its common stock at a price of $11.00 per share. The net
proceeds to the Company after deduction of underwriting

                                     F-13
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                               December 31, 1999

discounts and commissions and offering expenses was approximately $13.6
million. In connection with such offering all 10,992,735 outstanding shares of
the Company's preferred stock were converted into shares of common stock on a
one-to-one basis.

 1993 Equity Incentive Stock Option Plan ("1993 Stock Plan")

   The 1993 Stock Plan was in effect from the Company's inception to October
1998, whereby the 1998 Stock Plan became effective. Under the 1993 Stock Plan,
options, restricted stock, or stock bonuses may be granted by a committee of
the board of directors to employees, officers, directors, consultants, and
independent contractors. Options granted may be either incentive stock options
or nonstatutory stock options. Incentive stock options may be granted to
employees at exercise prices of no less than the fair market value and
nonstatutory options may be granted to employees or consultants at exercise
prices of no less than 85% of the fair market value of the common stock on the
grant date as determined by the board of directors. Options become exercisable
as determined by the board of directors (or a committee of the board of
directors), generally monthly over four years. Restricted stock awards shall be
subject to restrictions as determined by a committee of the board of directors.
Stock bonuses are awarded by a committee of the board of directors for services
rendered to the Company. A total of 1,525,844 common shares were reserved for
issuance under the 1993 Stock Plan at December 31, 1999. At October 13, 1998,
the 1993 Stock Plan was succeeded by the 1998 Stock Plan, and 136,118 remaining
available shares were rolled over into the 1998 Stock Plan for future option
grants.

 1998 Equity Incentive Plan ("1998 Stock Plan")

   The 1998 Stock Plan became effective in October 1998. Under the 1998 Stock
Plan, options, restricted stock, or stock bonuses may be granted by a committee
of the board of directors to employees, officers, employees, consultants, and
independent contractors. Options granted may be either incentive stock options
or nonstatutory stock options. Incentive stock options may be granted to
employees at exercise prices of no less than the fair market value and
nonstatutory options may be granted to employees or consultants at exercise
prices of no less than 85% of the fair market value of the common stock on the
grant date as determined by the board of directors. Options become exercisable
as determined by the board of directors (or a committee of the board of
directors), generally monthly over four years. Restricted stock awards shall be
subject to restrictions as determined by a committee of the board of directors.
Stock bonuses are awarded by a committee of the board of directors for services
rendered to the Company. A total of 1,136,035 common shares were reserved for
issuance under the 1998 Stock Plan at December 31, 1999, of which 926,935
remained available for future option grants.

 1998 Director's Stock Option Plan ("Director's Plan")

   The Directors Plan became effective on October 13, 1998 (the "Effective
Date"). Under the Directors Plan, only nonqualified stock option will be
granted to each outside board of director member. Each outside director who
first becomes a member of the board after the Effective Date will automatically
be granted an option for a number of shares equal to 417 shares multiplied by
the number of full and partial calendar months between (a) the date such
outside director becomes a member of the board and (b) the next succeeding May
1. On May 1 of each year following the Effective Date, each outside director
will automatically be granted an option for 5,000 shares, provided the outside
director is a member of the Board on such date and has served continuously as a
member of the board since the date of such outside director's initial grant or,
if such outside director was ineligible to receive an initial grant, since the
Effective Date. Each option granted under the Directors Plan is exercisable as
it vests over a period of ten years. The options vest generally monthly over
three years. A total of 125,000 common shares were reserved for issuance under
the Directors Plan at December 31, 1999, of which 83,889 remained available for
future option grants.

                                      F-14
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                               December 31, 1999


   A summary of the activities under the Company's stock option plans is as
follows:

<TABLE>
<CAPTION>
                                                                       Weighted-
                                    Shares                              Average
                                   Available    Options      Price     Exercise
                                   for Grant  Outstanding  Per Share     Price
                                   ---------  ----------- ------------ ---------
<S>                                <C>        <C>         <C>          <C>
Balance at December 31, 1995......   701,231   1,295,666  $0.15-$ 0.20  $ 0.17
  Additional shares authorized....   250,000         --            --      --
  Options granted.................  (334,610)    334,610  $0.30-$ 2.00  $ 0.47
  Options exercised...............       --     (243,470) $0.10-$ 1.00  $ 0.15
  Options canceled................    46,710     (46,710) $0.15-$ 2.00  $ 0.35
                                   ---------   ---------
Balance at December 31, 1996......   663,331   1,340,096  $0.10-$ 2.00  $ 0.24
  Options granted.................  (530,000)    530,000  $2.50-$ 3.00  $ 2.55
  Options exercised...............       --     (252,033) $0.15-$ 2.50  $ 0.20
  Options canceled................    87,626     (87,626) $0.15-$ 2.50  $ 0.73
                                   ---------   ---------
Balance at December 31, 1997......   220,957   1,530,437  $0.15-$ 3.00  $ 1.00
  Additional shares authorized.... 1,275,000         --            --      --
  Options granted.................  (363,919)    363,919  $4.00-$11.00  $ 5.32
  Options exercised...............       --      (85,347) $0.10-$ 4.00  $ 0.44
  Options canceled................   107,780    (107,780) $0.10-$ 4.00  $ 2.43
                                   ---------   ---------
Balance at December 31, 1998...... 1,239,818   1,701,229  $0.10-$11.00  $ 1.88
  Options granted.................  (358,901)    358,901        $11.00  $11.00
  Options exercised...............       --     (154,168) $0.15-$11.00  $ 1.18
  Options canceled................   129,907    (129,907) $0.30-$11.00  $ 4.19
                                   ---------   ---------
Balance at December 31, 1999...... 1,010,824   1,776,055  $0.10-$11.00  $ 3.61
                                   =========   =========
</TABLE>

   The weighted-average fair value per share of the options granted during the
years ended December 31, 1997, 1998 and 1999 were $1.46, $1.19 and $2.46,
respectively.

                                      F-15
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

                               December 31, 1999


   Exercise prices of options outstanding and options exercisable were as
follows:

<TABLE>
<CAPTION>
                                   Options Outstanding       Options Exercisable
                             ------------------------------- -------------------
                                        Weighted-  Weighted-           Weighted-
                                         Average    Average             Average
                                        Remaining  Exercise            Exercise
                             Number of Contractual   Price   Number of   Price
                              Options     Life     Per Share  Options  Per Share
                             --------- ----------- --------- --------- ---------
<S>                          <C>       <C>         <C>       <C>       <C>
December 31, 1998
  $0.10-$ 0.50..............   894,190    5.88      $ 0.22     808,288  $ 0.20
  $1.00-$ 2.50..............   428,494    8.31      $ 2.45     188,144  $ 2.43
  $3.00-$ 4.00..............   273,245    9.09      $ 3.84      71,764  $ 3.78
  $6.50-$11.00..............   105,300    9.54      $ 8.56      12,207  $ 7.62
                             ---------                       ---------
                             1,701,229    7.24      $ 1.88   1,080,403  $ 0.91
                             =========                       =========
December 31, 1999
  $0.10-$ 0.50..............   798,274    4.90      $ 0.22     793,086  $ 0.22
  $1.00-$ 2.50..............   290,108    7.13      $ 2.42     210,522  $ 2.41
  $3.00-$ 4.00..............   250,065    8.09      $ 3.84     124,997  $ 3.81
  $6.50-$11.00..............   437,608    9.12      $10.46     100,834  $10.01
                             ---------                       ---------
                             1,776,055    6.75      $ 3.61   1,229,439  $ 1.76
                             =========                       =========
</TABLE>

   At December 31, 1997, 792,232 options were exercisable with a weighted-
average exercise price of $0.40.

   Pro forma information regarding net income (loss) is required by SFAS 123,
which also requires that the pro forma information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1996 under the fair value method of that Statement. The fair
value of these options in 1997 was estimated at the date of grant using the
minimum value method option pricing model with the following weighted-average
assumptions: risk-free interest rate of 5.2%; a dividend yield of 0%; and a
weighted-average expected life of the option of five years. The value of
options granted after the underwritten offering and registration was
determined using the Black-Scholes method and the following weighted-average
assumptions were used in 1998 and 1999: volatility factor of 0.01; risk-free
interest rate of 5.2%; a dividend yield of 0%; and a weighted-average expected
life of the option of five years.

                                     F-16
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                               December 31, 1999


   Had the Company valued its stock options according to the fair value
provisions of SFAS 123, pro forma net loss and pro forma net loss per share
would have been as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                   Years ended December 31,
                                                   ---------------------------
                                                    1997      1998      1999
                                                   -------  --------  --------
     <S>                                           <C>      <C>       <C>
     Net loss:
       As reported................................ $(7,232) $(10,685) $(13,285)
                                                   =======  ========  ========
       Pro forma for SFAS 123..................... $(7,379) $(10,843) $(13,623)
                                                   =======  ========  ========
     Basic net loss per share:
       As reported................................ $ (2.64) $  (1.90) $  (0.85)
                                                   =======  ========  ========
       Pro forma for SFAS 123..................... $ (2.69) $  (1.93) $  (0.88)
                                                   =======  ========  ========
     Diluted net loss per share:
       As reported................................ $ (2.64) $  (1.90) $  (0.85)
                                                   =======  ========  ========
       Pro forma for SFAS 123..................... $ (2.69) $  (1.93) $  (0.88)
                                                   =======  ========  ========
</TABLE>

   The pro forma effects disclosed above are not necessarily indicative of
potential pro forma effects on results for future years.

 1998 Employee Stock Purchase Plan

   The 1998 Employee Stock Purchase Plan permits eligible employees to purchase
common stock through payroll deductions at a price equal to 85% of the fair
value of the Company's common stock at the beginning and end of the applicable
offering period. A total of 125,000 shares of common stock were reserved for
issuance under this plan.

 Deferred Compensation

   During the year ended December 31, 1997 and 1998, the Company recorded
deferred compensation of $2,293,000 and $2,211,000, respectively for the excess
of the deemed fair value of the Company's common stock over the exercise price
for certain options and warrants granted in 1997 and 1998. This deferred
compensation will be amortized to compensation expense over the related vesting
period, generally four years.

 Warrants

   The Company has issued warrants to consultants to purchase shares of the
Company's common stock. At December 31, 1999, the following warrants were
unexercised:

<TABLE>
<CAPTION>
                          Number   Exercise
       Issue Date        of Shares  Price              Vesting Term              Expiration
       ----------        --------- --------            ------------              ----------
<S>                      <C>       <C>      <C>                                <C>
August 1996.............  10,000    $ 3.00  3 years                               August 2001
September 1997..........  10,000    $ 3.00  3 years                            September 2002
February 1998...........   5,000    $ 4.00  3 years                             February 2003
February 1998...........  10,000    $ 4.00  5,000 upon completion of            February 2001
                                            the sale of 1,500,000 shares
                                            of common stock in October
                                            1998; remaining 5,000 over 3 years
February 1999...........  10,000    $11.00  3 years                             February 2004
</TABLE>

                                      F-17
<PAGE>

                         CENTAUR PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                               December 31, 1999


 Reserved Shares

   The Company has reserved shares of common stock as of December 31, 1999 for
future issuance as follows:

<TABLE>
     <S>                                                               <C>
     Warrants.........................................................    45,000
     Stock Option Plans............................................... 2,786,879
     Stock Purchase Plan..............................................   125,000
                                                                       ---------
                                                                       2,956,879
                                                                       =========
</TABLE>

10. Income Taxes

   As of December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $26,600,000. The Company also had federal
research and development tax credit carryforwards of approximately $1,100,000.
The federal net operating loss and credit carryforwards will expire on various
dates beginning in 2012 through 2019, if not utilized.

   Utilization of the net operating losses and credit carryforwards may be
subject to substantial annual limitation due to ownership change provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.

   Significant components of the Company's deferred tax assets are as follows
(in thousands):

<TABLE>
<CAPTION>
                                                          December 31,
                                                    --------------------------
                                                     1997     1998      1999
                                                    -------  -------  --------
     <S>                                            <C>      <C>      <C>
     Net operating loss carryforwards.............. $ 1,400  $ 5,800  $  9,300
     Research credit carryforwards.................     100      400     1,600
     Capitalized research and development..........     200      200     1,400
     Other accruals and reserves...................     400      200       800
                                                    -------  -------  --------
     Total deferred tax assets.....................   2,100    6,600    13,100
     Valuation allowance for deferred tax assets...  (2,100)  (6,600)  (13,100)
                                                    -------  -------  --------
     Net deferred tax assets....................... $   --   $   --   $    --
                                                    =======  =======  ========
</TABLE>

   The valuation reserve increased by $1,400,000, $4,500,000 and $6,500,000
during the years ended December 31, 1997, 1998 and 1999, respectively.
Approximately $200,000 of the valuation allowance for deferred tax assets
relates to benefits of stock option deductions which, when recognized, will be
allocated directly to contributed capital.

11. Subsequent Events (unaudited)

   Effective December 31, 1999, Brian D. Frenzel resigned as the Company's
President, Chief Executive Officer and Director. He will continue to serve in a
part-time capacity through the end of 2000 following which he will act as a
consultant to the Company. The Company and Mr. Frenzel are currently
negotiating the terms of the contract that will govern the new relationship.
Two of the Company's directors will serve as acting Chief Executive Officer and
acting Chief Operating Officer until a permanent replacement for Mr. Frenzel is
found.

   On March 10, 2000, the Company closed an underwritten offering of 1,904,169
shares of its Common Stock at a price of $11.50 per share. The net proceeds to
the Company after deduction of underwriting discounts and commissions and
offering expenses was approximately $20.1 million.

                                      F-18