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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

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

                  For the fiscal year ended December 31, 2001

                                      OR

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

            For the transition period from __________to __________

                       Commission file number 000-30992

                      3-DIMENSIONAL PHARMACEUTICALS, INC.
            (Exact name of registrant as specified in its charter)

               Delaware                              23-2716487
       (State of incorporation)         (I.R.S. Employer Identification No.)


Three Lower Makefield Corporate Center, Suite 300, 1020 Stony Hill Road,
Yardley, PA 19067
               (Address of principal offices including zip code)

                                (267) 757-7200
              (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 to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]

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

   As of February 11, 2002, the aggregate market value of the Common Stock
held by non-affiliates of the registrant was $111,835,628. Such aggregate
market value was computed by reference to the closing sale price of the Common
Stock as reported on the Nasdaq National Market on such date.

  As of February 11, 2002, there were 22,494,902 shares of the registrant's
Common Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

  Portions of the definitive Proxy Statement for the Registrant's 2002 Annual
Meeting of Stockholders to be held on May 17, 2002, to be filed within 120
days after the end of the fiscal year covered by this Annual Report on Form
10-K, are incorporated by reference into Part III of this Report and certain
exhibits are incorporated by reference into Part IV of this Report.

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                               TABLE OF CONTENTS

                                     PART I
<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
 <C>      <S>                                                             <C>
 Item 1.  Business......................................................     1
 Executive Officers of the Registrant....................................   19
 Item 2.  Properties....................................................    21
 Item 3.  Legal Proceedings.............................................    21
 Item 4.  Submission of Matters to a Vote of Security Holders...........    21

                                    PART II
          Market for the Registrant's Common Equity and Related
 Item 5.     Stockholder Matters........................................    21
 Item 6.  Selected Financial Data.......................................    22
          Management's Discussion and Analysis of Financial Condition
 Item 7.     and Results of Operations..................................    23
 Factors Affecting the Company's Prospects...............................   27
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....    38
 Item 8.  Financial Statements and Supplementary Data...................  F-1
          Changes in and Disagreements with Accountants on Accounting
 Item 9.     and Financial Disclosure...................................  F-22

                                   PART III
 Item 10. Directors of the Registrant...................................  F-22
 Item 11. Executive Compensation........................................  F-22
          Security Ownership of Certain Beneficial Owners and
 Item 12.    Management.................................................  F-22
 Item 13. Certain Relationships and Related Transactions................  F-22

                                    PART IV
          Exhibits, Financial Statement Schedules, and Reports on Form
 Item 14.    8-K........................................................  F-23
</TABLE>
<PAGE>

This report includes "forward-looking statements" within the meaning of the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include, but are not limited to,
statements about our plans, objectives, representations and contentions and
are not historical facts and typically are identified by use of terms such as
"may," "will," "should," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential," "continue" and similar words, although
some forward-looking statements are expressed differently. You should be aware
that the forward-looking statements included herein represent management's
current judgment and expectations, but our actual results, events and
performance could differ materially from those in the forward-looking
statements. The forward-looking statements are subject to a number of risks
and uncertainties which are discussed in the section entitled "Factors
Affecting the Company's Prospects." We do not intend to update any of these
factors or to publicly announce the results of any revisions to these forward-
looking statements.

                                    PART I

Item 1. Business

Overview

   We are a small molecule drug discovery and development business that has a
pipeline of drug candidates in the areas of cancer, inflammation, and
metabolic and cardiovascular diseases. Until recently when we in-licensed a
compound, all of the drug candidates in our pipeline were discovered using all
or a major portion of our integrated set of proprietary technologies called
DiscoverWorks.(R) We believe DiscoverWorks increases the productivity of the
drug discovery process by making it faster than traditional drug discovery
methods and by providing our scientists with the ability to design
characteristics into drug candidates that increase the probability of
development success. DiscoverWorks may also enable us to discover drugs that
act on many of the thousands of new drug targets revealed from sequencing the
human genome. We use DiscoverWorks to discover and develop drugs for our own
pipeline and in collaboration with pharmaceutical and biotechnology companies.
The drug discovery process is discussed below in "--Industry Background."

   Our objective is to be an industry leader in the discovery and development
of new drug candidates. The main elements of our strategy are to:

  .  Expand and advance our pipeline of drug candidates: We plan to continue
     to expand and advance our pipeline. Our most advanced program, partnered
     with Centocor, Inc., a Johnson & Johnson subsidiary, has been designed
     to inhibit the formation of blood clots and a Phase 1 clinical program
     was initiated. Our next most advanced program is our pre-IND (pre-
     Investigational New Drug Application) thrombopoietin (TPO) mimetic drug
     candidate for treating people with low blood platelet counts, which is
     expected to begin human clinical trials in early 2003. In addition, we
     have three other pre-clinical programs that could advance drug
     candidates to human trials within the next 24 months. We may also
     continue to acquire targets and drug candidates for our pipeline from
     other pharmaceutical and biotechnology companies.

  .  Pursue additional DiscoverWorks agreements: We intend to continue to
     enter into collaborative drug discovery and development agreements
     relating to the use of DiscoverWorks with pharmaceutical and
     biotechnology companies. We currently have research and development
     collaborations with several major pharmaceutical companies including
     Bristol-Myers Squibb Company and Johnson & Johnson. Our new and ongoing
     research and development collaborations generated $28 million in revenue
     during 2001.

  .  Maintain and improve DiscoverWorks: We intend to continue to pursue
     technological and process innovation that allows us to continue to
     improve drug discovery and development productivity by improving success
     rates and speed. To date, we have invented the key proprietary
     DiscoverWorks technologies. We intend to continue to patent or otherwise
     protect our technological innovations to maintain our intellectual
     property position.

  .  Create a world-class scientific research environment:  The growth and
     success of our business depends on the talents of our employees. We are
     committed to providing our employees with a culture
<PAGE>

     that emphasizes quality science, innovation, team work and empowerment.
     We are dedicated to continuous process improvement, implementation of
     new technologies, shared learning among our scientists, and innovative
     organizational design.

Our Drug Candidate Programs

   With the exception of our in-licensed TPO mimetic compound, all of our
programs are developing small molecule drug candidates that have been
discovered and are being optimized by our scientists using DiscoverWorks. Our
more advanced programs are described in the table below.

<TABLE>
<CAPTION>
                      Therapeutic
 Molecular Target        Area               Indication                    Development Status
 ----------------     -----------           ----------                    ------------------

 <S>                <C>             <C>                         <C>
     Thrombin       Cardiovascular          Thrombosis                Phase 1 program commenced
                                                                     Ongoing pre-clinical studies
                                                                     (Licensed to Centocor, Inc.
                                                                          /Johnson & Johnson)

    TPO mimetic         Cancer           Thrombocytopenia                      Pre-IND
     3DP-3534       Supportive care

  alphavbeta/3//
  alphavbeta/5/      Cancer             Solid Tumors                       Pre-clinical
                    Bone Disorders     Rheumatoid arthritis
                    Cardiovascular     Diabetic retinopathy
                                       Macular degeneration
                                            Restenosis
                                           Osteoporosis

     Urokinase          Cancer             Solid Tumors                      Pre-clinical
                    Cardiovascular  Restenosis, Atherosclerosis (Licensed to Berlex Laboratories, Inc.
                                                                        /Schering AG, Germany)

        C1s          Inflammation   Lupus, Autoimmune Diseases               Pre-clinical
                    Cardiovascular        Bypass Surgery                  (In collaboration
                       Pulmonary    Adult Respiratory Distress   with BioCryst Pharmaceuticals, Inc.)
                                          Syndrome (ARDS)

  Hdm2(mdm2)/p53        Cancer      Adjunct to Chemotherapy and           Lead Optimization
    interaction     Cardiovascular           Radiation
</TABLE>

   Oral Thrombin Inhibitors: Our most advanced cardiovascular drug discovery
program focuses on the development of potent, selective, and orally active
(orally administered) inhibitors of thrombin for arterial and venous
thrombosis. This program is being conducted under an agreement that we entered
into in December 2000 with Centocor, Inc., or Centocor, a subsidiary of
Johnson & Johnson, under which Centocor acquired worldwide rights to our
orally active direct thrombin inhibitor program. We are developing several
compounds under this program. During 2001, the agreement with Centocor was
amended to include compounds active against additional protease targets that
affect coagulation. Centocor is responsible for development and worldwide
commercialization of all compounds under the agreement. For the deep vein
thrombosis indication, however, we have an option to co-develop and co-promote
with Centocor in the United States. Under the agreement, we received an up-
front cash payment of $6 million from Centocor and in October of 2001 we
received a $4 million milestone payment. We could also receive additional
milestone payments of up to $38 million based on the achievement of certain
milestones for the first compound developed and approved under the agreement.
As of December 31, 2001, we have also received research funding aggregating
approximately $0.8 million, and the contract provides that we will receive
committed additional funding of approximately $0.8 million over the initial
two-year term of the research program. In addition, we are entitled to receive
royalties on sales of any products marketed under the agreement.

                                       2
<PAGE>

   The only oral anticoagulant currently marketed is warfarin (Coumadin(R) and
generic versions). We have designed our compounds to work by a different
mechanism of action from warfarin, which we believe will provide an enhanced
safety profile without the need for monitoring.

   Our thrombin inhibitors were discovered through the close integration of
structure-based drug design (the science of creating drug molecules from
knowledge of the structural features of the site on the target protein at
which drugs bind) and DirectedDiversity combinatorial chemistry. They
represent a new class of thrombin inhibitors that potently and reversibly
inhibit thrombin with excellent specificity and are orally active and
efficacious in several animal models. We filed an Investigational New Drug
Application (IND) with the FDA for 3DP-4815 in December 1999 and initiated
Phase 1 clinical trials in January 2000. In the Phase 1 clinical trials, 3DP-
4815 exhibited good safety, surrogate efficacy and tolerability
characteristics, and we are continuing additional pre-clinical studies to
characterize its pharmacological profile. We are also developing alternative
compounds from chemistry series different than 3DP-4815 to expand the spectrum
of compound pharmacological properties suitable for full development as oral
thrombin inhibitors.

   TPO Mimetic Program: In January of 2002, we acquired worldwide rights to a
pre-IND compound, 3DP-3534, from GlaxoSmithKline plc, or GSK, for the
prevention and treatment of thrombocytopenia, or low blood platelet count. We
believe this compound fits well with our strategic effort in oncology. All
payments that we will make to GSK will be in shares of our stock. We made an
initial payment of 0.5 million shares and will issue up to 1.9 million
additional shares if the compound achieves certain key development and
regulatory milestone events. We expect to recognize a non-cash in-process
research and development charge in the first quarter of 2002 of $4.1 million
for the 0.5 million shares paid to GSK.

   3DP-3534 is a pegylated synthetic TPO mimetic peptide that binds
specifically to the thrombopoietin receptor. In in-vivo (evaluation in living
organisms) studies, 3DP-3534 has been shown to increase the production of
blood platelets, which regulate the clotting process. Our current development
focus is on chemotherapy-induced thrombocytopenia. About one-third of the two
million platelet transfusions administered each year in the United States are
given to cancer patients, while the remainder are given to patients with a
variety of conditions including coronary bypass and hepatic surgery, HIV/AIDS,
hepatitis B and C, and idiopathic thrombocytopenia purpura. We are also
evaluating clinical development plans in these other conditions where people
are given platelet transfusions.

   Antagonists of alpha/v/beta/3/ and alpha/v/beta/5/ Integrins: The integrin
adhesion proteins alpha/v/beta/3/ and alpha/v/beta/5/ are essential mediators of
the adhesion of cells in tumor angiogenesis (the process by which tumors develop
blood vessels), atherosclerosis, restenosis and osteoporosis. We have applied
DiscoverWorks to the discovery of potent and selective small molecule
antagonists of alpha/v/beta/3/ and alpha/v/beta/5/ and discovered several
independent lead series of compounds. Our research has focused on finding
selective antagonists which are equipotent at alpha/v/beta/3/ and
alpha/v/beta/5/ integrins, thereby inhibiting cell adhesion or attachment as
well as the migration of endothelial cells to form blood vessels in tumors. Our
lead compounds have been shown to inhibit cellular processes that require
functioning of alpha/v/beta/3/ and alpha/v/beta/5/ integrins. They are not
cytotoxic and are being evaluated in several different in-vivo models for
efficacy and pharmacokinetics.

   Urokinase Inhibitor Program: Our urokinase inhibitor program targets the
inhibition of urokinase plasminogen activator (uPA or Urokinase). An inhibitor
of uPA provides a new therapeutic approach to cancer treatment by inhibiting
angiogenesis and metastasis. In addition, uPA has been identified as a target
for restenosis, aneurysm, and atherosclerosis. Our lead compounds are potent
and selective uPA inhibitors and have been shown to inhibit tumor cell
invasion and migration of blood vessel muscle cells, and are orally active.

   During May 2000, we entered into a license and research agreement with
Schering AG, Germany in which Schering AG obtained, for human therapeutic
uses, exclusive worldwide rights to our urokinase inhibitor compounds. Under
our agreement, we are responsible for further research and optimization of the
compounds and Schering AG is responsible for development, marketing, and sales
of the resulting products. As of December 31, 2001, we have received research
funding aggregating approximately $4.1 million, and the contract provides that
we will receive committed additional funding of approximately $0.9 million
over the initial two-

                                       3
<PAGE>

year term of the research program. The contract provides that we could also
receive milestone payments of up to approximately $23 million for the first
product developed in a therapeutic area, and further milestones for additional
therapeutic areas. After the initial research term, Schering AG, may terminate
the agreement at any time on 90 days' notice. In connection with the
agreement, we issued shares of our preferred stock to an affiliate of Schering
AG for $5 million. These shares automatically converted into 223,214 shares of
common stock upon the closing of our initial public offering.

   C1s Program: C1s is a serine protease that plays an important role in
regulating the complement pathway, the pathway by which plasma proteins work
to eliminate microorganisms and other antigens from tissues and blood. When
the complement pathway is inappropriately activated or regulated, it may play
a key role in several inflammation and autoimmune disorders including lupus,
rheumatoid arthritis, and acute respiratory distress syndrome. We have
discovered potent and selective leads that are currently being optimized
further in in-vivo studies.

   During October 1996, we entered into a research collaboration with BioCryst
Pharmaceuticals, Inc. to share resources and technology to develop inhibitors
of key serine protease enzymes, including C1s, that represent promising
targets for inhibiting the activation of complement. During June 1999, we
updated and renewed our original agreement to concentrate on selected
complement enzymes as targets for the design of inhibitors. Under our
agreement, we are each responsible for our own research costs. If a drug
candidate emerges as a result of our joint research, we will then negotiate
the product development and commercialization rights and responsibilities. The
initial term of the agreement was one year, subject to automatic annual
renewal. Either of us may terminate the agreement at any time upon 60 days
written notice.

   Hdm2(mdm2)/p53 Interaction Program: We have discovered a unique series of
small molecule inhibitors of the interaction in tumor cells between two
proteins, the tumor suppressor gene product p53 and another protein hdm2 which
stimulates the breakdown of p53. Our compounds are active in anti-
proliferative and apoptosis cellular models and are being investigated in-
vivo. Our rapid progress to date with this program has resulted from the use
of DiscoverWorks, where we integrated the analysis of the structure of our
molecules bound to the hdm2 protein and our ThermoFluor high throughput
screen, which is uniquely powerful for protein/protein interaction targets,
and our powerful chemi-informatics for lead optimization.

   Other Internal Discovery Programs: In connection with our strategy to build
our pipeline by gaining access to proprietary targets, in October 2001 we
entered into a collaboration with Athersys, Inc. to discover, develop, and
commercialize novel, small molecule drugs by screening against therapeutically
relevant drug targets derived from the G-Protein Coupled Receptor (GPCR)
family of proteins. This collaboration combines Athersys, Inc.'s functional
genomics expertise with our capabilities for rapid drug identification and
optimization of drug candidates. Under the terms of the agreement, certain
drug candidates identified from the collaboration will be jointly developed,
with the companies sharing future development costs and commercialization
rights, while others will be retained exclusively by each of the parties for
future development and commercialization.

   In addition to the programs described above, we have several other earlier
stage programs focused on cancer and metabolic disease.

Our Drug Discovery Collaborations

   We seek to enter into discovery collaborations and joint discovery programs
with pharmaceutical and biotechnology companies. These arrangements can take
various forms ranging from comprehensive programs to specific R&D arrangements
that utilize components of DiscoverWorks for target decryption (the assessment
of biochemical function) and validation, lead generation, and lead
optimization (the chemical modification of leads). Our collaborations provide
cash, drug targets, drug candidates, discovery and development capabilities,
and other assets we need to build our company. A summary of our drug discovery
collaborations is provided below.

 Bristol-Myers Squibb Company

   In July 2000, we entered into a collaboration with Bristol-Myers Squibb
Company, or BMS, under which we are using our DiscoverWorks technologies to
assist BMS in the discovery and development of new human

                                       4
<PAGE>

drugs for specific biological targets. In the initial three-year term of the
research collaboration, BMS will supply biological targets and we will create
chemical libraries and screen such libraries against these targets.
Thereafter, the parties will decide which organization will conduct subsequent
lead optimization and development activities of active hits toward creating
pre-clinical drug candidates and the terms of any such extension. In addition
to its collaboration in this research, BMS will be primarily responsible for
pre-clinical and clinical development of identified drug candidates, and for
marketing and sales of any resulting products.

   Under the BMS contract, we have received up-front licensing and technology
access fees amounting to $19 million, and, as of December 31, 2001, we had
received research funding of $7.5 million. The contract provides that we will
receive committed additional research funding of approximately $6.9 million
over the remaining initial three-year term of the collaboration. In addition,
the contract provides that we will receive milestone payments through the
development stages, and royalty payments on sales of any resulting products,
with the amount at each level determined based on our involvement in the
related optimization and development activities. For each compound, depending
on whether stipulated pre-clinical and clinical milestones are met and
depending on our level of contribution to the development of the compound, the
contract provides that we could receive milestone payments aggregating from up
to $4.5 million to $15 million.

   We have also granted BMS non-exclusive perpetual licenses under our
DirectedDiversity patent rights for the duration of the licensed rights and
non-exclusive perpetual licenses under our ThermoFluor technology for use by
BMS in their research and development programs.

   BMS may terminate research activities under our collaboration with 90 days
notice, without cause, but must pay any remaining research funding during the
initial research term or one-half of the remaining research funding during any
extended term. Following the end of the initial research or any extended
research term, either party may terminate the agreement on 30 days notice if
no compound is being optimized or developed under the collaborative agreement.

 Boehringer Ingelheim Pharmaceuticals, Inc.

   Effective December 1999, we entered into a collaboration agreement with
Boehringer Ingelheim Pharmaceuticals, Inc., or BIPI, to use our
DirectedDiversity technology to assist BIPI in the discovery of new drugs for
specific biological targets in humans. The initial research term of our
collaboration was for two years. In April 2001 we expanded our collaboration
to cover additional targets and extended the research term through March 2003,
subject to annual extensions by BIPI. In this collaboration, we have agreed to
generate custom combinatorial chemistry libraries based on molecules and
information provided by BIPI and will optimize those molecules into pre-
clinical development candidates. BIPI is responsible for pre-clinical and
clinical development, and marketing and sales of the resulting products. As of
December 31, 2001, we had received up-front fees and research funding
aggregating approximately $4.1 million, and the contract provides that we will
also receive committed additional research funding of approximately $3.1
million over the remaining term of the collaboration. The contract provides
that we could also receive milestone payments of up to $2.4 million for the
first product developed, depending on whether stipulated milestones are met,
and are eligible to receive additional milestones if subsequent products are
developed. We are also entitled to receive royalties on sales of resulting
products.

   BIPI may terminate the research program upon 30 days written notice
provided it pays us, in most circumstances, an early termination fee if it
terminates the research program prior to the end of any term.

 Johnson & Johnson Pharmaceutical Research & Development, L.L.C.

   In December 2001, we entered into a collaboration with Johnson & Johnson
Pharmaceutical Research & Development, L.L.C., or J&J PRD, under which we are
using our DiscoverWorks technology to discover and optimize small molecule
drug leads directed towards genomics targets identified by J&J PRD. J&J PRD,
will provide biological targets and we will create chemical libraries and
screen such libraries against these targets. J&J PRD is responsible for
subsequent lead optimization and development activities, and marketing and
sales of the resulting products. The initial research term is for
approximately one year, subject to renewal by mutual agreement.

                                       5
<PAGE>

   Under the terms of this agreement, we received an up-front technology
access fee and committed research funding aggregating $3.6 million over the
initial term of the collaboration. The contract provides that we could also
receive milestone payments of up to $4.2 million for the first product
developed, depending on whether stipulated milestones are met, and could
receive additional milestones if subsequent products are developed. The
contract also provides that we are entitled to receive royalties on sales of
licensed products.

   J&J PRD may terminate the research program upon 90 days notice, provided it
pays the lesser of the amount due for six months or the balance of any
financial support due for the remainder of the term of the research program.

 Aventis CropScience GmbH

   In October 1999, we entered into a collaboration with Hoechst Schering
AgrEvo GmbH, now Aventis CropScience GmbH, or Aventis, to use our
DirectedDiversity technology to assist Aventis in the discovery of compounds
applicable to plant and pest management, Under our agreement, we received up-
front payments and research funding totaling approximately $3.4 million. Our
agreement originally had a two-year research term, which was extended until it
expired in January 2002.

 DuPont Pharmaceuticals Company

   In February 2000, we entered into a collaboration with DuPont
Pharmaceuticals Company (acquired by Bristol-Myers Squibb Company in October
2001), or DuPont Pharmaceuticals, to use our DirectedDiversity technology to
assist DuPont Pharmaceuticals in the discovery of new human and veterinary
pharmaceutical compounds for specific biological targets. Under our agreement,
we received up-front payments and research funding totaling approximately $2.6
million. Our agreement had a two-year research term, which expired in December
2001. We have agreed not to work with any company other than DuPont
Pharmaceuticals on compounds acting through the targets of the research
program during the term of the program and for one year thereafter.

 Heska Corporation

   In December 1997, we entered into a research and license agreement with
Heska Corporation, or Heska, to use our DirectedDiversity technology to assist
in the discovery and development of new veterinary therapeutic agents. Under
our agreement, we also granted Heska the exclusive worldwide right to license
the veterinary therapeutic products developed for sale worldwide. As of
December 31, 2001, we had received up-front payments and research funding
totaling approximately $2.7 million. Our agreement originally had a two-year
research term expiring in December 1999, which was revived and extended until
May 31, 2002.

Industry Background

   Drugs are chemical compounds that change the activity of biological target
proteins associated with particular disease states to achieve the desired
therapeutic effect. Using traditional approaches, it has been estimated
generally to take from five to seven years from the initial identification of
a protein as a suitable target for a drug to the production of a drug
candidate ready to go into clinical trials. The major steps in the drug
discovery process following identification of the biological target involve
(a) hit identification, (b) lead generation, (c) lead optimization, and (d)
target validation, each of which is described below.

   Hit identification: This involves the screening of large collections of
compounds to identify those compounds that interact with the biological target
(which may be an enzyme, receptor, or other protein). A compound that
interacts with a target protein is referred to as a "hit." In order to
identify hits, the following steps are undertaken:

  .  production ("cloning and expression") of sufficient quantities of the
     target protein to facilitate high-throughput screening;

                                       6
<PAGE>

  .  design and development of a high-throughput screen specific to the
     target protein; and

  .  screening the target protein against collections or "libraries" of
     compounds.

   Lead generation: This involves the chemical modification of hits by
repeated cycles of synthesis and testing of analogs to produce "leads," which
are compounds with improved chemical characteristics, thereby increasing their
suitability as potential drugs.

   Lead optimization: This involves the further optimization of leads by
additional repeated modification to produce drug development candidates with
optimized characteristics for further pre-clinical and clinical development.

   Target validation: In parallel to the above steps in the discovery process,
"target validation" studies seek to establish the link between the target
protein and the particular clinical disease. These tests usually involve
correlating changes in the level of the target protein in cells or animals
with changes in cell biology or animal physiology characteristic of the
disease state. This "biology-driven" target validation, which is generally
employed today in the pharmaceutical industry, is in contrast to "chemistry-
driven" target validation, where the role of the target protein in disease is
determined by testing a target-specific compound in living organism models.

   Drug discovery has traditionally been a costly and time-consuming process
in which the failure rate remains very high. Pharmaceutical companies are
facing growing challenges to rapid and cost efficient drug discovery as
continuing advances are made in genomics research. While there are
approximately 500 currently known biological targets for human therapeutics,
it is estimated that genomics research will facilitate the identification of
perhaps an additional 5,000 potential targets. In order to take advantage of
the wealth of opportunities presented by genomics research, pharmaceutical
companies will need to generate new lead compounds on a scale commensurate
with the increase in new targets. This will require the use of more advanced
and integrated technologies to rapidly and cost efficiently discover and
develop lead compounds.

   Although advances in recent years have improved the drug discovery process,
there remain serious challenges, which can include:

  .  an inability to produce in a reasonable time sufficient quantities of
     the target protein for high-throughput screening and concurrent three-
     dimensional structure analysis of the target protein;

  .  the need to establish a different high-throughput screen for each new
     target, which typically can take from two to six months;

  .  an inability to rapidly generate leads from initial hits, a process
     which typically can take one to two years;

  .  the need for large resources in the lead optimization process;

  .  an inability to incorporate desirable "drug-like" attributes (as
     described below) into leads and to validate target proteins sufficiently
     early in the optimization process; and

  .  the time-consuming and resource-intensive nature of the biology-driven
     target validation process.

Our Integrated DiscoverWorks Solution

   We believe that we provide a unique solution to the problems of efficiency
and productivity in drug discovery by integrating the use of an array of
advanced tools with proprietary information technology to more efficiently
discover new drugs and harness the opportunities presented by genomics. We
believe that our technologies offer an important solution to the resource and
productivity dilemmas facing drug discovery by providing the following
advantages:

  .  Industrialization of Early Stage Drug Discovery. DiscoverWorks(R) is an
     integrated approach to establish the "drugability", biological functions
     and therapeutic relevance of the multitude of new

                                       7
<PAGE>

     drug targets emerging from sequencing the human genome. Drugability is
     the determination of whether or not a small molecule can bind
     sufficiently to a drug target. The efficiency and broad applicability of
     our ThermoFluor(R) high-throughput screen, coupled with rapid chemical
     property optimization enabled by DirectedDiversity(R) combinatorial
     chemistry and chemi-informatics, allow us to rapidly discover compounds
     that can be used to directly test therapeutic ideas for drug action in
     biological disease models. This approach, which we call chemi-genomics,
     allows targets to be prioritized and medicinal chemistry to begin at the
     earliest stage of the drug discovery process. We believe this increases
     the success rate of the drug discovery process and decreases the time
     required to discover and develop drugs.

  .  Improved Compound Characteristics. Our DirectedDiversity process and
     structural biology capabilities enable our scientists to design "drug-
     like" characteristics into our compounds throughout the lead generation
     and optimization processes. We believe this will increase the
     probability of development success of our drug candidates.

   We believe our technology reduces the risk in discovery and early
development by facilitating better, more timely decisions in discovery and
development. We believe that the key benefits of our technology, with its
broad applicability, will be even more important to the pharmaceutical
industry as the genomics revolution continues to expand the number of new
molecular targets.

Our DiscoverWorks Technology Platform

   DiscoverWorks is a highly integrated platform for drug discovery that links
our ThermoFluor high-throughput screen, Chemical Probe and computer-based
Synthetically Accessible Libraries, DirectedDiversity chemi-informatics and
combinatorial chemistry and structure-based drug design. Starting from the DNA
sequence of a molecular target, we can generate chemical leads that can be
used to test a disease hypothesis in a biological model and to serve as
starting points for lead optimization. Our DiscoverWorks technologies can
efficiently assimilate and process vast quantities of data produced from the
combination of combinatorial chemistry and high-throughput screening, and can
be rapidly and efficiently scaled to meet increasing demand. Our DiscoverWorks
process integrates the following technologies:

 Target Protein Production

   Timely large-scale production of target proteins is essential for effective
quantitative high-throughput screening and analysis of the three-dimensional
structure of the target. We have extensive experience in cloning, engineering
and expressing target proteins using a wide array of bacterial, insect cell,
and mammalian cell expression systems. We believe we can produce large
quantities of many types of target proteins in order to facilitate high-
throughput screening and target protein three-dimensional structure analysis.

 ThermoFluor High-Throughput Screening

   Our proprietary ThermoFluor high-throughput screening process is a direct
binding assay that measures the affinity of compounds in a screening library
to a target protein. ThermoFluor has broad target applicability because it is
based on the fact that most targets are proteins that melt at defined
temperatures. Drugs can be screened and their affinity measured by measuring
any difference in protein melting temperature with and without the drug
present. ThermoFluor can be applied with equal effectiveness to many varieties
of enzymes, receptors, growth factors, antibodies, cell adhesion molecules
(molecules that influence contact between cells), and other target proteins.
We have developed ThermoFluor in an automated computer workstation format
using 384-well assay plates with integrated data processing and database
connectivity. We are continuing to develop ThermoFluor to incorporate
improvements that improve its versatility and enhance throughput.

   ThermoFluor is able to directly discover leads for target proteins with
unknown biological function, including the thousands of new targets being
identified through genome sequencing. We believe ThermoFluor

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<PAGE>

significantly shortens the time required for target-specific high-throughput
screen development and compound library screening. The ThermoFluor assay
developed and used for high-throughput screening can also be applied during
lead generation and optimization, offering additional time and cost savings in
the discovery process. The technology is portable and can be scaled up to
screen very large numbers of compounds at many targets.

 ThermoFluor Target Decryption and Protein Characterization

   We believe ThermoFluor screening can be used to assess the biochemical
function (i.e. class of enzyme, receptor etc.) of targets emerging from
genomics and proteomics research. This capability is referred to as "target
decryption". The knowledge of the biochemical function of a potential target
that can be obtained with ThermoFluor can provide, in addition to establishing
a defensible intellectual property position, key information regarding target
"drugability", potential side effect profile, functional uniqueness, and
guidance for focusing a screening campaign that can lead to the discovery of
compounds that can be used as pharmacological probes for validating the role
of the target in disease model systems ("chemi-genomics" or chemistry driven
target validation).

 DirectedDiversity Probe Library

   In order to initiate our DiscoverWorks discovery process, we have
constructed a DirectedDiversity Probe Library incorporating approximately
300,000 individually synthesized "drug-like" compounds. The library includes a
diversity of chemical structures that are representative of the three-
dimensional molecular shapes that we believe are useful for targeting drug
binding sites on proteins and that possess "drug-like" properties, that is,
the structural and physicochemical characteristics (such as shape and
molecular weight) commonly found in orally active, small molecule marketed
drugs.

   Prior to including a compound in our Probe Library, we extensively analyze
and accumulate information on the compound, including a comprehensive set of
approximately 600 molecular descriptors (physicochemical characteristics of a
molecule, such as shape and molecular weight). The Probe Library includes sub-
libraries directed toward classes of enzyme targets called serine proteases
and metalloproteases, receptor tyrosine kinases, GPCRs, and several other
receptor classes with broad therapeutic relevance.

 DirectedDiversity Synthetically Accessible Library

   To complement our Probe Library, we have generated a computer-based
Synthetically Accessible Library of multi-billion compounds that are analogs
of the compounds in our Probe Library. Each compound in the Synthetically
Accessible Library can be synthesized using automated chemistry synthesis
protocols. For a typical optimization cycle, we select a focused library
varying from 100 to 1,000 compounds from our Synthetically Accessible Library
and synthesize them within two to three weeks. As with our Probe Library, each
of the compounds in our Synthetically Accessible Library is indexed using a
comprehensive set of approximately 600 molecular characteristics.

   In August 2001, we formed a collaboration with Cyprotex Services Limited,
or Cyprotex, aimed at providing parameters useful for improving the prediction
of ADME (Absorption, Distribution, Metabolism, Excretion) properties of
compounds. The collaboration is geared towards integrating the application of
Cyprotex ADME prediction methods with our DiscoverWorks process to improve the
development success rate of drug candidates.

 DirectedDiversity Chemi-informatics Software and Databases

   Using the 600 molecular characteristics referred to above and artificial
intelligence computer procedures, our DirectedDiversity chemi-informatics
software helps assure that properties important in drug development, such as
potency, selectivity, bio-availability, and minimal toxicity, are factored
into compound selection for inclusion in a focused library, and more broadly,
in the lead generation and lead optimization processes. Through

                                       9
<PAGE>

our ability to rapidly select and synthesize a focused library of compounds in
each optimization cycle, our chemists can test many optimization hypotheses in
parallel, with all information tracked and captured by the DirectedDiversity
software for use in future compound synthesis and testing cycles and other
discovery programs. The combination of the detailed chemical description of
each of our compounds and the biological screening data that is generated
provides a valuable drug property database for lead generation and further
optimization.

   We believe that traditional approaches to library generation using
combinatorial chemistry are less directed and information-rich, and therefore
an unnecessary expenditure of time and effort may be required in the discovery
process, and the compounds produced may lack required properties for orally
active drugs.

 Automated Chemical Synthesis Technologies

   We have a broad range of modern parallel synthetic technologies, which
affords us the capacity to synthesize over 10,000 compounds per month. We
believe this compound production is sufficient to support multiple concurrent
discovery programs and can be readily expanded.

 Structure-Based Drug Design Technology

   Our DiscoverWorks platform integrates structure-based drug design
technology that uses X-ray crystallography to directly visualize how lead
compounds bind to a target protein. Structure-based drug design allows the
atom-by-atom modification of leads to produce chemically new compounds with
high potency and specificity toward a given target protein. We have
established a state-of-the-art facility for protein production,
crystallization, X-ray crystallography, and computational chemistry to carry
out three-dimensional structure determination of target proteins and their
bound complexes with lead compounds. In addition, we have access through our
membership in the Industrial Macromolecular Crystallography Association (IMCA)
to the Advanced Photon Source at the Argonne National Laboratory in Argonne,
Illinois. The integration of DirectedDiversity technology with structure-based
drug design allows us to automate the parallel design and chemical synthesis
of compounds, enabling the simultaneous investigation and optimization of
multiple drug properties. We refer to this as the coupling of high-throughput
co-structure analysis and high-throughput chemistry.

 Chemi-Genomics: Chemistry-Driven Target Validation

   Our chemistry-driven target validation process, also referred to as
chemical genomics or chemi-genomics, relies on the broad capability of our
ThermoFluor screen, coupled with our ability using DirectedDiversity to
rapidly generate leads suitable for testing therapeutic hypotheses in
biological models. By capitalizing on DiscoverWorks, we can perform chemistry-
driven validation of new genomics targets early in the discovery process. We
believe this provides a unique advantage that allows us to prioritize targets
early, on the basis of therapeutic utility and drugability.

 GPCR Technology Program

   G-protein coupled receptors, or GPCRs, are an important class of target
proteins that exist on the surface membrane of all cells, and are associated
with a wide range of therapeutic categories. We have an ongoing program aimed
at the three-dimensional structure determination of a drug target GPCR using
X-ray crystallography. Successful crystallization of drug target GPCRs may
present a novel opportunity to exploit this broad and important range of drug
targets, benefiting both our internal discovery programs and pharmaceutical
and biotechnology company collaborations. Our collaboration with Athersys,
Inc. is focused on screening at several GPCR targets using our GPCR-directed
probe libraries.

                                      10
<PAGE>

Intellectual Property

   Protection of our intellectual property is a strategic priority. Our
ability to protect and use our intellectual property rights in the continued
development and commercialization of our technologies and drug candidates,
operate without infringing the proprietary rights of others and prevent others
from infringing on our proprietary rights is crucial to our continued success.
We will be able to protect our proprietary rights from unauthorized use by
third parties only to the extent that our proprietary rights are covered by
valid and enforceable patents, trademarks or copyrights, or are effectively
maintained as trade secrets, know-how or other proprietary information. We
currently rely on a combination of patents and pending patent applications,
some of which we license and most of which we own, and on trademarks,
copyrights, trade secrets, know-how and proprietary information, to protect
our interests as we continue to develop and commercialize our technologies and
drug candidates.

   We devote significant resources to obtaining, enforcing and defending
patents, as well as developing and protecting our other proprietary
information. Our comprehensive patent strategy is to augment our broad
proprietary portfolio by continuing to actively seek patents for our
technologies and compounds. We have already obtained patents or filed patent
applications on a number of our technologies and on certain of the compounds
we have developed. We also have certain proprietary trade secrets and know-how
that are not patentable or for which we have chosen to maintain secrecy rather
than file for patent protection.

   We have taken certain security measures to protect our trade secrets,
proprietary know-how, technologies and confidential information and continue
to explore further methods of protection. We have executed confidentiality
agreements with our employees and consultants upon the commencement of an
employment or consulting arrangement with us. These agreements require that
all confidential information developed or made known to the individual by us
during the course of the individual's relationship with us be kept
confidential and not disclosed to third parties. These agreements also provide
that inventions conceived by the individual in the course of rendering
services to us shall be our exclusive property. We also attempt to limit
access to, and dissemination of, our confidential information.

   Our intellectual property estate is as follows:

 Drug Discovery Program Patents

   We have 22 issued U.S. Patents, three Australian patents, three New Zealand
patents, two South African patents, one Pakistani patent and one Singapore
patent covering our drug discovery program inventions.

   The patents cover various, distinct families of new compounds, methods of
making compounds, pharmaceutical compositions, and methods of using the
compounds for treating particular disease states and for inhibiting proteases,
or in one instance, for antagonizing certain adhesion proteins.

   We also have 30 pending U.S. patent applications, four of which have
received a notice of allowance from the U.S. Patent & Trademark Office, 164
pending foreign patent applications, and five applications in preparation.
These applications describe and claim distinct families of new compounds,
methods of making the compounds, and pharmaceutical compositions. These
applications also variously describe and claim methods of using compounds for
treating particular disease states, methods of using compounds for inhibiting
proteases, methods of using compounds for antagonizing certain adhesion
proteins, methods of using compounds for antagonizing insect GABA receptors
and for use as pesticides, methods of using compounds for inhibiting
plasminogen activation inhibitor-1 activity, and methods of using compounds
for inhibiting mdm2-p53 interactions.

   The proteases that are inhibited by protease inhibitors described and
claimed in the issued patents and pending applications variously include, but
are not limited to, thrombin, factor Xa, urokinase, and complement C1s.
Particular disease states to which the issued patents and pending applications
are directed are described in the sections entitled "--Our Drug Candidate
Programs" and "--Our Drug Discovery Collaborations."

                                      11
<PAGE>

   We have two issued U.S. patents and three allowed U.S. applications
covering lead compounds and their manufacture and use in our thrombin program,
one issued U.S. patent and one allowed U.S. application covering lead
compounds and their manufacture and use in our urokinase program, one issued
U.S. patent and one allowed U.S. application covering lead compounds and their
manufacture and use in our C1s complement program, and one issued U.S. patent
and one allowed U.S. application covering lead compounds and their manufacture
and use in our integrin program. However, we may be unable to obtain any
issued patents for any patent applications we have filed or may file in the
future on our drug discovery inventions. Furthermore, if a compound considered
a lead compound at present changes in the future, we may have to file new
patent applications to cover the new one.

   We have an exclusive, worldwide license from GSK to patents that cover 3DP-
3534, in its pegylated and unpegylated forms, and methods of treatment with
3DP-3534, for in-vivo administration. We also have a worldwide, exclusive
license to other patents owned by another entity and directed to certain
polyethylene glycol moieties for use in preparing 3DP-3534.

 DirectedDiversity Combinatorial Chemistry Process Patents

   Our DirectedDiversity technology is protected by five issued U.S. patents.
Collectively, these patents provide apparatus and process patent coverage for
the automated, semi-automated and/or manual computer-directed selection,
synthesis, testing, and refinement of compounds in chemical libraries,
including the computer codes that allow implementation of this process.

   In October 1995, we were issued our first U.S. patent covering our
DirectedDiversity technology. The patent covers the use of semi-automated
feedback control for refining the properties of combinatorial libraries for
all applications in which suitable properties can be measured (e.g., drugs,
herbicides, paints, scents, solvents, advanced materials, etc.). A second U.S.
patent related to our DirectedDiversity technology was issued in November 1996
covering the automatic generation of new drug leads through computer-
controlled, iterative robotic synthesis and analysis of chemical libraries.
Our third U.S. patent, issued in November 1997, covers additional features of
our DirectedDiversity technology, including inventions related to computer
software for semi-automatic and automatic generation of compounds of interest.
We received our fourth U.S. patent for DirectedDiversity in May 1999, covering
the generation of new drug leads through computer-controlled, iterative
robotic synthesis and analysis of chemical libraries. Our fifth patent issued
September 2001, covering the method, system and computer program product for
representing the similarity/dissimilarity between chemical compounds.

   We also have four Australian patents and two Israeli patents, one Taiwan
patent and one allowed application in India that cover our DirectedDiversity
technology described above.

   Additionally, we have 13 pending U.S. patent applications and 43 pending
foreign patent applications. In addition to our DirectedDiversity technology
described above, these patent applications cover new methods for handling
large multidimensional data sets. Within our DirectedDiversity technology,
these methods are utilized for visualizing chemical compound
similarity/dissimilarity, for lead identification, and for lead optimization.
The methods for handling large multi-dimensional data sets have applications
beyond our DirectedDiversity technology.

 ThermoFluor Patents

   We have 11 issued U.S. patents covering our ThermoFluor screening and
protein characterization technology, process and instruments. These U.S.
patents cover methods for screening compounds for binding to proteins and
nucleic acids; an instrument for implementing these methods for screening
compounds; methods for screening for biochemical conditions that stabilize
proteins and nucleic acids; methods for screening for biochemical conditions
that facilitate protein crystallization; methods for screening for biochemical
conditions that promote recombinant protein folding; methods for screening for
lead compounds that bind to a target receptor; methods and apparatus for
sensing emission fluorescence; and methods of screening for molecules in
combinatorial systems.

                                      12
<PAGE>

   We also have six pending U.S. applications, one New Zealand patent and 19
pending foreign patent applications covering this technology. At least one of
the pending applications cover "functional genomics," which include methods
for screening proteins of unknown function in order to determine the function
of newly discovered proteins.

   Under the terms of a settlement agreement with Anadys Pharmaceuticals, Inc.
(formerly Scriptgen Pharmaceuticals, Inc.) or Anadys, relating to an action
that Anadys brought against us in the United States District Court for the
District of Delaware on October 13, 1998 for our alleged infringment of two
patents, we acquired a limited license to Anadys' ATLAS (Any Target Ligand
Affinity Screen) assay technology and Anadys was granted a limited license to
the method claims of our ThermoFluor assay technology. Neither of these
licenses is exclusive. Under this agreement, we paid Anadys $1.5 million and
Anadys released us from all claims of infringement with respect to those two
patents. The settlement agreement restricts us, until March 7, 2003, from
specified activities in connection with screening drugs useful for treating
"infection" (defined as relating to drugs whose principal aim is to treat or
cure infectious disease in humans). As part of this settlement agreement, we
are precluded from using our ThermoFluor screening technology in the Hepatitis
C Virus "infection" area as part of collaborative agreements or as part of our
internal drug programs until March 7, 2003. In addition, we are precluded from
using our ThermoFluor screening technology as part of more than one
collaboration agreement in other areas of "infection" until March 7, 2003, and
such collaborative agreement must be limited to a maximum of three anti-viral
targets. Our collaboration with Bristol-Myers Squibb Company constitutes the
one permitted collaboration agreement in the area of infection. The settlement
with Anadys, however, does not restrict use of our ThermoFluor screening
technology for our internal drug discovery efforts, other than the limitation
with respect to Hepatitis C Virus "infection," or for purposes of
collaborative agreements outside the area of "infection." In addition, if our
use of ThermoFluor facilitates the discovery of a drug used to treat
infectious disease, we are obligated to pay Anadys a royalty based on revenue
from the sale of such a drug.

 U.S. Government Grants

   We have been awarded a number of U.S. government grants to fund a variety
of internal scientific programs and undertake exploratory research. Under
these grants, we retain ownership of all intellectual property and commercial
rights generated during these projects, subject to a non-transferable, paid-up
license for the use by or on behalf of the United States of the inventions
made with federal funds. This license is not exclusive and is retained by the
U.S. government as provided by applicable statutes and regulations. We have
received the following government grants and awards from the National
Institutes of Health (Small Business Innovative Research "SBIR" grants) and
the National Institute of Standards and Technology (Advanced Technology
Program "ATP" award) during the past several years under which we have
received a total of approximately $3.9 million:

<TABLE>
<CAPTION>
Grant/Award Title                                             Grant/Award Date
-----------------                                             ----------------

<S>                                                           <C>
Automated Receptor Screening by Thermal Physical Assays
 (SBIR)(Phase 1).............................................        May 1995

Crystallization and Structural Determination of G-Coupled
 Protein Receptors (ATP).....................................     August 1995

Protein Engineering a Receptor Antagonist (SBIR)(Phase 1)....  September 1995

Automated Receptor Screening by Thermal Physical Assays
 (SBIR)(Phase 2).............................................  September 1996

Four Helix Bundle Analog of a G-Protein Coupled Receptor
 (SBIR)(Phase 1).............................................   February 1999

Expression of G-Protein Coupled Receptors for Structure
 Determination (SBIR)(Phase 1)...............................  September 1999

Four Helix Bundle Analog of a G-Protein Coupled Receptor
 (SBIR)(Phase 2).............................................      March 2000

Expression of G-Protein Coupled Receptors for Structure
 Determination (SBIR)(Phase 2)...............................       June 2001
</TABLE>

   The sponsoring agencies make decisions annually on continuations of multi-
year awards based on the availability of funds from the United States Congress
and our satisfactory performance under each grant or award.

                                      13
<PAGE>

Government Regulation

   The U.S. Food and Drug Administration (FDA) and comparable regulatory
agencies in state and local jurisdictions and in foreign countries impose
substantial requirements on the development, manufacture and marketing of
pharmaceutical candidates. These agencies and other federal, state and local
entities regulate research and development activities and the testing,
manufacture, quality control, safety, effectiveness, labeling, storage,
record-keeping, approval, promotion and advertising and pricing of our drug
candidates and those of our collaborative partners. Obtaining marketing
approvals and later complying with ongoing statutory and regulatory
requirements are costly and time-consuming. Any failure by us or our
collaborators, licensors or licensees to obtain, or any delay in obtaining,
regulatory approvals or in complying with other requirements could adversely
affect the commercialization of drug candidates and our ability to receive up-
front payments, milestone payments or royalty revenues.

   The steps required before a new drug candidate for humans may be
distributed commercially in the U.S. generally include:

  .  conducting appropriate laboratory evaluations of the drug candidate's
     chemistry, formulation and stability, and pre-clinical studies to assess
     the potential safety and efficacy of the product candidate;

  .  submitting the results of these evaluations and tests to the FDA, along
     with manufacturing information and analytical data, in an
     investigational new drug application (IND);

  .  obtaining approval of Institutional Review Boards, or IRBs, to introduce
     the drug into humans in clinical studies;

  .  conducting adequate and well-controlled human clinical trials that
     establish the safety and efficacy of the drug candidate for the intended
     use, typically in the following sequential, or slightly overlapping,
     stages:

    Phase 1: The drug candidate is initially introduced into healthy human
             subjects or patients and tested for safety, dose tolerance,
             absorption, metabolism, distribution and excretion;

    Phase 2: The drug candidate is studied in patients to identify possible
             adverse effects and safety risks, determine dosage tolerance
             and the optimal dosage, and collect some efficacy data;

    Phase 3: The drug candidate is studied in an expanded patient
             population at multiple clinical study sites to confirm
             efficacy and safety at the optimized dose, by measuring a
             primary endpoint established at the outset of the study; and

    Phase 4: The FDA may in some circumstances require post-marketing
             studies to delineate additional information about a drug's
             risks, benefits and optimal use;

  .  submitting the results of preliminary research, pre-clinical studies,
     and clinical trials as well as chemistry, manufacturing and control and
     labeling information on the drug candidate to the FDA in an New Drug
     Application (NDA) or Biologics License Application (BLA);

  .  payment of fees authorized by the Prescription Drug User Fee Act
     ("PDUFA") which include a one-time application fee for approval of an
     NDA or BLA, an annual establishment fee imposed on facilities used to
     manufacture prescription drugs and biologics, and an annual product fee
     imposed on prescription drugs and biologics after FDA approval; and

  .  obtaining FDA approval of the NDA or BLA, including inspection of
     manufacturing facilities, prior to any commercial sale or shipment of
     the drug candidate.

   The steps required before a new animal drug may be distributed commercially
in the U.S. are similar to the foregoing. The major differences are that
additional safety issues need to be addressed if the target animal(s) will
contribute or be part of human food, and the requisite clinical study
requirements for animal drugs are oftentimes less expensive than those for
human drugs. Also, there are no user fees for New Animal Drug Applications
(NADAs).

                                      14
<PAGE>

   Upon approval, a drug candidate may be marketed only in those dosage forms
and for those indications approved in the NDA, BLA or NADA. In addition to
obtaining FDA approval for each indication to be treated with each product
candidate, each foreign and domestic drug candidate manufacturing
establishment must register with the FDA, list its product candidates with the
FDA, comply with current good manufacturing practices (cGMPs) and permit and
pass manufacturing plant inspections by the FDA. Moreover, the submission of
applications for approval may require additional time to complete
manufacturing stability studies. Foreign companies that manufacture drug
candidates for distribution in the United States also must list their product
candidates with the FDA and comply with cGMPs. They are also subject to
periodic inspection by the FDA or by local authorities under agreement with
the FDA. Moreover, approval of drug candidates may be delayed by certain
market exclusivity and patent protections awarded to other parties concerning
similar products or drug candidates.

   Any drug candidates that we or our collaborators manufacture or distribute
under FDA approvals are subject to extensive continuing regulation by the FDA,
including recordkeeping requirements and reporting of adverse experiences with
the product candidate. Additionally, if we or our collaborators propose any
modifications to a product, including changes in indication, manufacturing
process, manufacturing facility or labeling, we or our collaborators may be
required to submit an NDA/NADA supplement to the FDA. The promotion and
advertising for drugs that we or our collaborators market are also subject to
review and can be the subject of possible FDA action.

   Failure to comply subjects the manufacturer to possible FDA action, such as
warning letters, suspension of manufacturing, seizure of the product,
voluntary recall or withdrawal of a product or injunctive action, as well as
possible civil or criminal penalties. We currently rely on, and intend to
continue to rely on, third parties to manufacture our compounds and product
candidates. These third parties will be required to comply with cGMPs.

   Products manufactured in the United States for distribution abroad will be
subject to FDA regulations regarding export, as well as to the requirements of
the country to which they are shipped. These latter requirements are likely to
cover the conduct of clinical trials, the submission of marketing
applications, and all aspects of manufacturing and marketing. Such
requirements can vary significantly from country to country. As part of our
strategic relationships, our collaborators may be responsible for the foreign
regulatory approval process for our product candidates, although we may be
legally liable for noncompliance.

   We and our collaborators are also subject to various federal, state and
local laws, rules, regulations and policies relating to safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use and disposal of hazardous or potentially hazardous
substances used in connection with our research work. Also, the availability
and levels of government or third-party payor reimbursement for our products
and those of our collaborators/licensees that involve our technology will have
a considerable impact on our revenues and business. The availability and scope
of government and third-party reimbursement for drugs are subject to ongoing
debate and change. For example, the U.S. Congress is actively debating whether
and how to provide prescription drug benefits to Medicare beneficiaries.
Government and third-party payors are continuously striving to reduce
reimbursement levels for healthcare products, and these cost control
initiatives may be applied to our products or those of our
collaborators/licensees. Further, changes in government reimbursement are
oftentimes adopted by other payors.

   The extent of government regulation which might result from future
legislation or administrative action cannot be accurately predicted. As a
result, the actual effect of these developments on our business is uncertain
and unpredictable.

Competition

   We compete both in the markets for pharmaceutical products and the markets
for drug discovery technologies and services. Our principal competitors are
the internal drug discovery departments of our pharmaceutical company
customers and potential customers. Many of our customers and potential
customers have developed or acquired or are developing or are acquiring
integrated drug discovery capabilities that use combinatorial chemistry,
chemi-informatics software, structure-based drug design and high-throughput

                                      15
<PAGE>

screening. In addition, many of these companies have large collections of
compounds that they have previously synthesized, purchased from chemical
supply catalogs or obtained from other sources against which they may screen
new targets.

   For drug candidates that we seek to develop commercially and/or outlicense
from our drug discovery pipeline, we face, and will continue to face, intense
competition from organizations such as large pharmaceutical and biotechnology
companies. Competition with any of the programs in our internal drug discovery
pipeline may arise from current or future drug candidates in the same
therapeutic class or other classes of therapeutic agents or other methods of
preventing or reducing the incidence of disease. In addition, any drug
candidate that is successfully developed may compete with existing therapies
that have long histories of safe and effective use.

   Due to perceived shortcomings of available agents and the large market
potential, competition to develop a safe, orally active antithrombotic agent
is intense, with many discovery programs in process, including programs in
clinical development by AstraZeneca, Pfizer Inc., and Abbott Laboratories. In
addition, we are aware of several other programs targeting additional proteins
in the coagulation process that could be competitive with our thrombin
inhibitor, including programs of Schering AG, Germany and AstraZeneca. We are
aware of an oral heparin program of Emisphere Technologies, Inc., believed to
be in Phase 2, which may also compete with our thrombin inhibitor. In
addition, oral agents that effect blood platelet activation could provide
competitive therapeutic approaches to oral inhibitors of the coagulation
process. We are aware of such drug development programs at Merck & Co., Inc.,
GlaxoSmithKline plc, Bristol-Myers Squibb Company, and Schering-Plough
Corporation, among others.

   Our thrombopoietin-mimetic compound, 3DP-3534, with potential for
prophylaxis and/or therapy for chemotherapy-induced thrombocytopenia, competes
directly with the recombinant form of the natural human hormone (rhTPo)
currently in Phase 3 clinical development by Pharmacia Corporation. We also
are aware of a related product by Receptron, Inc. that is in Phase 1 clinical
trials as a thrombopoietin receptor modulator. In addition, several companies
may be attempting to develop small molecule agonists of the human
thrombopoietin receptor in pre-clinical studies.

   Our orally active alpha/v/beta/3//alpha/v/beta/5/ integrin antagonist program
for the treatment of solid and metastatic tumors, osteoporosis, and arthritis
has significant competition from several companies. We are aware of competing
small molecule programs at GlaxoSmithKline plc, Merck & Co., Inc., Pharmacia
Corporation., and Merck KGaA that may have advanced one or more compounds into
clinical trials. In addition, we are aware of programs at MedImmune and
Centocor, Inc. developing humanized monoclonal antibodies against specific
integrins to target tumor angiogenesis and/or rheumatoid arthritis among other
indications.

   Our orally active urokinase inhibitor for the inhibition of cancer
metastasis and tumor angiogenesis faces competition from a number of agents
and approaches under development. We are aware of competing small molecule
inhibitor programs at Abbott Laboratories, Pfizer Inc., Celera Genomics Group,
Corvas International, Inc., and Wilex Biotechnology GmbH. We are also aware of
programs aimed at developing compounds that are antagonists of the receptor
for urokinase that could compete with our oral urokinase inhibitor. There are
also a number of alternative approaches to controlling angiogenesis or
metastasis including the use of a) inhibitors of matrix metalloproteases,
which are protease enzymes that destroy the matrix material that binds cells
together, including programs by British Biotech plc, Bristol-Myers Squibb
Company, Pharmacia Corporation, and Pfizer, Inc., b) inhibitors of endothelial
cell receptor tyrosine kinases, including programs by AstraZeneca, Pharmacia
Corporation, Cephalon, Inc., and Merck & Co., Inc., and c) other therapeutic
proteins or monoclonal antibodies that target a variety of processes in cancer
cells.

   Our C1s complement antagonist program for the treatment of inflammatory
diseases such as rheumatoid arthritis and lupus faces significant industry
competition as well. We are aware of programs targeting various proteins in
the complement activation cascade, including a humanized antibody directed
against complement factor C5 by Alexion Pharmaceuticals, Inc. currently in
Phase 2 clinical trials and a soluble complement receptor by AVANT
Immunotherapeutics, Inc. In addition, small molecule programs directed against
complement factors have been reported by Abbott Laboratories, Merck & Co.,
Inc., and Pfizer Inc.

                                      16
<PAGE>

   Our hdm2 antagonist program, targeting a key molecular regulator of the
well-known tumor suppressor gene p53, is also an area of active research in
the pharmaceutical industry. In this regard, we are aware of pre-clinical
research programs targeting hdm2 at AstraZeneca and Novartis AG. In
additional, many companies are working on alternative ways to modulate normal
p53 functioning, including various gene therapy and biological approaches.

   Other earlier-phase research programs in small molecule drug discovery are
also in highly competitive areas. Many companies are working in these areas,
and they may achieve earlier or greater success than we may be able to
achieve. Most of our competitors, either alone, or together with their
collaborators, have substantially greater research and development
capabilities and financial, scientific, operational, marketing, and sales
resources than we do, as well as significantly more experience in research and
development, clinical trials, regulatory matters, manufacturing, marketing,
and sales. These competitors and other companies may have developed or may in
the future develop new technologies or products that compete with ours or
which could render our technologies and products obsolete. In addition, our
competitors may succeed in obtaining broader patent protection, receiving FDA
approval for products, or developing and commercializing products or
technologies before us. We also compete with these organizations in recruiting
and retaining qualified scientific and management personnel.

   We also compete with biotechnology and drug discovery services companies,
academic and scientific institutions, governmental agencies, and public and
private research organizations. We face competition based on numerous factors,
including size, diversity and ease of use of compound libraries, speed and
cost of identifying and optimizing potential lead compounds and patent
position from companies offering one or more technology components of the
discovery process. Companies such as Aurora Biosciences Corporation (recently
acquired by Vertex Pharmaceuticals Incorporated) and EVOTEC BioSystems AG have
developed ultra-high-throughput screening capabilities. In addition, several
competitors, including Anadys Pharmaceuticals, Inc., Novalon Pharmaceutical
Corporation, Cetek Corporation, NeoGenesis Pharmaceuticals, Inc., and
Signature Pharmaceuticals, Inc., have developed alternative approaches to
screening protein targets of unknown function that are competitive with our
ThermoFluor technology. There are many companies that provide combinatorial
chemistry services for lead generation and optimization that compete with our
DiscoverWorks technologies and discovery services. Competitors such as
Pharmacopeia, Inc., ArQule, Inc., Discovery Partners International, Inc. and
MediChem Life Sciences, Inc. (recently purchased by deCODE Genetics, Inc.) use
computer methods to assist in the design of large screening libraries and
synthesize them using combinatorial or parallel chemical synthesis methods,
which are competitive with our DirectedDiversity technology. Competitors such
as Accelerys Inc. (a division of Pharmacopeia, Inc.), Tripos, Inc., and MDL
Information Systems, Inc. are computer software companies that offer chemi-
informatics and other software and database services to support drug
discovery, which are competitive with the software components of our
DirectedDiversity chemi-informatics technology. Competitors such as Vertex
Pharmaceuticals Incorporated, Millennium Pharmaceuticals, Inc., and Axys
Pharmaceuticals, Inc. (recently purchased by Celera Genomics, Inc.)
extensively use structure-based drug design or genomics technologies
integrated with combinatorial chemistry and other drug discovery technologies.
These entities compete with us either on their own or in collaborations.
Companies such as Arena Pharmaceuticals, Inc., Synaptic Pharmaceutical
Corporation, and EVOTEC BioSystems AG have developed GPCR screening
technologies that offer alternative approaches to GPCR drug discovery which
may be competitive with our structure-based drug design approach. In addition,
both internal drug design units at major pharmaceutical companies and
companies offering protein modeling services, such as Structural
Bioinformatics, Inc. and BioIT Inc, may compete with 3DP's approach, while
companies such as Structural GenomiX Inc., Astex Technology Ltd, and Syrrx,
Inc. specialize in the use of high throughput crystallography for drug
discovery and may have competitive GPCR crystallography programs.

   While we believe that our integration of proprietary technologies for drug
discovery provides us with a competitive advantage over many of our
competitors and intend to further develop our integrated "target-to-lead"
technologies, we recognize that many of our competitors will seek to integrate
and improve their technologies to provide discovery capabilities similar or
superior to those provided by us.


                                      17
<PAGE>

Clinical Testing Strategy

   We do not have the ability to independently conduct clinical studies and
obtain regulatory approvals for our drug candidates. To the extent our
collaborators do not perform these functions, we rely and intend to continue
to rely on third-party expert clinical investigators and clinical research
organizations to perform these functions.

Manufacturing Strategy

   We are an early stage drug discovery company and, accordingly, do not at
this stage require commercial scale manufacturing capabilities. We currently
rely, and anticipate continuing to do so for the foreseeable future, on
internal capabilities for synthesis of the small amounts of chemical compounds
required for the discovery phases of our internal programs and external
collaborations.

   Completion of any pre-clinical trials for our drug candidates involving
large quantities of chemical compounds, or any future clinical trials and
commercialization of our drug candidates by us or our collaborators, will
require access to, or development of, facilities to manufacture a sufficient
supply of our drug substance. We do not have the facilities or experience to
manufacture the quantities of drug substance necessary for any such trials or
commercial purposes on our own and do not intend to develop or acquire
facilities for the manufacture of such quantities of drug substance in the
foreseeable future. We currently intend, instead, to rely on our collaborators
and third-party contract manufacturers.

   In connection with our TPO mimetic compound 3DP-3534, we have signed a
license, manufacturing, and supply agreement with Shearwater Corporation, a
subsidiary of Inhale Therapeutic Systems, Inc., to provide a key ingredient
required for the manufacture of the drug substance. Under the terms of this
agreement, we will pay for the supply of the ingredient and may pay
milestones, and royalties on product sales. We are currently working with
other third-party manufacturers to provide adequate quantities of drug
substance to meet our clinical development requirements.

   In addition, for drug candidates that we have licensed or may in the future
license to third-party collaborators for further development and
commercialization, we must rely on our collaborators' ability to manufacture,
or to have manufactured, the quantities necessary for further development and
commercialization.

Marketing and Sales

   We sell and license our DiscoverWorks drug discovery services,
technologies, and drug candidates through a direct marketing effort to
pharmaceutical and biotechnology companies. Since we are an early-stage
company, we do not have an established sales and marketing department.
Instead, we solicit potential collaborative partners primarily through the
efforts of our management and business development teams. We also present at
industry conferences and have an internet web site that describes our products
and services.

   We currently have no sales, marketing, or distribution capabilities to
commercialize our drug candidates. In order to commercialize drugs, we will
either internally develop sales, marketing, and distribution capabilities or
make arrangements with third parties to perform these services.

Employees

   As of March 1, 2002, we had 204 full-time employees, 89 of whom hold Ph.D.
degrees. Of these employees, 161 were engaged in research and development and
43 were engaged in business development, finance, legal, facility operations,
and general administration. Our scientific staff includes: 61 biologists, 73
chemists, and 27 computer scientists and engineers. Many of our employees have
extensive experience in drug discovery at major pharmaceutical companies. None
of our employees are represented by labor unions or covered by collective
bargaining agreements. We have not experienced any work stoppages, consider
our employee relations to be good, and believe that we enjoy a strong
corporate culture built on cooperation among our various departments, which we
view as a key element in our interdisciplinary approach to research.

                                      18
<PAGE>

Executive Officers of the Registrant

   The following table sets forth certain information concerning the executive
officers, as well as certain other members of senior management, of the
Company:

<TABLE>
<CAPTION>
                    Name                  Age Position
                    ----                  --- --------
   <C>                                    <C> <S>
   David C. U'Prichard, Ph.D............. 53  Chief Executive Officer
                                              President and Chief Scientific
   F. Raymond Salemme, Ph.D.............. 57  Officer
   John M. Gill.......................... 50  Chief Operating Officer
   Roger F. Bone, Ph.D................... 44  Senior Vice President, Research &
                                              Development
   Scott M. Horvitz...................... 43  Vice President, Finance and
                                              Administration, Secretary,
                                              Treasurer
   Brian R. MacDonald, MB ChB and Ph.D... 42  Vice President, Development
   Kathy A. Quay......................... 46  Vice President, Human Resources
   Melinda P. Rudolph.................... 44  Vice President, General Counsel
</TABLE>

   Dr. David C. U'Prichard joined us in September 1999 as our CEO and a member
of our Board of Directors. From 1997 to 1999, Dr. U'Prichard served as
President of Research and Development at SmithKline Beecham. While at
SmithKline Beecham, Dr. U'Prichard oversaw the entry of approximately ten
compounds into global development, the international registration of the
diabetes drug Avandia(R) and the entry of four compounds into Phase 3 trials
and six compounds into early clinical trials; additionally, he instituted
several major restructuring efforts at the company. Prior to SmithKline
Beecham, he worked for ICI/Zeneca (now AstraZeneca) from 1986 to 1997, as
Executive Vice President and International Research Director from 1994 to
1997. Previously, Dr. U'Prichard was instrumental in the launch of Nova
Pharmaceuticals in 1983, following an academic career as the Associate
Professor of Pharmacology and Neurobiology at Northwestern University Medical
School (1978-83), and his postdoctoral fellowship at Johns Hopkins University
(1975-78). Dr. U'Prichard received his Ph.D. in Pharmacology from the
University of Kansas, and his B.S. in Pharmacology with first-class honors
from the University of Glasgow, Scotland. He has held academic appointments at
Northwestern University, Johns Hopkins University and the University of
Pennsylvania and is an Honorary Professor at the University of Glasgow. He is
also an author of more than 100 primary and review publications, was a
founding co-editor of Molecular Neurobiology and co-editor of Epinephrine in
the Central Nervous System and has served as a member of various editorial
boards. Dr. U'Prichard serves on the Board of Directors of Lynx Therapeutics,
Inc., a public company. Dr. U'Prichard also serves on the Board of Directors
of Predict, Inc., RiboTargets plc, and GeneMatrix, Inc., and is on the Board
of the Pennsylvania Biotechnology Association.

   Dr. F. Raymond Salemme founded our company in 1993 and currently serves as
President and Chief Scientific Officer and as a member of our Board of
Directors. Dr. Salemme is co-inventor on 14 U.S. patents covering our
DirectedDiversity(R) chemi-informatics process control technology and our
ThermoFluor(R) assay technology. Prior to founding our company, Dr. Salemme
established drug discovery groups specializing in structure-based drug design,
biophysics and computational chemistry at Sterling Winthrop Pharmaceuticals
and DuPont Merck Pharmaceuticals, Inc. Dr. Salemme also worked in Central
Research and Development at DuPont, where he led research in protein X-ray
crystallography and engineering, developed computational methods for
crystallography and drug design, and conducted large-scale computational
simulations of proteins and polymer systems. In 1983, Dr. Salemme founded the
Protein Engineering Division of Genex Corporation, among the first companies
to use X-ray crystallography and molecular modeling for genetically
engineering proteins. From 1973 to 1983, Dr. Salemme was Professor of
Biochemistry at the University of Arizona and published extensively in the
areas of molecular structures of redox proteins, theory of biological electron
transfer and protein architecture. Dr. Salemme received a B.A. in Molecular
Biophysics from Yale University (with exceptional distinction) and a Ph.D. in
Chemistry from the University of California, San Diego, where his Ph.D. thesis
solved one of the first high-resolution 3-D protein structures by X-ray
crystallography. In addition to duties at 3DP, Dr. Salemme serves on several
corporate scientific and academic advisory boards, as well as federal advisory
committees on advanced

                                      19
<PAGE>

technology and biotechnology, including the National Institute of Science and
Technology (NIST) Visiting Committee on Advanced Technology, and advisory
committees for National Institutes of Health (NIH).

   Mr. John M. Gill currently serves as our Chief Operating Officer and as a
member of our Board of Directors. Mr. Gill joined us in May 2001 as Executive
Vice President and Chief Financial Officer. Prior to joining us, Mr. Gill was
Vice President and Director, Operations and Finance, SmithKline Beecham
Research and Development, now GlaxoSmithKline plc. Mr.Gill served in Division
and Corporate Finance positions at SmithKline Beecham from 1979 to 1984.
During 1985, Mr. Gill was a founding member of SmithKline Beecham's life
sciences venture capital fund, S.R. One, Ltd. In 1989, he was named Executive
Vice President and Chief Operating Officer of SK&F/NOVA Pharmaceuticals, a
neuroscience drug discovery joint venture of SmithKline Beckman and NOVA
Pharmaceutical Corporation. He returned to S.R. One, Ltd. during 1991 and
moved to SmithKline Beecham Research and Development during 1995. Prior to
joining SmithKline Beecham, Mr. Gill worked for Peat, Marwick, Mitchell &
Company. Mr. Gill is a Certified Public Accountant and received his B.A. in
Accounting and Economics from Rutgers University in 1975. He served in the
United States Marine Corps from 1971 to 1973.

   Dr. Roger F. Bone joined us in 1993 and currently serves as Senior Vice
President, Research and Development. Dr. Bone began his career with Merck &
Co. in 1990 as Senior Research Biophysicist and was named Research Fellow in
1992. He was a Postdoctoral Fellow at the University of California from 1985
to 1990, and he was an associate with Howard Hughes Medical Institute from
1988 to 1990. Dr. Bone is a recipient of the U.S. Public Health Service
Individual National Research Award, is widely published in scientific
journals, and is a co-inventor on several patents, including patents covering
our DirectedDiversity(R) technology. Dr. Bone received his Ph.D. in
Biochemistry from the University of North Carolina at Chapel Hill and his B.S.
in Chemistry from Purdue University.

   Mr. Scott M. Horvitz has served as our Vice President, Finance and
Administration since our inception. From 1991 to 1993, Mr. Horvitz held
various positions at Magainin Pharmaceuticals Inc., now Genaera Corporation,
and most recently served as Executive Director, Finance and Human Resources.
From 1983 to 1991, Mr. Horvitz was with the firm of Richard A. Eisner and
Company, LLP, Certified Public Accountants, where he most recently served as a
Senior Audit Manager, specializing in venture-financed, technology start-up
companies. Mr. Horvitz holds a B.S. in Accounting from the University at
Albany and is a Certified Public Accountant. Mr. Horvitz is currently a member
of the University at Albany Life Sciences Steering Committee.

   Dr. Brian R. MacDonald joined us in January 2002 as Vice President,
Development. Prior to joining us, Dr. MacDonald served as Group Director,
Emerging Therapeutic Areas, North American Medical Affairs, for
GlaxoSmithKline plc (GSK) where he managed the clinical development of a
portfolio of compounds in several disease areas. From 1995 to 2002, Dr.
MacDonald held positions of increasing responsibility with SmithKline Beecham
Pharmaceuticals (subsequently GSK). Prior to joining SmithKline Beecham
Pharmaceuticals, Dr. MacDonald held teaching positions with the University of
Pennsylvania and the University of Bath, U.K. Dr. MacDonald is a member of
several well-respected medical research organizations. He received his medical
degree and his Ph.D. from the University of Sheffield Medical School,
Sheffield, UK and trained as a rheumatologist at the Royal National Hospital
for Rheumatic Diseases, Bath UK.

   Ms. Kathy A. Quay joined us in September 2001 as Vice President Human
Resources. From February 1999 to February 2001, Ms. Quay was a Senior
Consultant with Watson Wyatt Worldwide, a global consulting firm. Prior to
joining Watson Wyatt, Ms. Quay held leadership positions in Human Resources
for Rhone-Poulenc Rorer, Inc. She also held various human resources positions
for Centeon LLC, PECO Energy Company and General Electric Company. Ms. Quay
received her BBA with a concentration in Industrial Relations from Ursinus
College.

   Melinda P. Rudolph joined us in March 2002 as Vice President and General
Counsel. From 1992 until she joined us, Ms. Rudolph was in private practice at
the law firm of Harkins Cunningham, where she served as a partner (1998-2002),
and of counsel (1996-1998) and an associate (1992-1995). Before joining
Harkins

                                      20
<PAGE>

Cunningham, Ms. Rudolph was associated with the law firm of Pepper Hamilton &
Scheetz (now Pepper Hamilton LLP). Ms. Rudolph received her J.D. in 1986 from
the University of Pennsylvania Law School, where she was the winner of the
Edwin R. Keedy Moot Court Competition. She received a B.A., cum laude from the
University of Pennsylvania in 1978.

Item 2. Properties

   We currently occupy approximately 104,500 square feet of space including
our executive offices in Yardley, Pennsylvania and our two research facilities
located in Exton, Pennsylvania and Cranbury, New Jersey. Our corporate and
administrative offices cover 20,500 square feet of office space which we
occupied in October of 2001 and which are leased through March of 2006. We
lease approximately 41,000 square feet of space in Exton, Pennsylvania which
houses one of our research and development facilities, including approximately
10,000 square feet, adjacent to our initial space, which we occupied in
December 2000. The initial 31,000 square feet of our Exton facility is leased
through June 2008 and the additional 10,000 square feet is subject to options
allowing us to extend that portion of the lease term through June 2008. Our
other research and development facility includes approximately 43,000 square
feet of space in Cranbury, New Jersey. Our Cranbury facility is leased through
May 2007. We believe that our current space is sufficient to meet our near
term requirements.

Item 3. Legal Proceedings

   We are not currently a party to any material legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

   No matters were submitted to stockholders during the fourth quarter of
2001.

                                    PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

   Our common stock has been traded on the Nasdaq National Market under the
symbol "DDDP" since August 4, 2000.

   The following table sets forth the high and low closing prices for our
common stock for the quarters indicated as reported on the Nasdaq National
Market.

<TABLE>
<CAPTION>
                                                                  High     Low
                                                                 ------- -------
       <S>                                                       <C>     <C>
       2000
        Third Quarter........................................... $38.875 $15.00
        Fourth Quarter..........................................  35.00   11.375

       2001
        First Quarter........................................... $15.125 $ 7.25
        Second Quarter..........................................  16.64    7.75
        Third Quarter...........................................  10.39    6.60
        Fourth Quarter..........................................   9.60    5.54
</TABLE>

   As of February 11, 2002, there were approximately 138 holders of record and
approximately 2,845 beneficial stockholders of our common stock.

   We do not intend to pay any cash dividends on our common stock in the
foreseeable future. We currently intend to retain any future earnings for use
in our business.

                                      21
<PAGE>

Item 6. Selected Consolidated Financial Data

   The selected consolidated financial data set forth below is derived from
our consolidated financial statements. Our statements of operations data for
the year ended December 31, 2001 and our balance sheet data at December 31,
2001 are derived from our consolidated financial statements that have been
audited by Arthur Andersen LLP and our consolidated statements of operations
data for the years ended December 31, 2000 and 1999 and our consolidated
balance sheet data at December 31, 2000 are derived from our financial
statements that were audited by Richard A. Eisner & Company, LLP. These
financial statements are included elsewhere in this annual report, and are
qualified by reference to such consolidated financial statements. The
statement of operations data for the years ended December 31, 1998 and 1997
and the balance sheet data as of December 31, 1999, 1998 and 1997 are derived
from our audited financial statements, which are not included in this annual
report. The selected consolidated financial information set forth below should
be read together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes appearing elsewhere in this annual report.

<TABLE>
<CAPTION>
                                          Year ended December 31,
                                 ---------------------------------------------
                                   2001     2000      1999     1998     1997
                                 --------  -------  --------  -------  -------
                                    (in thousands except per share data)
<S>                              <C>       <C>      <C>       <C>      <C>
Statements of Operations Data:
Research and grant revenue.....  $ 28,399  $12,409  $  4,489  $ 5,095  $ 3,580
                                 --------  -------  --------  -------  -------
Costs and expenses
 Research and development......    29,614   14,562    12,136   10,984    6,517
 General and administrative....    15,334    8,652     6,525    4,458    3,000
 Litigation settlement.........       --       --      1,500      --       --
                                 --------  -------  --------  -------  -------
  Total costs and expenses.....    44,948   23,214    20,161   15,442    9,517
                                 --------  -------  --------  -------  -------
Loss from operations...........   (16,549) (10,805)  (15,672) (10,347)  (5,937)
Interest income................     5,344    3,458       328      868      521
Interest expense...............      (237)    (646)     (625)    (232)    (149)
                                 --------  -------  --------  -------  -------
Loss before income taxes.......   (11,442)  (7,993)  (15,969)  (9,711)  (5,565)
Provision for income taxes.....       --       159       --       --       --
                                 --------  -------  --------  -------  -------
Net loss.......................   (11,442)  (8,152)  (15,969)  (9,711)  (5,565)
Declared and accrued cumulative
 dividends on preferred
 stock.........................       --      (396)     (669)    (144)     --
                                 --------  -------  --------  -------  -------
Net loss applicable to common
 stock.........................  $(11,442) $(8,548) $(16,638) $(9,855) $(5,565)
                                 ========  =======  ========  =======  =======
Basic and diluted net loss per
 common share--historical......  $   (.53) $  (.97) $ (27.37) $(22.20) $(27.55)
                                 ========  =======  ========  =======  =======
Weighted average common shares
 outstanding--historical.......    21,626    8,778       608      444      202
                                 ========  =======  ========  =======  =======
Basic and diluted net loss per
 common share--pro forma.......            $  (.52) $  (1.57)
                                           =======  ========
Weighted average common shares
 outstanding--pro forma........             15,663    10,198
                                           =======  ========
</TABLE>

   See our consolidated financial statements for a description of the
computation of the historical and pro forma net loss per share and the number
of shares used in the historical and pro forma per share calculations in
"Statements of Operations Data" above.

                                      22
<PAGE>

<TABLE>
<CAPTION>
                                           As of December 31,
                                ---------------------------------------------
                                  2001      2000     1999     1998     1997
                                --------  --------  -------  -------  -------
                                             (in thousands)
<S>                             <C>       <C>       <C>      <C>      <C>
Balance Sheet Data:
Cash, cash equivalents and
 marketable securities......... $100,389  $114,557  $ 7,645  $ 9,726  $ 8,953
Total assets...................  117,119   123,244   12,480   15,712   12,646
Notes payable--dividends and
 accrued interest..............      --        --       685      144      --
Deferred revenue, less current
 portion.......................    3,286     9,619      --       --       --
Long-term debt, less current
 portion.......................      161     1,315    2,330    3,270      820
Convertible notes and accrued
 interest......................      --        --    10,115      --       --
Settlement accrual, less
 current portion...............      --        --       500      --       --
Redeemable convertible
 preferred stock...............      --        --    34,834   34,834   24,461
Accumulated deficit............  (64,703)  (53,261) (45,109) (29,140) (19,429)
Total stockholders' equity
 (deficiency)..................   92,246   100,023  (41,748) (25,384) (15,702)
</TABLE>

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Overview

   We are a small molecule drug discovery and development business that has a
pipeline of drug candidates in the areas of cancer, inflammation, and
metabolic and cardiovascular diseases. Almost all of the drug candidates in
our pipeline were discovered using portions of our integrated set of
proprietary technologies called DiscoverWorks.(R) We believe DiscoverWorks
increases the productivity of the drug discovery process by making it faster
than traditional drug discovery methods and by providing our scientists with
the ability to design characteristics into drug candidates that increase the
probability of development success. DiscoverWorks may also enable us to
discover drugs that act on many of the thousands of new drug targets revealed
from sequencing the human genome. We use DiscoverWorks to discover and develop
drugs for our own pipeline and in collaboration with pharmaceutical and
biotechnology companies.

   To date, substantially all of our revenue has been from corporate
collaborations, license agreements, and government grants. Revenue from
corporate collaborations and licensing agreements consists of up-front fees,
research and development funding, and milestone payments. Royalties from sales
of developed products are not expected for at least several years, if at all.

   We have incurred substantial operating losses since our inception in 1993.
As of December 31, 2001, our accumulated deficit was $64.7 million. We have
funded our operations primarily through public and private placements of
equity securities totaling $153.0 million and cash received under
collaborative agreements, license agreements, and government grants of $68.5
million. Our losses have resulted from costs incurred in research and
development activities related to technology development, internally funded
drug discovery and development programs, and associated administrative support
costs. During 2001, we achieved a significant portion of our near term
staffing needs, increasing our staff from 125 to 200, which includes 90
Ph.D.s. The staff expansion has enabled us to initiate and advance several
internally funded programs. A key objective of ours is to continue to progress
and expand our pipeline of drug candidates, which currently includes several
programs in various stages of discovery and development.

   For 2002, our existing collaborations, license agreements, and government
grants are expected to provide revenues of approximately $24 million relating
to up-front fees, research funding payments, and license fees. Not included in
the 2002 estimate are potential milestone payments from existing agreements or
revenues from any future collaborations. Although one of our goals is to enter
into additional DiscoverWorks collaborations, our basic business model is to
focus a greater portion of our resources on internally funded product research
and development. As a result, we expect to incur increasing operating losses
in 2002 and over the next several years. In connection with our objective to
enhance our pipeline, in January 2002 we acquired worldwide rights to a pre-
clinical compound from GlaxoSmithKline plc (GSK) for the prevention and
treatment of thrombocytopenia,

                                      23
<PAGE>

or low blood platelet count. We believe that this compound fits well with our
strategic effort in oncology. All payments that we will make to GSK will be in
3DP stock. We made an initial payment of 0.5 million shares and are obligated
to issue up to 1.9 million additional shares if the compound achieves certain
key development and regulatory milestone events. We expect to recognize a non-
cash in-process research and development charge in the first quarter of 2002
of $4.1 million for the initial 0.5 million shares.

   Our ability to achieve profitability is dependent on the progress and
commercialization of drug candidates from existing programs and collaborations
and our ability to initiate and develop new programs and enter into additional
collaborations with favorable economic terms. Payments under drug discovery
and development agreements will be subject to significant fluctuation in both
timing and amount and therefore our results of operations for any period may
not be comparable to the results of operations for any other period.

Critical Accounting Policies

   Our significant accounting policies are described in Note B to the
consolidated financial statements included in Item 8 of this Form 10-K. We
believe our most critical accounting policy is revenue recognition. Revenue
from corporate collaborations and licensing agreements consists of up-front
fees, research and development funding, and milestone payments. Non-refundable
up-front fees are deferred and amortized to revenue over the related
performance period. We estimate our performance period as the initial research
term. The actual performance period may vary. We will adjust the performance
period estimate based upon available facts and circumstances. Periodic
payments for research and development activities and government grants are
recognized over the period that we perform the related activities under the
terms of the agreements. Revenue resulting from the achievement of milestone
events stipulated in the agreements is recognized when we have (i) adequate
evidence that the milestone has been achieved and (ii) the achievement of the
milestone is deemed to be substantive. The determination whether the
achievement of the milestone is substantive is generally based upon the
ability to verify the developmental progress.

Results of Operations

 Years Ended December 31, 2001 and 2000

   Revenue. Our revenue for the year ended December 31, 2001 was $28.4
million, compared to $12.4 million for the year ended December 31, 2000. The
revenue increase results from discovery collaborations and license agreements
with Schering AG, Germany, Bristol-Myers Squibb Company and Centocor, Inc., a
wholly owned subsidiary of Johnson & Johnson, that commenced in May 2000, July
2000 and December 2000, respectively. Included in the 2001 revenue is a $4.0
million payment resulting from a milestone that the Company achieved in
October 2001 in connection with the Centocor, Inc. agreement. In December
2001, we entered into a DiscoverWorks drug discovery alliance with Johnson &
Johnson Pharmaceutical Research & Development L.L.C. We will begin to
recognize revenue from this agreement in 2002.

   Research and Development Expenses. Our research and development expenses
increased by $15.0 million to $29.6 million for the year ended December 31,
2001, compared to $14.6 million for the year ended December 31, 2000. During
2001, we increased our capacity to generate drug leads and added resources to
progress our drug candidates to clinical trials. Related to our expansion were
increases in personnel, scientific instrumentation, computing, and facilities
expenses. We anticipate that research and development expenses will continue
to increase as we advance more research and development programs towards and
into human clinical trials.

   General and Administrative Expenses. Our general and administrative
expenses increased by $6.6 million to $15.3 million for the year ended
December 31, 2001, compared to $8.7 million for the year ended December 31,
2000. The increase was primarily related to increased management and personnel
expenses, increased investments in business development and facilities
required to support our continued research and development efforts, and
additional expenses relating to our operations as a public company.

                                      24
<PAGE>

   Other Income (Expenses). Interest income increased by $1.8 million to $5.3
million for the year ended December 31, 2001, compared to $3.5 million for the
year ended December 31, 2000. The increase in interest income is attributable
to the investment of the proceeds from our initial public offering and private
placements of securities, as well as investment of the up-front fees we have
received from our collaborators. Interest expense was $0.2 million for the
year ended December 31, 2001 and $0.6 million for the year ended December 31,
2000. The decrease was due to the decrease in the amount of interest-bearing
notes outstanding during the period.

   Provision for Income Taxes. As of December 31, 2001, we had net operating
loss carryforwards for federal income taxes of $43.4 million. We also had
federal research and development tax credit carryforwards. Our utilization of
the net operating loss and tax credit carryforwards may be subject to annual
limitations pursuant to Section 382 of the Internal Revenue Code, and similar
state provisions, as a result of changes in our ownership structure. The
annual limitations may result in the expiration of net operating losses and
credits prior to utilization.

   At December 31, 2001 and 2000, the Company had deferred tax assets
representing the benefit of net operating loss carryforwards, certain start up
costs capitalized for tax purposes, up-front payments from collaborators
taxable in the year received, and research and development tax credits. During
the year ended December 31, 2000, we recorded a provision for federal and
state income taxes of $0.2 million. The federal tax provision was based on the
alternative minimum tax under which net operating loss carryforwards are
available to offset 90% of our current tax liability. The Company did not
record a benefit for the deferred tax asset because realization of the benefit
was uncertain and, accordingly, a valuation allowance is provided to offset
the deferred tax asset.

 Years Ended December 31, 2000 and 1999

   Revenue. Our revenue for the year ended December 31, 2000 was $12.4
million, compared to $4.5 million for the year ended December 31, 1999. The
revenue increase results from discovery collaborations and license agreements
with Schering AG, and Bristol-Myers Squibb, that commenced in May 2000 and
July 2000, respectively. The 2000 revenue amount is net of a charge of
approximately $0.4 million in connection with a modification of the Bristol-
Myers Squibb agreement made during the fourth quarter of 2000. The
modification resulted from an agreement with Bristol-Myers Squibb to terminate
both Bristol-Myers Squibb's subscription to a planned GPCR structure database
and its non-exclusive license to related technologies.

   Research and Development Expenses. Our research and development expenses
increased by $2.5 million to $14.6 million for the year ended December 31,
2000, compared to $12.1 million for the year ended December 31, 1999. During
2000, we continued to expand our research and development investments,
including clinical testing of our lead thrombin inhibitor compound, in our
internally funded and collaborative programs. Related to our expansion were
increases in personnel, scientific instrumentation, and facilities expenses.

   General and Administrative Expenses. Our general and administrative
expenses increased by $2.2 million to $8.7 million for the year ended December
31, 2000 compared to $6.5 million for the year ended December 31, 1999. The
increase was primarily related to increased management and personnel expenses,
increased investments in business development and facilities required to
support our continued growth, and additional expenses relating to our
operations as a public company.

   Other Income (Expenses). Interest income increased by $3.2 million to $3.5
million for the year ended December 31, 2000, compared to $0.3 million for the
year ended December 31, 1999. The increase in interest income is attributable
to the investment of the proceeds from our initial public offering and private
placements of securities completed during this period, as well as investment
of the up-front fees we have received from our collaborators. Interest expense
was $0.6 million for the years ended December 31, 2000 and December 31, 1999.

   Provision for Income Taxes. As of December 31, 2000, we had net operating
loss carryforwards for federal income taxes of $35.1 million. We also had
federal research and development tax credit carryforwards.

                                      25
<PAGE>

Our utilization of the net operating loss and tax credit carryforwards may be
subject to annual limitations pursuant to Section 382 of the Internal Revenue
Code, and similar state provisions, as a result of changes in our ownership
structure. The annual limitations may result in the expiration of net
operating losses and credits prior to utilization.

   At December 31, 2000 and 1999, the Company had deferred tax assets
representing the benefit of net operating loss carryforwards, certain start up
costs capitalized for tax purposes, up-front payments from collaborators
taxable in the year received, and research and development tax credits. During
the year ended December 31, 2000, we recorded a provision for federal and
state income taxes of $0.2 million. The federal tax provision was based on the
alternative minimum tax under which net operating loss carryforwards are
available to offset 90% of our current tax liability. The Company did not
record a benefit for the deferred tax asset because realization of the benefit
was uncertain and, accordingly, a valuation allowance is provided to offset
the deferred tax asset.

Liquidity and Capital Resources

   At December 31, 2001, we had cash, cash equivalents, and marketable
securities of $100.4 million and working capital of $82.0 million. We have
funded substantially all of our operations through public and private
placements of equity securities with aggregate proceeds of approximately
$153.0 million, and cash received from corporate collaborations totaling $64.7
million, government grants totaling $3.8 million, capital equipment and
leasehold improvement financing totaling $7.8 million, and interest earned on
our cash balances. In addition, in February 2002 we repaid a $5.0 million
short-term note and then entered into a series of loans totaling $6.5 million,
payable over 36 to 48 months, to finance the purchase of capital equipment and
leasehold improvements. We believe that our available cash and cash
equivalents, and marketable securities, expected revenue from collaborations
and license arrangements, existing capital resources, interest income, and
additional borrowings should be sufficient to fund anticipated levels of
operations for at least the next two years.

   We expect that substantially all of our revenue for the foreseeable future
will come from corporate collaborations, license agreements, government
grants, and interest earned on the proceeds from our sales of securities,
primarily in our initial public offering in 2000. However, there can be no
assurance that we will successfully enter into new agreements with
collaborators or extend the terms of our existing collaborations. If we raise
additional funds through collaborations and licensing arrangements, we may be
required to relinquish some rights to our technologies or drug candidates, or
grant licenses on terms that are not favorable to us. We expect to incur
increasing operating losses over the next several years as we continue to
focus a greater portion of our effort on internal product research and
development and further develop our technologies. To the extent that funds
from our existing and future collaborations are not sufficient to fund our
activities, it will be necessary to raise additional funds through public
offerings or private placements of securities, long-term borrowings, or other
methods of financing. There can be no assurance that such financing will be
available on acceptable terms, if at all. If adequate funds are not available,
we may have to delay or may not be able to continue developing our drug
candidates.

   The following table summarizes our obligations as of December 31, 2001 to
make future principal payments under our current contractual obligations:

<TABLE>
<CAPTION>
                                     Less than                        After 5
                            Total      1 Year   1-3 Years  4-5 Years   Years
                         ----------- ---------- ---------- ---------- --------
<S>                      <C>         <C>        <C>        <C>        <C>
Short-term debt......... $ 5,000,000 $5,000,000        --         --       --
Long-term debt..........   1,227,000  1,066,000 $  161,000        --       --
Operating leases........  13,469,000  2,418,000  7,432,000 $3,397,000 $222,000
                         ----------- ---------- ---------- ---------- --------
Total contractual
 obligations............ $19,696,000 $8,484,000 $7,593,000 $3,397,000 $222,000
                         =========== ========== ========== ========== ========
</TABLE>

   In addition, pursuant to our lease agreement for our Cranbury, New Jersey
research facility, we maintain a $750,000 standby letter of credit.

                                      26
<PAGE>

Factors Affecting the Company's Prospects

We have a history of net losses and may never achieve or maintain
profitability.

   We have incurred net losses since our inception, including net losses of
approximately $8.2 million for the year ended December 31, 2000 and
approximately $11.4 million for the year ended December 31, 2001. As of
December 31, 2001, we had an accumulated deficit of approximately $64.7
million. Although one of our goals is to enter into additional DiscoverWorks
collaborations, our basic business model is to focus a greater portion of our
efforts on internally funded product research and development. As a result, we
expect to incur increasing operating losses over the next several years. The
extent of our future losses will depend on the rate of growth, if any, of our
revenue and on the level of our expenses. To date, we have derived
substantially all of our revenue from corporate collaborations, license
agreements and government grants. We expect that substantially all of our
revenue for the foreseeable future will result from payments from these
sources and from the licensing of our technologies and certain of our pre-
clinical and clinical drug candidates. We also expect to continue to invest in
our drug discovery technologies and to fund research and development of drug
candidates. Because our operating expenses will increase in the future, we
will need to generate significant additional revenue to achieve profitability.
In order to generate revenue, we must continue to develop products and
technologies from which we can derive revenue either ourselves or through
existing and future collaborations. Accordingly, we may never achieve
profitability. Even if we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis.

If we fail to obtain necessary funds for our operations, we will be unable to
maintain and improve our technology position and will be unable to develop and
commercialize our drug candidates.

   To date, we have funded our operations primarily through public and private
placements of equity securities and revenues from corporate collaborations,
with additional revenue from government grants, capital equipment and
leasehold financing, and interest earned on net proceeds of our initial public
offering and private placements. We believe that our cash and cash
equivalents, expected revenue from collaborations and license arrangements,
existing capital resources and interest income should be sufficient to meet
our operating and capital requirements for at least the next two years.
However, our present and future capital requirements depend on many factors,
including:

  .  the level of research and development investment required to maintain
     and improve our technology position;

  .  our ability to enter into new agreements with collaborators or to extend
     the terms of our existing collaborations, and the terms of any agreement
     of this type. During 2001, the research term for one of our
     collaborations ended and the research terms for two other collaborations
     are scheduled to end in 2002;

  .  our success rate or that of our collaborators in discovery and
     development efforts associated with milestones and royalties;

  .  the timing, willingness and success of our collaborators to
     commercialize our products, which would result in milestone payments and
     in royalties;

  .  costs of recruiting and retaining qualified personnel;

  .  costs of filing, prosecuting, defending and enforcing patent claims and
     other intellectual property rights;

  .  our need or decision to acquire or license complementary technologies or
     new targets, or acquire complementary businesses; and

  .  changes in drug candidate development plans needed to address any
     difficulties in clinical studies or in commercialization.

                                      27
<PAGE>

   Should we require additional capital in the future, we do not know whether
additional financing will be available on acceptable terms when needed. We
would try to raise necessary funds through public or private equity offerings
or debt financings or through corporate collaborations and licensing
arrangements.

   If we raise additional capital by issuing equity securities, our existing
stockholders' percentage ownership will be reduced and they may experience
substantial dilution. Any equity securities issued may also provide for
rights, preferences or privileges senior to those of holders of our common
stock. If we raise additional funds by issuing debt securities, these debt
securities would have rights, preferences and privileges senior to those of
holders of our common stock and the terms of the debt securities issued could
impose significant restrictions on our operations. If we raise additional
funds through collaborations and licensing arrangements, we may be required to
relinquish some rights to our technologies or drug candidates, or grant
licenses on terms that are not favorable to us. If adequate funds are not
available, we may have to delay or may not be able to continue developing our
drug candidates.

   If additional funds are required to operate our business, these funds may
not be available on terms that we find favorable, if at all. If adequate funds
are not available or are not available on acceptable terms, our ability to
fund our operations, take advantage of opportunities, develop products or
technologies or otherwise respond to competitive pressures could be
significantly delayed or limited and we may need to downsize or halt our
operations.

All of the drug candidates we are developing, including those we have licensed
for commercial development, are at an early stage of development, and they may
fail in later development or commercialization.

   All of the compounds that we are currently developing will require
significant additional research, formulation and manufacturing process
development, and pre-clinical and extensive clinical testing prior to
regulatory approval and commercialization. Pre-clinical and clinical studies
of our products under development may not display the safety and efficacy
necessary to obtain regulatory approvals. Pharmaceutical and biotechnology
companies have suffered significant setbacks in advanced clinical trials, even
after experiencing promising results in earlier trials. Products that appear
to be promising at early stages of development may not reach the market or be
marketed successfully for a number of reasons, including the following:

  .  researchers may find that the product is ineffective or has harmful side
     effects during later pre-clinical testing or clinical trials;

  .  the product may fail to receive necessary regulatory approval or
     clearance;

  .  the product may be too difficult to manufacture on a large scale;

  .  the product may be too expensive to manufacture or market;

  .  the product may not achieve broad market acceptance;

  .  others may hold proprietary rights that will prevent the product from
     being marketed; or

  .  others may market equivalent or superior products.

   We do not expect that we will make commercially available any products we
are developing internally or in association with our collaborators for at
least several years, if at all. We and our collaborators may not succeed in
our research and product development efforts and we may not be able to launch
any successfully commercialized products. Further, after commercial
introduction of a new product, discovery of problems through adverse event
reporting could result in restrictions on the product, including recall or
withdrawal from the market and, in certain cases, civil or criminal penalties
resulting from actions by regulatory authorities or damage from product
liability judgments.

                                      28
<PAGE>

We are developing and using new technologies, and if we are unable to
successfully commercialize these technologies, we will not achieve
profitability.

   Our DiscoverWorks technologies, in particular our DirectedDiversity and
ThermoFluor technologies, represent a new approach to the identification and
optimization of lead compounds with therapeutic potential. We have not used
these technologies in the development of any compound that has reached the
point of commercialization. The collaboration with Bristol-Myers Squibb
Company represents the initial collaborative use of the entire DiscoverWorks
process. In addition, although we began using the entire DiscoverWorks set
process in our internal programs in 1998, we did not use our ThermoFluor
technology in our most advanced programs. Our technologies may not result in
the successful identification, optimization or development of compounds that
are safe or efficacious. Because the development of new pharmaceutical
products is highly uncertain, our drug discovery technologies may not produce
any commercially successful compounds. Failure to validate our technologies
through the successful discovery of compounds that become commercialized would
hinder our ability to license drug candidates developed by us internally and
to market successfully our technologies and services.

   Historically, due to the highly proprietary nature of drug discovery and
development efforts, and the desire to obtain maximum patent and other
proprietary protection for their programs, other pharmaceutical and
biotechnology companies have conducted molecular target screening and lead
compound identification and optimization within their own internal research
departments. We must convince these companies that our technologies and
capabilities justify retaining us to work on drug discovery programs on their
behalf or the licensing by them of our technologies. Under the terms of a
settlement agreement with Anadys Pharmaceuticals, Inc., formerly known as
Scriptgen Pharmaceuticals, Inc., we acquired a limited license to Anadys'
ATLAS (Any Target Liquid Affinity Screen) assay technology, and Anadys was
granted a limited license to the method claims of our ThermoFluor screening
technology. Neither of these licenses was exclusive. The settlement agreement
precludes us, until March 7, 2003, from using our ThermoFluor screening
technology in the Hepatitis C Virus "infection" area as part of collaborative
agreements or as part of our internal drug programs. In addition, the
settlement agreement precludes us from using our ThermoFluor screening
technology as part of more than one collaboration agreement in other areas of
"infection" until March 7, 2003, and such collaborative agreement must be
limited to a maximum of three anti-viral targets. Our collaboration agreement
with Bristol-Myers Squibb Company constitutes the one permitted collaboration
agreement in the area of infection. Our ability to succeed will depend upon
the acceptance by potential collaborators of our systems, services and
technologies as effective discovery tools.

If we do not update and enhance our technologies, they will become obsolete.

   Technological change occurs rapidly in the pharmaceutical market, and our
future success may depend on our ability to continuously update and enhance
our technologies. Because DiscoverWorks integrates many technologies, we may
find it difficult to stay abreast of the rapid changes in each of the areas
that DiscoverWorks encompasses. If we fail to stay at the forefront of
technological change, we may be unable to compete effectively. In particular,
our DirectedDiversity technology for optimizing the properties of lead
compounds and our ThermoFluor technology for high-throughput screening involve
areas where many companies are actively developing new technologies. Because
the pharmaceutical and biotechnology industries currently perceive high-
throughput screening and optimizing of lead compounds to represent critical
bottlenecks in the discovery process, our competitors are using substantial
resources to develop new technologies to reduce these bottlenecks.
Accordingly, advances in existing technological approaches or our current or
future competitors' development of different approaches may render our
technologies obsolete.

We are dependent on our collaborators, and our failure to successfully manage
our existing and future collaborations and license arrangements could prevent
us or our collaborators from developing and commercializing our products.

   Our strategy depends upon the maintenance of our existing collaborations
and licensing arrangements as well as the formation of new collaborations and
licensing arrangements, principally with pharmaceutical and

                                      29
<PAGE>

biotechnology companies. We may fail to maintain our existing collaborations
or licensing arrangements, or establish additional collaborative or licensing
arrangements, on terms favorable to us. In addition, our current or future
collaborations or licensing arrangements may not be successful or we may be
unable to successfully manage these collaborations or licensing arrangements.
As a result, we could become involved in disputes that might result in, among
other things, a significant strain on our management resources, legal claims
involving significant time and expense, a loss of capital and a loss of
current or future collaborators. Several other factors could harm our present
or future collaborations or licensing arrangements, such as:

  .  our failure to achieve our research and development objectives under our
     collaborative agreements;

  .  the development of conflicts with our collaborators as to rights to
     intellectual property to technologies or product candidates either we or
     they develop;

  .  our entry into additional collaboration agreements that potentially
     conflict with the business objectives of our collaborators;

  .  the decision by our collaborators to become competitors of ours or enter
     into agreements with our competitors; or

  .  the limit on the number of potential collaborators that results from
     further consolidation in our target markets.

   In addition, if we exclusively license any aspect of our technologies to
one or more collaborators, we will limit our ability to license this
technology to other parties. This may limit our ability to enter into future
collaborations or licensing arrangements.

   Since we do not currently possess the resources necessary to complete
development and commercialization of our drug candidates, we expect to rely on
and continue to enter into licensing arrangements and/or third party expert
clinical investigators and clinical research organizations for the further
development and commercialization of our drug candidates. These drug
candidates will require significant pre-clinical and/or clinical development
efforts, the receipt of the requisite regulatory approvals and the successful
manufacturing and marketing of the drugs. A party to whom we license a drug
candidate may not devote sufficient resources to the development, manufacture,
marketing or sale of these products. We will have limited or no control over
the resources that any third party may devote to our projects.

   Any of our present or future collaborators may breach or terminate their
agreements with us or otherwise fail to conduct their collaborative activities
successfully and in a timely manner. In addition, we may dispute the
application of payment provisions under any of our collaboration agreements.
If we fail to enter into or maintain collaborative agreements, or if any of
these events occur, we may not be able to commercialize our technologies or
develop and commercialize our drug candidates.

If our collaborators fail to advance compounds arising from the use of our
technologies to develop and commercialize pharmaceutical products, our
business will suffer.

   Our future revenue will depend in part on the realization of milestone
payments and royalties, if any, triggered by our collaborators' successful
development and commercialization of compounds identified through the use of
our technologies or of compounds that we licensed. The agreements with our
collaborators do not obligate them to develop or commercialize lead compounds
identified through the use of our technologies. Our development and
commercialization of lead compounds will therefore depend not only on our and
our collaborators' achievement of development objectives, but also on each
collaborator's own financial, competitive, marketing and strategic
considerations, such as the relative advantages of other companies' products,
including relevant patent and proprietary positions. If a collaborator fails
to develop or commercialize a lead compound identified through the use of our
technologies, or if a compound that a collaborator develops is determined to
be unsafe or of no therapeutic benefit, we will not receive any future
milestone payments or royalties for that compound, and we may have only
limited or no rights to independently develop and commercialize that compound.

                                      30
<PAGE>

If the third-party expert clinical investigators and clinical research
organizations we intend to rely on to conduct any of our future clinical
trials do not perform in an acceptable or timely manner, our clinical trials
could be delayed or unsuccessful.

   We do not have the ability to independently conduct clinical studies and
obtain regulatory approvals for our drug candidates and, to the extent our
collaborators do not perform these functions, we intend to rely on third-party
expert clinical investigators and clinical research organizations to perform
these functions. If we cannot locate and enter into favorable agreements with
acceptable third parties, or if these third parties do not successfully carry
out their contractual duties, meet expected deadlines and enrollment
objectives and follow regulatory guidelines, including clinical laboratory and
manufacturing guidelines, then we will not obtain required approvals and will
be unable to commercialize our drug candidates on a timely basis, if at all.

If we or our collaborators are unable to manufacture or contract with third
parties to manufacture drug candidates in sufficient quantities and at an
acceptable cost, we or our collaborators may be unable to complete clinical
trials and commercialize these drug candidates.

   Our or our collaborators' completion of any pre-clinical or clinical trials
for our drug candidates involving large quantities of chemical substance, or
any future clinical trials and commercialization of drugs, will require access
to, or development of, facilities to manufacture a sufficient supply of our
investigational drug substance. We do not have the facilities or experience to
manufacture the quantities of drug substance necessary for any such trials or
commercial purposes on our own and do not intend to develop or acquire
facilities for the manufacture of such quantities of drug substance in the
foreseeable future. Instead, we currently intend to rely on third-party
contract manufacturers.

   In addition, because we intend to license certain of our drug candidates
for further development and commercialization, once a drug candidate is
licensed, we must rely on our collaborators' abilities to manufacture, or have
manufactured, the quantities necessary for further development and
commercialization of these drug candidates.

   Our manufacturing strategy presents the following risks:

  .  we, or our collaborators, may not be able to locate acceptable
     manufacturers or enter into favorable long-term agreements with them;

  .  third parties may fail to successfully manufacture our drug candidates
     or to manufacture them in a cost effective and/or timely manner;

  .  we have not tested the manufacturing processes for our drug candidates
     in quantities needed for clinical trials or commercial sales;

  .  delays in scale-up to commercial quantities could delay clinical
     studies, regulatory submissions, and commercialization of drug
     candidates;

  .  we may not have intellectual property rights, or may have to share
     intellectual property rights, to many improvements in the manufacturing
     processes or new manufacturing processes for our drug candidates;

  .  our drug candidates require a long lead time to manufacture and the
     manufacturing process is complex; and

  .  manufacturers of our drug candidates are subject to the FDA's current
     Good Manufacturing Practices regulations, or cGMPs, and similar foreign
     standards and we and our collaborators do not have day-to-day control
     over compliance with these regulations by third-party manufacturers.


                                      31
<PAGE>

   Any of these factors could delay clinical trials or commercialization of
drug candidates developed and commercialized by us or by our collaborators,
entail higher costs, and result in us or our collaborators being unable to
effectively sell any products.

If we, or our collaborators, do not obtain and maintain required regulatory
approvals, we will be unable to commercialize our product candidates.

   Regulation by governmental entities in the United States and other
countries could impact the development, production and marketing of any
pharmaceutical products that we or our collaborators develop. The nature and
the extent to which such regulation may apply will vary depending on the
nature of any such pharmaceutical products. In particular, FDA, and foreign
regulatory authorities apply rigorous pre-clinical and clinical testing and
other approval requirements to pharmaceutical products for use in humans and
animals. Various federal and, in some cases, state statutes and regulations
and similar statutes and regulations of foreign jurisdictions also govern or
influence the manufacturing, safety, labeling, storage, recordkeeping,
confidential patient information exchange, promotion, advertising, marketing,
and pricing relating to such pharmaceutical products. Companies spend a
significant amount of time and resources obtaining these approvals and
complying with appropriate federal and foreign statutes and regulations. Both
we and our collaborators may be unable to successfully complete the pre-
clinical and clinical development of, and file new drug applications, or NDAs
or BLAs, with the FDA for any drug candidate. In addition the FDA may not
grant approval on a timely basis, if at all, for any drug candidate. Any
failure by our collaborators or licensees to obtain, or any delay in
obtaining, regulatory approval or non-patent market exclusivity could
adversely affect our ability to receive milestone payments or royalty
revenues. Even if our collaborators or licensees obtain FDA regulatory
approvals, material changes to an approved product, such as manufacturing
changes or additional labeling claims, require further FDA review and
approval. Once obtained, the FDA may withdraw any approval. Further, if we,
our collaborators, our contract research organizations or our contract
manufacturers fail to comply with applicable FDA and other regulatory
requirements at any stage during the regulatory process, the FDA may impose
sanctions, including delays, warning letters, fines, product recalls or
seizures, injunctions, refusal of the FDA to review pending market approval
applications or supplements to approval applications, total or partial
suspension of production, civil penalties, withdrawals of previously approved
marketing applications, or criminal prosecutions. In addition, foreign
regulatory requirements governing human and animal clinical trials and
marketing approval for pharmaceutical products govern our and our
collaborators' marketing outside the United States. The requirements governing
the conduct of clinical trials, product licensing, pricing, and reimbursement
may vary from country to country, adding to the overall expense of drug
development.

If we, or our collaborators, do not obtain adequate reimbursement, we will be
unable to commercialize our product candidates.

   In both domestic and foreign markets, sales of our product candidates will
depend in part upon the availability of reimbursement from third-party payors.
Such third-party payors include government health administration authorities,
managed care providers, private health insurers, and other organizations.
These third-party payors are increasingly challenging the price and examining
the cost effectiveness of medical products and services. In addition,
significant uncertainty exists as to the reimbursement status of newly
approved healthcare products. We, or our collaborators, may need to conduct
post-marketing studies in order to demonstrate the cost-effectiveness of our
products. Such studies may require us to provide a significant amount of
resources. Our product candidates may not be considered cost-effective.
Adequate third-party reimbursement may not be available to enable us to
maintain price levels sufficient to realize an appropriate return on our
investment in product development. Domestic and foreign governments continue
to propose and pass legislation designed to reduce the cost of healthcare.
Accordingly, legislation and regulations affecting the pricing of
pharmaceuticals may change before our proposed products are approved for
marketing. Adoption of such legislation could further limit reimbursement for
pharmaceuticals. If the government and third-party payors fail to provide
adequate coverage and reimbursement rates for our product candidates, the
market acceptance of our products may be adversely affected. If our products
do not receive market acceptance, our business, financial condition, and
results of operations will be materially adversely affected.

                                      32
<PAGE>

If we are unable to build sales, marketing and distribution capabilities or
enter into agreements with third parties to perform these functions, we will
not be able to commercialize any of our drug candidates.

   We currently have no sales, marketing or distribution capabilities to
commercialize our drug candidates. In order to commercialize any of our drug
candidates, we must either internally develop sales, marketing and
distribution capabilities or make arrangements with third parties to perform
these services.

   To market any of our drug products directly, we would have to develop a
marketing and sales force with technical expertise and supporting distribution
capabilities and we may not be able to do so. To promote any of our drug
products through third parties, we would have to locate acceptable third
parties for these functions and enter into agreements with them on acceptable
terms and we may not be able to do so. If we enter into co-promotion or other
licensing arrangements, any product revenues would likely be lower than if we
directly marketed and sold our products, and any revenues that we may receive
would depend upon the efforts of third parties, which efforts may not be
successful. If these third parties do not succeed in carrying out their
contractual duties or do not meet expected deadlines, our sales would suffer
and we might not be profitable.

Our ability to compete in the market may decline if we do not adequately
protect our proprietary technologies, or if we lose some of our intellectual
property rights as a result of, or otherwise become involved in, expensive
lawsuits or administrative proceedings.

   Our intellectual property consists of patents, copyrights, trade secrets,
and trademarks. Our success depends in part on our ability to obtain patents
and maintain adequate protection of our intellectual property for our
technologies and products in the United States and other countries. We may be
unable to obtain any issued patents for any patent applications we have filed
or may file in the future.

   Our commercial success depends in part on avoiding infringing patents and
proprietary rights of third parties and developing and maintaining a
proprietary position with regard to our own technologies, products, and
business. The patent positions of pharmaceutical companies, including our
patent position, involve complex legal and factual questions, and whether a
company will be able to enforce its patent cannot always be predicted with
certainty. Even if we obtain patents, we may lose them in part or in whole as
a result of lawsuits or administrative proceedings, or competitors may
otherwise challenge or circumvent them. We cannot be sure that relevant
patents have not been issued, or that relevant publications or actions by
others have not occurred, that could block our ability to obtain patents or to
operate as we would like. Others may develop similar technologies or duplicate
technologies to those that we have developed. We are aware of the existence of
claims in a granted patent and published patent applications in some countries
that, if valid and broadly construed, may block our ability to commercialize
products or processes in those countries if we are unable to circumvent or
license them. As to those patents that we have licensed, our rights depend on
maintaining our obligations to the licensor under the applicable license
agreement and we may be unable to do so.

   Extensive litigation regarding patents and other intellectual property
rights characterizes our industry. Many companies have employed intellectual
property litigation as a way to gain a competitive advantage. If we became
involved in litigation or interference proceedings declared by the United
States Patent and Trademark Office, or oppositions or other intellectual
property proceedings outside of the United States, to defend our intellectual
property rights or as a result of alleged infringement of the rights of
others, we might have to spend significant amounts of time and money. We are
aware of a significant number of patents and patent applications relating to
our technologies filed by, or issued to, third parties. Should any of our
competitors have filed patent applications or obtained patents that claim
inventions that we also claim, we may have to participate in an interference
proceeding to determine priority of invention and, thus, the right to a patent
for these inventions or discoveries in the United States. We could incur
substantial costs from such a proceeding even if the outcome is favorable.
Even if successful on priority grounds, an interference may result in loss of
claims based on patentability grounds raised in the interference. The
litigation or proceedings could divert our management time and efforts. Even
unsuccessful claims could result in significant legal fees and other expenses,
diversion of management time and disruption in our business. Uncertainties
resulting from initiation and continuation of any patent or related litigation
could harm our ability to compete.

                                      33
<PAGE>

   An adverse ruling arising out of any intellectual property dispute,
including but not limited to an adverse decision as to the priority of our
inventions, would undercut or invalidate our intellectual property position.
An adverse ruling could also subject us to significant liability for damages,
prevent us from using processes or products, or require us to license disputed
rights from third parties. Although patent and intellectual property disputes
in the biotechnology area are often settled through licensing or similar
arrangements, costs associated with these arrangements may be substantial and
could include ongoing royalties. We may not be able to obtain any necessary
licenses on satisfactory terms, if at all.

   From time to time we have received letters from third parties suggesting
that we may want to consider licensing patents held by such third parties. We
believe that we have defenses to any infringement claim with respect to such
patents. However, we cannot be certain that one or more of the third parties
will not initiate litigation alleging that our technologies infringe claims of
such patents or that a court would not find such claims valid and infringed.

   We have funded specific technologies with U.S. government grants. For
instance, we developed our ThermoFluor screening technology using funds from a
grant awarded by the National Institute for General Medical Sciences at the
National Institutes of Health, and portions of our GPCR technology using funds
from grants awarded by the National Institute for General Medical Sciences at
the National Institutes of Health. We elected to retain title in these
technologies, subject to a nonexclusive, nontransferable, irrevocable, paid-up
license to the U.S. government to practice or have practiced for or on behalf
of the government any technology developed with these funds.

Confidentiality agreements with employees and others may not adequately
prevent disclosure of trade secrets and other proprietary information.

   In order to protect our proprietary technology and processes, we also rely
in part on trade secret protection for our confidential and proprietary
information. Our policy is to execute confidentiality agreements with our
employees and consultants upon the commencement of an employment or consulting
arrangement with us. These agreements require that all confidential
information that the individual develops or that we make known to the
individual during the course of the individual's relationship with us be kept
confidential and not disclosed to third parties. These agreements also provide
that inventions that the individual conceives in the course of rendering
services to us shall be our exclusive property. Such individual may,
nonetheless, disclose proprietary information, others may independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to our trade secrets, and we may be unable to
meaningfully protect our trade secrets. Costly and time-consuming litigation
could be necessary to enforce and determine the scope of our proprietary
rights, and failure to obtain or maintain trade secret protection could
adversely affect our competitive business position.

If our competitors develop and market drug discovery technologies or drug
candidates faster than we do or that are superior to our drug discovery
technologies or drug candidates, our commercial opportunities will be reduced
or eliminated.

   We compete both in the markets for drug discovery technologies and services
and the markets for pharmaceutical products. Our principal competitors are the
internal drug discovery departments of our pharmaceutical company customers
and potential customers. Many of our customers and potential customers have
developed or acquired or are developing or are acquiring integrated drug
discovery capabilities that use combinatorial chemistry (the science of
modifying a central core structure by adding different chemical groups
connected to the core at different positions), chemi-informatics software
(software for handling chemistry data), structure-based drug design and high-
throughput screening. In addition, many of these companies have large
collections of compounds that they have previously synthesized, purchased from
chemical supply catalogs or obtained from other sources against which they may
screen new targets.

                                      34
<PAGE>

   We also compete with biotechnology and drug discovery services companies,
academic and scientific institutions, governmental agencies, and public and
private research organizations. Our technology platform integrates many
technologies, including combinatorial chemistry, chemi-informatics software,
structure-based drug design and high-throughput screening. We face competition
based on numerous factors, including size, diversity and ease of use of
compound libraries, speed and cost of identifying and optimizing potential
lead compounds and patent position, from companies offering one or more
technology components of the discovery process. These entities compete with us
either on their own or in collaborations.

   While we believe that our integration of proprietary technologies for drug
discovery provides us with a competitive advantage over many of our
competitors, we expect that many of our competitors will seek to integrate and
improve their technologies to provide discovery capabilities similar or
superior to those provided by us.

   For drug candidates developed internally which we seek to license, we face,
and will continue to face, intense competition from organizations such as
large pharmaceutical and biotechnology companies. Competition with any of the
programs in our internal drug discovery pipeline may arise from current or
future drug candidates in the same therapeutic class or other classes of
therapeutic agents or other methods of preventing or reducing the incidence of
disease. Any drug candidate that is successfully developed may compete with
existing therapies that have long histories of safe and effective use.

   Due to perceived shortcomings of available agents and the large market
potential, competition to develop a safe, orally active antithrombotic agent (an
agent which inhibits the formation of blood clots) is intense, with many
discovery programs in process. Our orally active urokinase inhibitor for the
inhibition of cancer metastasis (development of secondary tumors in other organs
of the body during the spread of cancer) and tumor angiogenesis (development of
new blood vessels that allow the further growth of tumors) and for
cardiovascular indications faces competition from a number of agents and
approaches currently under development. Our thrombopoietin-mimetic compound,
3DP-3534, with potential for prophylaxis and/or therapy for chemotherapy-induced
thrombocytopenia, competes directly with the recombinant form of the natural
human hormone (rhTPo) currently in Phase 3 clinical development. We also are
aware of a related product that is in Phase 1 clinical trials as a
thrombopoietin receptor modulator. In addition, several companies may be
attempting to develop small molecule agonists of the human thrombopoietin
receptor in pre-clinical studies. Our orally active
alpha/v/beta/3//alpha/v/beta/5/ integrin antagonist program for the treatment of
solid and metastatic tumors, osteoporosis, and arthritis has significant
competition from several companies. We are aware of competing small molecule
programs that may have advanced one or more compounds into clinical trials. In
addition, we are aware of programs developing humanized monoclonal antibodies
against specific integrins to target tumor angiogenesis and/or rheumatoid
arthritis among other indications. Our C1s complement antagonist program for the
treatment of inflammatory diseases such as rheumatoid arthritis and lupus faces
significant industry competition as well. We are aware of programs targeting
various proteins in the complement activation cascade, including a humanized
antibody directed against complement factor C5 currently in Phase 2 clinical
trials. Our hdm2 antagonist program, targeting a key molecular regulator of the
well-known tumor suppressor gene p53, is also in an area of active research in
the pharmaceutical industry. In this regard, we are aware of preclincal research
programs targeting hdm2 at two companies. In addition, many companies are
working on alternative ways to modulate normal p53 functioning, including
various gene therapy and biological approaches.

   Other earlier-phase research programs in small molecule drug discovery at
3DP are also in highly competitive areas. Many other companies are working in
these areas and they may achieve earlier or greater success than we may be
able to achieve. Most of our competitors, either alone, or together with their
collaborators, have substantially greater research and development
capabilities and financial, scientific, operational, marketing and sales
resources than we do, as well as significantly more experience in research and
development, clinical trials, regulatory matters, manufacturing, marketing and
sales. These competitors and other companies may have developed or may in the
future develop new technologies or products that compete with ours or which
could render our technologies and products obsolete. In addition, our
competitors may succeed in

                                      35
<PAGE>

obtaining broader patent protection, receiving FDA approval for products or
developing and commercializing products or technologies before us. We also
compete with these organizations in recruiting and retaining qualified
scientific and management personnel.

   Most of our competitors, either alone, or together with their
collaborators, have substantially greater research and development
capabilities and financial, scientific, operational, marketing and sales
resources than we do, as well as significantly more experience in research and
development, clinical trials, regulatory matters, manufacturing, marketing and
sales. These competitors and other companies may have already developed or may
in the future develop new technologies or products that compete with ours or
which could render our technologies and products obsolete. In addition, our
competitors may succeed in obtaining broader patent protection, receiving FDA
approval for products or developing and commercializing products or
technologies before us. We also compete with these organizations in recruiting
and retaining qualified scientific and management personnel.

If we lose our key personnel or are unable to attract and retain qualified
personnel as necessary, it could delay our product development programs and
harm our research and development efforts.

   We are highly dependent on the principal members of our scientific and
management staff, including David C. U'Prichard, our Chief Executive Officer,
F. Raymond Salemme, our President and Chief Scientific Officer and John M.
Gill, our Chief Operating Officer. If we lose the services of one or more of
these persons, we may be unable to achieve our business objectives. Our future
success also will depend in part on the continued service of our other key
scientific, software, engineering and management personnel and our ability to
identify, hire and retain additional personnel. Intense competition exists for
qualified personnel in the areas of our activities, and we may not be able to
continue to attract and retain such personnel necessary for the development of
our business. Failure to attract and retain key personnel could have a
material adverse effect on our business, financial condition and results of
operations.

We have experienced a period of significant expansion of personnel and space,
which could delay our product development programs and harm our research and
development efforts.

   During 2001 we increased our staff from 125 to 200 and increased our space
from 41,000 square feet to 104,500, square feet which includes three
locations. As a result, we will face the challenge of managing the business in
multiple locations. These needs and challenges will place demands on our
management, information technology and other support functions, which may,
from time to time, cause delays in our product development programs and
diminish the results of our research and development efforts.

We expect that our quarterly results of operations will fluctuate, and this
fluctuation could cause our stock price to decline, causing investor losses.

   To date, substantially all of our revenue has been from corporate
collaborations, license agreements and government grants. We expect that a
significant portion of our revenues for the foreseeable future will be
comprised of this funding as well as milestone payments. The timing of revenue
in the future will depend largely upon the signing and terms of collaborative
research and development or technology licensing agreements or the licensing
of drug candidates for further development and the recognition of fees,
milestone payments and royalty revenues from these agreements. In any one
fiscal quarter we may receive multiple or no payments from our collaborators.
Although we recognize certain revenue under our collaborations and some
licenses over the life of the contract, operating results may vary from
quarter to quarter. Revenue for any given period may be greater or less than
revenue in the immediately preceding period or in the comparable period of the
prior year. Our operating results may also fluctuate due to other factors,
including the following:

  .  termination of collaborations and licensing arrangements;

  .  the ability and willingness of collaborators to develop and
     commercialize milestone and royalty-bearing products within expected
     timelines and the resulting demand for any commercialized products;

                                      36
<PAGE>

  .  our ability to enter into new collaborative agreements, or to extend the
     terms of our existing collaborative agreements, and the terms of any
     agreement of this type;

  .  our ability or that of our collaborators to successfully satisfy all
     pertinent regulatory requirements;

  .  the level of our expenditures on research and development and the level
     of other operating expenses; and

  .  general and industry specific economic conditions, which may affect our
     collaborators' research and development expenditures.

   If revenue declines or does not grow as anticipated due to the expiration
of collaborative agreements, failure to obtain new agreements or grants,
lower-than-expected milestone or royalty payments or other factors, we may not
be able to correspondingly reduce our operating expenses. A large portion of
our expenses, including expenses for facilities, equipment and personnel, are
committed and growing. Failure to achieve anticipated levels of revenue could
therefore significantly harm our operating results for a particular fiscal
period.

   Due to the possibility of fluctuations in our revenue and our anticipated
increasing expenses, we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future performance. Our
operating results in some quarters may not meet the expectations of stock
market analysts and investors. In that case, our stock price may decline.

If we use or our collaborators use biological and hazardous materials in a
manner that causes injury, we may be liable for damages.

   Both we and our collaborators conduct research and development activities
which involve the controlled use of potentially harmful biological materials
as well as hazardous materials, chemicals and various radioactive compounds.
We use a wide range of solvents and other chemicals in order to discover new
drug candidates. We also generate biological waste products such as bacterial
cells and analyzed blood products during drug discovery programs. In addition,
several of our biological studies use small quantities of radioactive isotopes
of hydrogen, iodine, carbon, sulfur and phosphorus. We cannot completely
eliminate the risk of accidental contamination or injury from the use,
storage, handling or disposal of these materials. In the event of
contamination or injury, we could be held liable for damages that result, and
any liability could exceed our resources. We do not have liability insurance
coverage for contamination or injury. We also do not have mass tort insurance
coverage or environmental insurance coverage. The cost of compliance with
Federal and local regulatory requirements with respect to the use, monitoring
and disposal of chemical and biological waste products could be significant.

We may be sued for product liability.

   Because we are involved in the drug discovery process, our business exposes
us to potential product liability risks. We may not be able to avoid product
liability claims. Product liability insurance for the pharmaceutical industry
is generally expensive, if it is available at all. If we are unable to obtain
sufficient insurance coverage on reasonable terms or to otherwise protect
against potential product liability claims, we may be unable to commercialize
our product candidates. We currently maintain products/professional liability
insurance with coverage which we believe is customary and appropriate for
businesses such as ours. If a plaintiff brings a successful product liability
claim against us in excess of our insurance coverage, if any, we may incur
substantial liabilities and our business may fail.

If we engage in any acquisition or business combination, we will incur a
variety of risks that could adversely affect our business operations.

   We generally consider and will continue to consider strategic business
initiatives intended to further the development of our business, including
acquiring businesses, technologies and products and entering into

                                      37
<PAGE>

business combinations with other companies. If we do pursue one or more of
these strategic initiatives, we could, among other things:

  .  issue equity securities that would dilute current stockholders'
     percentage ownership, incur substantial debt, or both;

  .  spend substantial operational, financial and management resources in
     integrating new businesses, technologies and products;

  .  assume substantial actual or contingent liabilities; or

  .  merge, or otherwise enter into a business combination with, another
     company in which our stockholders would receive cash or shares of the
     other company, or a combination of both. In such case, many stockholders
     may disagree with the terms of such business combination or may view the
     sufficiency of the consideration to be received to be inadequate, or
     both.

   In addition, any future acquisitions or business combinations might
negatively impact our business relations with a collaborator and could lead to
a termination of our agreement with that collaborator.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

   Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on
our investment portfolio and on the increase or decrease in the amount of
interest expense we must pay with respect to our various outstanding debt
instruments. Our risk associated with fluctuating interest expense is limited
to our long-term borrowings, the underlying interest rates of which are
closely tied to market rates, and our investments in interest rate sensitive
financial instruments. Under our current policies, we do not use interest rate
derivative instruments to manage exposure to interest rate changes. We seek to
ensure the safety and preservation of our invested principal funds by limiting
default risk, market risk and reinvestment risk. We seek to minimize the risk
of default by investing in investment grade securities. A hypothetical 100
basis point adverse move in interest rates along the entire interest rate
yield curve would not materially affect the fair value of our interest rate
sensitive financial instruments at December 31, 1999, December 31, 2000 or
December 31, 2001. Declines in interest rates over time will, however, reduce
our interest income while increases in interest rates over time will increase
our interest expense.

                                      38
<PAGE>

Item 8. Financial Statements and Supplementary Data

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                                    CONTENTS
<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Consolidated Financial Statements
 Report of independent public accountants
  As of and for the year ended December 31, 2001......................... F-2
  As of December 31, 2000 and for the years ended December 31, 2000 and
   1999.................................................................. F-3
Consolidated balance sheets as of December 31, 2001 and 2000............. F-4
Consolidated statements of operations for the years ended December 31,
 2001, 2000 and 1999..................................................... F-5
Consolidated statements of stockholders' equity (deficit) for the years
 ended December 31, 2001, 2000 and 1999.................................. F-6
Consolidated statements of cash flows for the years ended December 31,
 2001, 2000 and 1999..................................................... F-7
Notes to consolidated financial statements............................... F-8
</TABLE>
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

   To 3-Dimensional Pharmaceuticals, Inc.:

   We have audited the accompanying consolidated balance sheet of 3-
Dimensional Pharmaceuticals, Inc. (a Delaware corporation) and subsidiaries as
of December 31, 2001, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the year then ended. 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 audit.

   We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides 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 3-Dimensional
Pharmaceuticals, Inc. and subsidiaries as of December 31, 2001, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.

                                             Arthur Andersen LLP

Philadelphia, Pennsylvania
February 19, 2002

                                      F-2
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
3-Dimensional Pharmaceuticals, Inc.
Yardley, Pennsylvania

   We have audited the accompanying consolidated balance sheet of 3-
Dimensional Pharmaceuticals, Inc. and subsidiary as of December 31, 2000 and
the related consolidated statements of operations, changes in stockholders'
equity (deficit) and cash flows for the years ended December 31, 2000 and
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 auditing standards generally
accepted in 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 consolidated financial position of 3-Dimensional
Pharmaceuticals, Inc. and subsidiary as of December 31, 2000, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2000 and 1999 in conformity with accounting principles
generally accepted in the United States of America.

                                             Richard A. Eisner & Company, LLP

New York, New York
February 7, 2001

                                      F-3
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                    December 31,  December 31,
                                                    ------------  ------------
                                                        2001          2000
                                                    ------------  ------------
<S>                                                 <C>           <C>
                      ASSETS
Current assets:
 Cash and cash equivalents......................... $ 19,519,000  $114,557,000
 Marketable securities.............................   80,870,000           --
 Prepaid expenses and other current assets.........    3,087,000       977,000
                                                    ------------  ------------
   Total current assets............................  103,476,000   115,534,000
Property and equipment, net........................   11,735,000     5,508,000
Restricted cash....................................      835,000           --
Other assets.......................................    1,073,000     2,202,000
                                                    ------------  ------------
                                                    $117,119,000  $123,244,000
                                                    ============  ============
       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable and accrued expenses............. $  5,759,000  $  3,193,000
 Current portion of deferred revenue...............    9,601,000     7,385,000
 Note payable......................................    5,000,000           --
 Current portion of long-term debt.................    1,066,000     1,209,000
 Current portion of settlement accrual.............          --        500,000
                                                    ------------  ------------
   Total current liabilities.......................   21,426,000    12,287,000
Deferred revenue, less current portion.............    3,286,000     9,619,000
Long-term debt, less current portion...............      161,000     1,315,000
                                                    ------------  ------------
                                                      24,873,000    23,221,000
                                                    ------------  ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
 Preferred Stock--$.001 par value: 5,000,000 shares
  authorized, none issued and outstanding at
  December 31, 2001 and 2000.......................           --            --
 Common stock--$.001 par value; 45,000,000 shares
  authorized, 21,988,238 and 21,385,798 shares
  issued and outstanding at December 31, 2001
  and December 31, 2000, respectively..............       22,000        21,000
 Additional paid-in capital........................  158,450,000   157,223,000
 Note receivable from officer......................     (260,000)     (390,000)
 Deferred compensation.............................   (2,386,000)   (3,570,000)
 Accumulated deficit...............................  (64,703,000)  (53,261,000)
 Accumulated other comprehensive income............    1,123,000           --
                                                    ------------  ------------
Total stockholders' equity.........................   92,246,000   100,023,000
                                                    ------------  ------------
                                                    $117,119,000  $123,244,000
                                                    ============  ============
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-4
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                              Year Ended December 31,
                                       ---------------------------------------
                                           2001         2000          1999
                                       ------------  -----------  ------------
<S>                                    <C>           <C>          <C>
Research and grant revenue...........  $ 28,399,000  $12,409,000  $  4,489,000
Costs and expenses:
 Research and development............    29,614,000   14,562,000    12,136,000
 General and administrative..........    15,334,000    8,652,000     6,525,000
 Litigation settlement...............           --           --      1,500,000
                                       ------------  -----------  ------------
                                         44,948,000   23,214,000    20,161,000
                                       ------------  -----------  ------------
Loss from operations.................   (16,549,000) (10,805,000)  (15,672,000)
Interest income......................     5,344,000    3,458,000       328,000
Interest expense.....................      (237,000)    (646,000)     (625,000)
                                       ------------  -----------  ------------
Loss before income taxes.............   (11,442,000)  (7,993,000)  (15,969,000)
Provision for income taxes...........           --       159,000           --
                                       ------------  -----------  ------------
Net loss.............................   (11,442,000)  (8,152,000)  (15,969,000)
Declared and accrued cumulative
 dividends on preferred stock........           --      (396,000)     (669,000)
                                       ------------  -----------  ------------
Net loss applicable to common stock..  $(11,442,000) $(8,548,000) $(16,638,000)
                                       ============  ===========  ============
Basic and diluted net loss per common
 share--historical...................  $      (0.53) $     (0.97) $     (27.37)
                                       ============  ===========  ============
Weighted average common shares
 outstanding--historical.............    21,626,000    8,778,000       608,000
                                       ============  ===========  ============
Basic and diluted net loss per common
 share--pro forma....................                $     (0.52) $      (1.57)
                                                     ===========  ============
Weighted average common shares
 outstanding--pro forma..............                 15,663,000    10,198,000
                                                     ===========  ============
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-5
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
                    Preferred Stock       Common Stock
                   ------------------  -------------------
                                                                           Notes                    Accumulated
                                                            Additional   Receivable                    Other
                                Par                  Par     Paid-in        From       Deferred    Comprehensive Accumulated
                     Shares    Value     Shares     Value    Capital      Officers   Compensation  Income (Loss)   Deficit
                   ----------  ------  ----------  ------- ------------  ----------  ------------  ------------- ------------
<S>                <C>         <C>     <C>         <C>     <C>           <C>         <C>           <C>           <C>
Balance--December
 31, 1998........   1,400,000  $1,000     733,979  $ 1,000 $  3,875,000  $(121,000)  $       --     $      --    $(29,140,000)
Common stock
 issued pursuant
 to exercise of
 stock options...         --      --       11,439      --        11,000        --            --            --             --
Value of options
 issued to
 consultants.....         --      --          --       --        18,000        --            --            --             --
Value of warrants
 issued in
 connection with
 bridge loan.....         --      --          --       --        26,000        --            --            --             --
Dividend declared
 on Series A-1
 preferred.......         --      --          --       --      (501,000)       --            --            --             --
Forgiveness of
 loans made to
 officers........         --      --          --       --           --      51,000           --            --             --
Net loss.........         --      --          --       --           --         --            --            --     (15,969,000)
                   ----------  ------  ----------  ------- ------------  ---------   -----------    ----------   ------------
Balance--December
 31, 1999........   1,400,000   1,000     745,418    1,000    3,429,000    (70,000)          --            --     (45,109,000)
Common stock
 issued pursuant
 to exercise of
 stock options,
 warrants and
 stock grants....         --      --      622,010      --     1,605,000   (521,000)          --            --             --
Common stock
 issued pursuant
 to cashless
 exercise of
 warrants........         --      --    1,017,230    1,000       (1,000)       --            --            --             --
Issuance of
 Series D
 preferred stock,
 net of offering
 costs of
 $24,000.........     625,000   1,000         --       --     4,976,000        --            --            --             --
Common stock
 issued pursuant
 to initial
 public offering,
 net of offering
 costs of
 $7,362,500......         --      --    5,750,000    6,000   78,882,000        --            --            --             --
Conversion of
 convertible
 preferred
 stock...........  (2,025,000) (2,000)    723,214    1,000        1,000        --            --            --             --
Conversion of
 redeemable
 preferred
 stock...........         --      --   12,463,389   12,000   63,523,000        --            --            --             --
Conversion of
 notes payable--
 dividends and
 accrued
 interest........         --      --       71,234      --     1,068,000        --            --            --             --
Dividends
 declared on
 Series A-1
 preferred.......         --      --          --       --      (563,000)       --            --            --             --
Value of options
 issued to
 consultants.....         --      --          --       --       392,000        --            --            --             --
Deferred
 compensation
 charge in
 connection with
 option grants...         --      --          --       --     3,983,000        --     (3,983,000)          --             --
Forfeiture of
 options subject
 to deferred
 compensation....         --      --          --       --       (53,000)       --         53,000           --             --
Deferred
 compensation
 expense.........         --      --          --       --           --         --        360,000           --             --
Common stock
 reacquired......         --      --       (6,697)     --       (19,000)    19,000           --            --             --
Forgiveness of
 loans made to
 officers........         --      --          --       --           --     182,000           --            --             --
Net loss.........         --      --          --       --           --         --            --            --      (8,152,000)
                   ----------  ------  ----------  ------- ------------  ---------   -----------    ----------   ------------
Balance--December
 31, 2000........         --      --   21,385,798   21,000  157,223,000   (390,000)   (3,570,000)          --     (53,261,000)
Common stock
 issued pursuant
 to exercise of
 stock options...         --      --      246,134      --       603,000        --            --            --             --
Common stock
 issued pursuant
 to exercise of
 warrants........         --      --      356,306    1,000       10,000        --            --            --             --
Value of options
 issued to
 consultants.....         --      --          --       --       433,000        --            --            --             --
Compensation
 charge in
 connection with
 acceleration of
 vesting terms on
 options.........         --      --          --       --       365,000        --            --            --             --
Forfeiture of
 options subject
 to deferred
 compensation....         --      --          --       --      (184,000)       --        184,000           --             --
Deferred
 compensation
 expense.........         --      --          --       --           --         --      1,000,000           --             --
Forgiveness of
 loans made to
 officer.........         --      --          --       --           --     130,000           --            --             --
Comprehensive
 loss:                                                                                                     --
 Net loss........         --      --          --       --           --         --            --                   (11,442,000)
 Unrealized gain
  on
  investments....         --      --          --       --           --         --            --      1,123,000            --
Comprehensive
 loss............
                   ----------  ------  ----------  ------- ------------  ---------   -----------    ----------   ------------
Balance--December
 31, 2001........         --   $  --   21,988,238  $22,000 $158,450,000  $(260,000)  $(2,386,000)   $1,123,000   $(64,703,000)
                   ==========  ======  ==========  ======= ============  =========   ===========    ==========   ============
<CAPTION>
                       Total
                   Stockholders'
                      Equity
                     (Deficit)
                   --------------
<S>                <C>
Balance--December
 31, 1998........  $(25,384,000)
Common stock
 issued pursuant
 to exercise of
 stock options...        11,000
Value of options
 issued to
 consultants.....        18,000
Value of warrants
 issued in
 connection with
 bridge loan.....        26,000
Dividend declared
 on Series A-1
 preferred.......      (501,000)
Forgiveness of
 loans made to
 officers........        51,000
Net loss.........   (15,969,000)
                   --------------
Balance--December
 31, 1999........   (41,748,000)
Common stock
 issued pursuant
 to exercise of
 stock options,
 warrants and
 stock grants....     1,084,000
Common stock
 issued pursuant
 to cashless
 exercise of
 warrants........           --
Issuance of
 Series D
 preferred stock,
 net of offering
 costs of
 $24,000.........     4,977,000
Common stock
 issued pursuant
 to initial
 public offering,
 net of offering
 costs of
 $7,362,500......    78,888,000
Conversion of
 convertible
 preferred
 stock...........           --
Conversion of
 redeemable
 preferred
 stock...........    63,535,000
Conversion of
 notes payable--
 dividends and
 accrued
 interest........     1,068,000
Dividends
 declared on
 Series A-1
 preferred.......      (563,000)
Value of options
 issued to
 consultants.....       392,000
Deferred
 compensation
 charge in
 connection with
 option grants...           --
Forfeiture of
 options subject
 to deferred
 compensation....           --
Deferred
 compensation
 expense.........       360,000
Common stock
 reacquired......           --
Forgiveness of
 loans made to
 officers........       182,000
Net loss.........    (8,152,000)
                   --------------
Balance--December
 31, 2000........   100,023,000
Common stock
 issued pursuant
 to exercise of
 stock options...       603,000
Common stock
 issued pursuant
 to exercise of
 warrants........        11,000
Value of options
 issued to
 consultants.....       433,000
Compensation
 charge in
 connection with
 acceleration of
 vesting terms on
 options.........       365,000
Forfeiture of
 options subject
 to deferred
 compensation....           --
Deferred
 compensation
 expense.........     1,000,000
Forgiveness of
 loans made to
 officer.........       130,000
Comprehensive
 loss:
 Net loss........   (11,442,000)
 Unrealized gain
  on
  investments....     1,123,000
                   --------------
Comprehensive
 loss............  (10,319,000)
                   --------------
Balance--December
 31, 2001........  $ 91,123,000
                   ==============
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-6
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                              Year Ended December 31,
                                       ----------------------------------------
                                           2001          2000          1999
                                       ------------  ------------  ------------
<S>                                    <C>           <C>           <C>
Cash flows from operating activities:
Net loss.............................  $(11,442,000) $ (8,152,000) $(15,969,000)
Adjustments to reconcile net loss to
 net cash provided by (used in)
 operating activities:
 Depreciation and amortization.......     2,863,000     1,922,000     1,565,000
 Amortization of premium on
  marketable securities..............       851,000           --         19,000
 Amortization of discount on
  marketable securities..............      (691,000)          --            --
 Accretion of interest on discounted
  note payable.......................        34,000        26,000           --
 Non-cash compensation expense.......     1,495,000       201,000        51,000
 Valuation of options and warrants...       433,000       752,000        44,000
 Interest paid with common stock.....            --        49,000           --
 Interest paid with preferred stock..            --       239,000           --
  Changes in:
   Other assets......................      (981,000)   (1,899,000)      260,000
   Accounts payable and accrued
    expenses ........................     2,566,000       454,000     1,620,000
   Settlement accrual................      (500,000)   (1,000,000)    1,500,000
   Deferred revenue..................    (4,117,000)   16,116,000       345,000
                                       ------------  ------------  ------------
    Net cash provided by (used in)
     operating activities............    (9,489,000)    8,708,000   (10,565,000)
                                       ------------  ------------  ------------
Cash flows from investing activities:
 Purchases of marketable securities..  (137,978,000)          --            --
 Maturities of marketable
  securities.........................    58,071,000           --      7,267,000
 Cash restricted for collateral......       835,000           --            --
 Acquisition of subsidiary, net of
  $25,000 cash acquired..............           --            --         (5,000)
 Capital expenditures................    (9,090,000)   (3,469,000)     (278,000)
                                       ------------  ------------  ------------
    Net cash provided by (used in)
     investing activities............   (89,832,000)   (3,469,000)    6,984,000
                                       ------------  ------------  ------------
Cash flows from financing activities:
 Proceeds from sale of stock.........           --    102,212,000           --
 Proceeds from exercise of options
  and warrants ......................       614,000     1,068,000        11,000
 Dividends paid on Series A-1
  Preferred Stock....................           --       (229,000)          --
 Proceeds from issuance of short-term
  debt...............................     5,000,000           --     10,000,000
 Repayment of long-term debt and
  notes payable......................    (1,331,000)   (1,378,000)   (1,224,000)
                                       ------------  ------------  ------------
    Net cash provided by financing
     activities......................     4,283,000   101,673,000     8,787,000
                                       ------------  ------------  ------------
Net increase (decrease) in cash and
 cash equivalents....................   (95,038,000)  106,912,000     5,206,000
Cash and cash equivalents--beginning
 of year.............................   114,557,000     7,645,000     2,439,000
                                       ------------  ------------  ------------
Cash and cash equivalents--end of
 year................................  $ 19,519,000  $114,557,000  $  7,645,000
                                       ============  ============  ============
Supplemental disclosures of cash flow
 information:
 Cash paid for interest..............  $    204,000  $    331,000  $    446,000
 Noncash investing and financing
  activities:
  Equipment purchased under capital
   leases............................           --            --   $    390,000
  Dividends declared but not paid....                         --   $    501,000
  Note receivable exchanged for
   common stock......................           --   $    521,000           --
  Notes payable (including interest
   due of $89,000) exchanged for
   common stock......................           --   $  1,068,000           --
  Notes payable (including interest
   due of $353,000) exchanged for
   redeemable preferred stock........           --   $ 10,353,000           --
  Conversion of redeemable and
   convertible preferred stock to
   common stock......................           --   $ 71,751,000           --
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-7
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                         NOTES TO FINANCIAL STATEMENTS

                          December 31, 2001 and 2000

NOTE A--DESCRIPTION OF BUSINESS

   3-Dimensional Pharmaceuticals, Inc. (the Company) is a drug discovery and
development company that has a pipeline of drug candidates in the areas of
cancer and inflammation, and metabolic and cardiovascular diseases. The
Company has developed an integrated set of proprietary technologies called
DiscoverWorks(R) to accelerate and improve the drug discovery process.
DiscoverWorks enables scientists to design characteristics into drug
candidates that the Company believes increases the probability of development
success. The Company uses DiscoverWorks to discover and develop drugs for its
own pipeline and in collaboration with pharmaceutical and biotechnology
companies.

   The Company has incurred net losses since inception in 1993 and may incur
additional losses for at least the next several years. Through December 31,
2001, substantially all of the Company's revenue has been derived from
corporate collaborations, license agreements and government grants. The
Company expects that substantially all of its funds for the next several years
will result from payments from these sources, from outlicensing of
technologies and internally developed drug candidates, and from interest
income. The Company expects to spend significant resources to enhance its drug
discovery technologies and to fund research and development of its pipeline of
drug candidates. Through December 31, 2001, the Company's technologies have
not been used in the development of any compound that has reached the point of
commercialization. In order to achieve profitability, the Company must
continue to develop products and technologies that can be commercialized by
the Company or through existing and future collaborations.

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 [1] Principles of consolidation:

   The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All inter-company balances have been
eliminated in consolidation.

 [2] Cash, cash equivalents and marketable securities:

   The Company considers all highly liquid investment instruments purchased
with an original maturity of three months or less to be cash equivalents.

   Marketable securities include investments in commerical paper, notes and
bonds with original maturities of greater than three months having a remaining
maturity of less than 24 months. These marketable securities are treated for
accounting purposes as available-for-sale and as such are reported at their
fair market values. At December 31, 2001, the Company had $1,123,000 of
unrealized gains on these marketable securities. All realized gains and losses
are recorded in the results of operations. Unrealized gains and losses have
been recorded as a separate component of stockholders' equity.

 [3] Restricted Cash:

   Restricted cash of $0.8 million at December 31, 2001 collateralizes a $0.8
million outstanding letter of credit associated with the lease of the
Company's Cranbury research facility. The funds are invested in a money market
fund. (Note K)

 [4] Property and equipment:

   Property and equipment are recorded at cost and depreciated using the
straight-line method over estimated useful lives of two to five years.
Leasehold improvements and equipment acquired under capital leases are
amortized over the lesser of the economic useful life of the improvement or
asset or the term of the lease. Expenditures for repairs and maintenance are
charged to expense as incurred, while major renewals and improvements are
capitalized.

                                      F-8
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                         NOTES TO FINANCIAL STATEMENTS


 [5] Revenue recognition:

   Revenue from corporate collaborations and licensing agreements consists of
up-front fees, research and development funding and milestone payments. Non-
refundable up-front fees are deferred and amortized to revenue over the
related performance period. Periodic payments for research and development
activities and government grants are recognized over the period that the
Company performs the related activities under the terms of the agreements.
Revenue resulting from the achievement of milestone events stipulated in the
agreements is recognized when the milestone is achieved.

   In the year ended December 31, 1999, the Company changed its method of
recognizing revenue with respect to nonrefundable up-front fees received under
corporate collaboration research agreements to the method described above to
conform with the requirements of an accounting bulletin on revenue recognition
issued by the staff of the Securities and Exchange Commission in December 1999
and retroactively restated its prior years' financial statements to reflect
the application of the new method. Prior to the change, the Company recognized
revenue from such fees upon the execution of the agreement.

 [6] Research and development:

   Research and development costs are expensed as incurred.

 [7] Accounting for stock-based compensation:

   The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). In October 1995, the Financial Accounting Standards Board
issued Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123), which establishes a fair value-based method of accounting for stock-
based compensation plans. The Company has adopted the disclosure-only
alternative under SFAS No. 123, which requires disclosure of the pro forma
effects on net loss and net loss per share as if stock-based employee
compensation was measured under SFAS No. 123, as well as certain other
information. The Company accounts for stock-based compensation to non-
employees using the fair value method in accordance with SFAS No. 123. The
Company has recognized deferred stock compensation related to certain stock
option grants (see Note I).

 [8] Use of estimates:

   The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.

 [9] Per share data:

   Historical basic and diluted net loss per common share is computed by
dividing the net loss increased by declared and accrued cumulative dividends
on the Series A-1 preferred stock for the year by the weighted average number
of common shares exclusive of outstanding shares of common stock which are
subject to repurchase and are nonvested. As their effects would be anti-
dilutive, shares of common stock issuable upon conversion of preferred stock
(for the periods prior to conversion) and exercise of outstanding options and
warrants as well as outstanding common shares which are nonvested during the
periods were not included in computing diluted net loss per common share.

                                      F-9
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                         NOTES TO FINANCIAL STATEMENTS


   Securities and the related number of common shares not included in the
diluted computation for the years ended December 31, 2001, 2000 and 1999 that
could potentially dilute basic earnings per share, if any, in the future are
as follows:

                       Dilutive Potential Common Shares*

<TABLE>
<CAPTION>
                                                   2001       2000       1999
                                                 --------- ---------- ----------
   <S>                                           <C>       <C>        <C>
   Preferred Stock (see below)..................       --   6,858,000  9,545,000
   Options...................................... 2,991,000  2,115,000  2,023,000
   Warrants.....................................   279,000  1,531,000  1,843,000
   Common stock--subject to repurchase..........   111,000    179,000    115,000
                                                 --------- ---------- ----------
                                                 3,381,000 10,683,000 13,526,000
                                                 ========= ========== ==========
</TABLE>
  --------
   * Includes weighted average shares for period prior to conversion and
exercise.

   The preferred stock automatically converted into common stock on a 1 for
..36 basis and certain nonvested common stock automatically became vested upon
completion of the initial public offering of the Company's common stock in
August 2000. Accordingly, pro forma basic and diluted net loss per common
share on the accompanying consolidated statements of operations for the years
ended December 31, 2000 and 1999 has been calculated by dividing net loss by
the weighted average outstanding common shares as if the preferred stock were
converted into common stock, and certain nonvested common stock was vested, as
of the original date of issuance.

 [10] Comprehensive loss:

   Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires the reporting of all changes in equity of an
enterprise that result from recognized transactions and other economic events
of the period other than transactions with owners in their capacity as owners.
The Company's other comprehensive loss includes unrealized gains on available
for sale securities.

 [11] Impairment of long-lived assets:

   As required by Statement of Financial Accounting Standards No.
121,"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company assesses the recoverability of any
long-lived assets for which an indicator of impairment exists. Specifically,
the Company calculates, and recognizes, any impairment losses by comparing the
carrying value of these assets to its estimate of the undiscounted future
operating cash flows. Although its current and historical operating cash flows
are indicators of impairment, the Company believes that the future cash flows
to be received from its long-lived assets will exceed the assets' carrying
value. Accordingly, the Company has not recognized any impairment losses
through December 31, 2001.

 [12] Income taxes:

   The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
objective of this pronouncement is to recognize and measure, in accordance
with enacted tax laws, the amount of current and deferred income taxes payable
or refundable at the date of the financial statements as a result of all
events that have been recognized in the financial statements.


                                     F-10
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                         NOTES TO FINANCIAL STATEMENTS


NOTE C--CERTAIN RESEARCH AND COLLABORATION AGREEMENTS

   In December 1997, the Company entered into a research collaboration with
Heska Corporation to assist in the discovery and development of new veterinary
therapeutic agents. The agreement originally had a two-year research term,
which was revived and extended until May 31, 2002. As of December 31, 2001,
the Company received up-front cash payments and research funding aggregating
approximately $2.7 million.

   In October 1999, the Company entered into a research collaboration and
license agreement with Hoechst Schering, AgrEvo GmbH, now part of Aventis
CropScience GmbH, under which the Company utilized its DirectedDiversity(R)
technology in the discovery of compounds applicable to plant and pest
management. The initial term of the agreement was for two years and was
extended until it expired in January 2002. As of December 31, 2001, the
Company has received up-front payments, payment for delivery of compounds and
research funding of approximately $3.4 million.

   In December 1999, the Company entered into a collaboration with Boehringer
Ingelheim Pharmaceuticals, Inc., or BIPI, to use its DirectedDiversity
technology to assist BIPI in the discovery of new drugs for specific
biological targets in humans. The initial term of the collaboration was for
two years and, in April 2001, the collaboration was expanded to cover
additional targets and the research term was extended until March 2003. As of
December 31, 2001, the Company has received up-front payments and research
funding aggregating approximately $4.1 million, and will receive additional
committed research funding of approximately $3.1 million over the remaining
term of the collaboration. The Company could also receive milestone payments
of up to $2.4 million for the first product developed depending on whether
stipulated milestones are met, and is eligible to receive additional milestone
payments if subsequent products are developed. The Company is also entitled to
receive royalties on the sales of resulting products.

   In February 2000, the Company entered into a collaboration with DuPont
Pharmaceuticals Company (acquired by Bristol-Myers Squibb Company in October
2001) under which the Company would utilize its DirectedDiversity technology
to develop new drugs for specific biological targets. As of December 31, 2001,
the Company has received up-front payments and research funding aggregating
approximately $2.6 million. The agreement expired on December 31, 2001, the
end of the initial research term of the collaboration.

   In March 2000, the Company was awarded and commenced a research project in
which it was the recipient of a two-year Small Business Innovative Research
(SBIR) award totaling up to $1 million. In addition, in June 2001, the Company
was awarded and commenced an additional research project under a two-year SBIR
Award totaling up to $1 million. The SBIRs are sponsored by the National
Institutes of Health.

   In May 2000, the Company entered into a license and research agreement with
Schering AG, Germany, in which Schering AG obtained, for human therapeutic
uses, exclusive worldwide rights to the Company's urokinase inhibitor
compounds. During the initial two-year research and development term, the
Company is to receive payments for research funding totaling $5 million, of
which $4.1 million was received by December 31, 2001. In addition, the Company
is eligible to receive milestone payments of up to approximately $23 million
for the first product developed in a therapeutic area depending on whether
stipulated milestones are met, and future milestone payments for additional
therapeutic areas and royalties on the sales of any resulting products. In
connection with the agreement, an affiliate of Schering AG made a $5 million
equity investment in the Company consisting of shares of preferred stock that
converted into 223,214 shares of common stock.

   In July 2000, the Company entered into a collaboration with Bristol-Myers
Squibb Company, or BMS, under which the Company will use its DiscoverWorks
technologies to assist BMS in the discovery and development of new human drugs
for specific biological targets. In the initial three-year term of the
research

                                     F-11
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                         NOTES TO FINANCIAL STATEMENTS

collaboration, BMS will supply biological targets and the Company will create
chemical libraries and screen such libraries against these targets. BMS may
terminate research activities with 90 days notice, without cause, but must pay
any remaining research funding during the initial research term or one-half of
the remaining research funding during any extended term. Following the end of
the initial research or any extended research term, either party may terminate
the agreement on 30 days notice if no compound is being optimized or developed
under the collaborative agreement. The Company received up-front cash
licensing and technology access fees amounting to $19 million, net of a $4.5
million refund resulting from a modification of the agreement, and research
funding of $14.4 million has been committed over the first three years of the
collaboration of which $7.5 million was received by December 31, 2001.

   In addition, the Company could receive milestone payments through the
clinical development stages, and royalty payments on the sales of any
resulting products, with the amount at each level determined based on the
Company's involvement in the related optimization and development activities.
For each compound, depending on whether all pre-clinical and clinical
milestones are met and depending on the Company's contribution to the
development of the compound, the Company could receive milestone payments
aggregating up to between $4.5 million and $15 million.

   In December 2000, the Company entered into an agreement with Centocor,
Inc., a subsidiary of Johnson & Johnson, under which Centocor acquired
worldwide rights to the Company's direct thrombin inhibitor program. Centocor
is responsible for development and worldwide commercialization of all
compounds under the agreement. For the deep vein thrombosis indication, the
Company has an option to co-develop and co-promote with Centocor in the United
States. Under the agreement, the Company received an up-front cash payment of
$6 million from Centocor, research funding of $0.8 million during the year
ended December 31, 2001 and a milestone payment of $4 million in October 2001
and is eligible to receive additional committed research funding of $0.8
million over the remaining term of the contract. The Company could also
receive milestone payments of up to $38 million based on the achievement of
certain milestones for the first compound developed and approved under the
agreement. In addition, the Company is entitled to receive royalties on the
sales of any products marketed under the agreement.

   In December 2001, the Company entered into a collaboration with Johnson &
Johnson Pharmaceutical Research & Development, L.L.C., or J&J PRD, to utilize
the Company's DiscoverWorks technology to discover and optimize small molecule
drug leads directed towards genomics targets identified by J&J PRD. The
initial research term is for approximately one year, subject to renewal by
mutual agreement. Under the terms of this agreement, the Company received an
up-front technology access fee and committed research funding aggregating $3.6
million. The contract provides that the Company could also receive milestone
payments of up to $4.2 million for the first product developed depending on
whether stipulated milestones are met and could receive additional milestones
if subsequent products are developed. The contract also provides that the
Company is entitled to receive royalties on the sales of any resulting
products.

   All revenue from research and collaboration agreements is earned from
activities performed in the United States. Revenue from foreign corporate
collaborators (based on the location of the collaborator) comprised 13%, 30%
and 23% of total collaboration revenues for the years ended December 31, 2001,
2000 and 1999, respectively.

                                     F-12
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                         NOTES TO FINANCIAL STATEMENTS


   Revenue from the Company's major customers as a percentage of total
revenue, for the years ended December 31, 2001, 2000 and 1999 was comprised of
the following:

<TABLE>
<CAPTION>
            Customer                     2001 2000 1999
            --------                     ---- ---- ----
            <S>                          <C>  <C>  <C>
            A........................... 43%  35%  --
            B........................... 30%  --   --
            C...........................  4%  16%   3%
            D...........................  9%  13%  --
            E...........................  8%  14%  --
            F........................... --   --   37%
            G........................... --    3%  27%
            H........................... --   --   20%
                                         ---  ---  ---
                                         94%  81%  87%
                                         ===  ===  ===
</TABLE>

   Deferred revenue at December 31, 2001, which consists of unamortized up-
front fees, is expected to be recognized as revenue in 2002 and 2003 in the
amounts of $9,601,000 and $3,286,000, respectively.

NOTE D--PROPERTY AND EQUIPMENT

   Property and equipment, all of which are located in the United States, is
summarized as follows:

<TABLE>
<CAPTION>
                                                      As of December 31,
                                                    ------------------------
                                                       2001         2000
                                                    -----------  -----------
      <S>                                           <C>          <C>
      Laboratory equipment, computer software and
       office equipment............................ $12,330,000  $ 6,720,000
      Leasehold improvements.......................   4,570,000    2,655,000
                                                    -----------  -----------
                                                     16,900,000    9,375,000
      Less accumulated depreciation and
       amortization................................  (5,165,000)  (3,867,000)
                                                    -----------  -----------
                                                    $11,735,000  $ 5,508,000
                                                    ===========  ===========
</TABLE>

NOTE E--ACCOUNTS PAYABLE AND ACCRUED EXPENSES

   Accounts payable and accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                           As of December 31,
                                                          ---------------------
                                                             2001       2000
                                                          ---------- ----------
      <S>                                                 <C>        <C>
      Professional fees.................................. $  950,000 $  289,000
      Equipment..........................................  1,473,000    685,000
      Payroll and related expenses.......................  1,615,000  1,280,000
      Trade payables.....................................  1,721,000    939,000
                                                          ---------- ----------
                                                          $5,759,000 $3,193,000
                                                          ========== ==========
</TABLE>

NOTE F--DEBT

 [1] Short-term note payable:

   On December 31, 2001, the Company completed a short-term note financing for
$5 million. The note bears interest at the prime rate of 4.75%. Principal and
interest is due by February 28, 2002. The Company intends to repay the
principal and interest and to arrange to refinance the amount borrowed as a
long-term note.

                                     F-13
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                         NOTES TO FINANCIAL STATEMENTS


 [2] Convertible notes payable:

   On November 18, 1999, the Company completed a convertible note financing
for $10 million.

   The notes bore interest at the rate of prime + 1% per annum (9.5% through
December 31, 1999). Principal and interest was due on the first anniversary of
the closing date (the Maturity Date). The notes provided that, if prior to the
Maturity Date the Company raised an additional $10 million through the sale of
redeemable preferred stock, the notes and any unpaid accrued interest would
convert into the redeemable stock on the same terms and conditions as given to
the new investors. On March 31, 2000, the Company raised $18.4 million through
the sale of redeemable preferred stock, which upon completion of the IPO
converted into 2,186,101 shares of common stock. In connection therewith, the
$10 million of convertible notes and $353,000 of accrued interest were
converted into shares of redeemable preferred stock, which upon completion of
the IPO converted into 1,232,559 shares of common stock.

   In connection with the sale of the notes, the Company issued warrants to
purchase 1,250,000 shares of common stock exercisable at $3.50 per share for a
period of one year. The Company recorded a noncash interest charge in
connection with these warrants of $26,000 for the year ended December 31,
1999. All of the warrants were exercised prior to expiration, certain of which
on a net issuance basis, resulting in the issuance of 1,119,285 shares of
common stock.

 [3] Long-term debt:

   Long-term debt, including capital lease obligations, was as follows:

<TABLE>
<CAPTION>
                                                           As of December 31,
                                                          ---------------------
                                                             2001       2000
                                                          ---------- ----------
      <S>                                                 <C>        <C>
      Loans payable(a)................................... $1,010,000 $2,002,000
      Note payable(b)....................................    217,000    308,000
      Capital lease obligations..........................        --     214,000
                                                          ---------- ----------
                                                           1,227,000  2,524,000
      Current portion of long-term debt..................  1,066,000  1,209,000
                                                          ---------- ----------
      Long-term debt..................................... $  161,000 $1,315,000
                                                          ========== ==========
</TABLE>
--------
(a)  During 1998 and 1999, the Company entered into a series of 48-month loans
     to finance the purchase of laboratory equipment and office equipment and
     certain tenant improvements at interest rates varying between 10.68% and
     11.65%. The loans are payable in monthly installments of principal and
     interest aggregating $98,000 with final payments in 2002 and 2003
     aggregating $362,000 and $39,000, respectively. Borrowings related to the
     purchase of laboratory equipment and office equipment are collateralized
     by the equipment.
(b) The note is payable in annual installments of $125,000 through December
    2003. Interest on the note payable has been imputed at 10.0% per annum. As
    of December 31, 2001, the discounted amount of the note is $217,000 (face
    value $250,000).

   Minimum principal repayments of long-term debt as of December 31, 2001 were
as follows:

<TABLE>
      <S>                                                             <C>
      2002........................................................... $1,066,000
      2003...........................................................    161,000
                                                                      ----------
          Total...................................................... $1,227,000
                                                                      ==========
</TABLE>

                                     F-14
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                         NOTES TO FINANCIAL STATEMENTS


NOTE G--FAIR VALUE OF FINANCIAL INSTRUMENTS

   Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires the Company to disclose the
estimated fair value of its financial instruments. The carrying amounts
reported in the balance sheets for cash and cash equivalents, accounts payable
and accrued expenses approximate fair value because of the short-term duration
of those items. The carrying amounts of debt and notes payable approximate
fair value because the interest rates on such debt approximate the market
rate.

NOTE H--REDEEMABLE PREFERRED STOCK AND EQUITY SECURITIES

 [1] Preferred stock:

   In August 2000, all outstanding Series A, B, C and D preferred shares and
the notes payable were automatically converted into common shares of the
Company on a 1 to .36 basis upon completion of the initial public offering of
the Company's common stock.

 [2] Common Stock:

   In August 2000, the Company completed an initial public offering of its
common stock. The offering consisted of 5,000,000 shares, which were priced at
$15 per share. The Company also granted its underwriters an option to purchase
750,000 shares to cover over allotments, which was exercised concurrently with
the IPO. Net proceeds to the Company after subtracting underwriting discounts
and expenses was $78,888,000.

 [3] Warrants:

   As of December 31, 2001, the Company has outstanding warrants to purchase
common shares, all of which are exercisable, as follows:

<TABLE>
<CAPTION>
                                      Expiration                         Number of Common
         Exercise Price                  Date                            Shares Reserved
         --------------               ----------                         ----------------
         <S>                          <C>                                <C>
             $0.03                       2005                                   5,894
             $0.03                       2006                                  90,599
             $0.03                       2007                                   5,336
             $7.00                       2004                                   4,500
                                                                             --------
                                                                             *106,329
                                                                             ========
</TABLE>
--------
* Weighted average exercise price was $.32 and weighted average remaining
contractual life was 4.44 years.

 [4] Common stock subject to repurchase:

   As of December 31, 2001 and 2000, 93,792 and 139,796 shares of common
stock, respectively, are subject to repurchase by the Company. The shares are
subject to repurchase at the Company's option at the original purchase prices,
ranging from $2.94 to $6.30, in the event that the purchaser's relationship
with the Company is terminated. The number of shares subject to repurchase by
the Company decreases by 25% on the one-year anniversary of the sale, and
further reduces upon later anniversary dates.

 [5] Note receivable from officer:

   At December 31, 2001, the Company has a note receivable from an officer
with an unpaid balance of $260,000 in connection with a loan made in March
2000 to purchase 176,871 restricted shares of the Company's common stock. The
loan is collateralized by the officer's beneficial interest in the stock.
Under the terms of the

                                     F-15
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                         NOTES TO FINANCIAL STATEMENTS

note, interest accrues on the unpaid principal at approximately 7% per annum.
Principal and accrued interest is to be paid in four equal installments with
the first payment due six months from the loan date and the remaining payments
due annually thereafter. The Company has forgiven installments of principal
and interest due on loans to this officer and to other officers as part of the
overall executive compensation program. These amounts have been recorded as
compensation expense totaling $156,000, $182,000 and $58,000 for the years
ended December 31, 2001, 2000 and 1999, respectively.

NOTE I--EQUITY COMPENSATION PLANS

   The Company has maintained two equity compensation plans (together the
Plans) for the issuance of stock options and other stock grants to its
employees, non-employee directors, advisors and consultants.

   The Company's Equity Compensation Plan adopted in 1993, as amended,
provides for the issuance of restricted stock and the granting of both
incentive stock options and nonqualified stock options to purchase a total of
3,022,095 shares of common stock. The options vest over various periods, not
exceeding five years, and expire no later than ten years from date of grant.
Upon the close of the Company's IPO in August 2000, the Company stopped making
grants under the 1993 Plan.

   During 2000, the board of directors and stockholders approved the 2000
Equity Compensation Plan, which became effective upon the close of the IPO in
August 2000 and provided for the granting of up to 2,200,000 shares of common
stock. On May 14, 2001, the board of directors and stockholders increased the
number of shares under the plan to 4,200,000 shares of common stock.

   The 2000 Plan provides for grants of incentive stock options, nonqualified
stock options, stock awards and performance units.

   The Plans are administered by a committee of the board of directors. The
committee has the authority to determine the term during which an option may
be exercised (provided that no option may have a term of more than ten years),
the exercise price of an option and the rate at which options may be
exercised. Incentive stock options may be granted only to employees of the
Company. Nonqualified stock options may be granted to employees, directors or
consultants of the Company. For incentive stock options, the exercise price
may not be less than the fair value of the stock on the date of grant.

   The Company applies APB 25 in accounting for its employee stock option
awards, which requires the recognition of compensation expense for the
difference between the market value of the underlying common stock and the
exercise price of the option at the grant date.

   Pro forma information regarding net loss and loss per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The
weighted average fair value of options granted during the years ended December
31, 2001, 2000 and 1999 is estimated to be $6.80, $13.83 and $.35,
respectively. The fair value of these options was estimated at the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                      -------------------------
                                                       2001     2000     1999
                                                      -------  -------  -------
      <S>                                             <C>      <C>      <C>
      Risk-free interest rate........................     5.7%     5.9%     6.6%
      Expected life.................................. 6 Years  6 Years  6 Years
      Expected volatility............................     102%     120%      10%
      Divided yield..................................       0%       0%       0%
</TABLE>

                                     F-16
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                         NOTES TO FINANCIAL STATEMENTS


   Had compensation cost for the Company's stock options been determined based
upon the fair value at the grant date for awards under the Plans consistent
with the methodology prescribed under SFAS No. 123, the Company's pro forma
net loss and pro forma net loss per share would be as follows:


<TABLE>
<CAPTION>
                                              Year Ended December 31,
                                        -------------------------------------
                                           2001         2000         1999
                                        -----------  -----------  -----------
   <S>                                  <C>          <C>          <C>
   Net loss:
    Historical......................... $11,442,000  $ 8,152,000  $15,969,000
    Pro forma..........................  15,652,000   10,388,000   16,398,000
   Basic and diluted net loss per
    share:
    Historical......................... $     (0.53) $     (0.97) $    (27.37)
    Pro forma.......................... $     (0.72) $     (1.23) $    (28.07)
</TABLE>

   The following table summarizes information about stock option activity
under the Plans during the periods indicated:

<TABLE>
<CAPTION>
                                   Incentive Options   Nonqualified Options
                                  -------------------- ------------------------
                                              Weighted               Weighted
                                              Average                Average
                                              Exercise              Excercise
                                    Shares     Price     Shares       Price
                                  ----------  -------- -----------  -----------
   <S>                            <C>         <C>      <C>          <C>
   Balance--December 31, 1998....  1,020,149   $ 2.08      160,487   $   1.92
   Granted.......................    157,585     2.94      727,619       3.67
   Exercised.....................    (11,439)    0.97           --         --
   Forfeited.....................    (31,541)    2.65           --         --
                                  ----------           -----------
   Balance--December 31, 1999....  1,134,754     2.20      888,106       3.35
   Granted.......................    455,170    11.07      431,090      15.17
   Exercised.....................   (200,569)    1.80     (191,433)      2.59
   Forfeited.....................   (133,832)    3.44           --         --
                                  ----------           -----------
   Balance--December 31, 2000....  1,255,523     5.34    1,127,763       8.00
   Granted.......................  1,096,421    10.16      230,142      12.66
   Exercised..................... (1,096,974)    2.45      (49,214)      2.44
   Forfeited.....................   (134,998)   10.46      (86,891)     15.17
                                  ----------           -----------
   Balance--December 31, 2001....  2,019,972   $ 7.90    1,221,800   $   8.59
                                  ----------   ------  -----------   --------
</TABLE>

   The following table presents information relating to stock options
outstanding and exercisable at December 31, 2001:

<TABLE>
<CAPTION>
                                 Options Outstanding       Options Exercisable
                            ------------------------------ --------------------
                                        Weighted
                                         Average  Weighted             Weighted
                                        Remaining Average              Average
                              Number      Life    Exercise   Number    Exercise
Range of Exercise Price     Outstanding in Years   Price   Exercisable  Price
-----------------------     ----------- --------- -------- ----------- --------
<S>                         <C>         <C>       <C>      <C>         <C>
Incentive Stock Options
  $0.03 to $7.28...........    904,494    6.77     $ 3.52    559,235    $ 2.45
  $7.29 to $30.00..........  1,115,478    9.20      11.44     48,690     16.02
                             ---------                       -------
                             2,019,972    8.11     $ 7.90    607,925    $ 3.54
                             =========             ======    =======    ======
Nonqualified Stock Options
  $0.03 to $7.28...........    710,853    7.40     $ 3.89    382,965    $ 3.66
  $7.29 to $30.00..........    510,947    8.98      15.14    109,503     17.54
                             ---------                       -------
                             1,221,800    8.06     $ 8.59    492,468    $ 6.75
                             =========             ======    =======    ======
</TABLE>

                                     F-17
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                         NOTES TO FINANCIAL STATEMENTS


   In addition to the stock option activity, the Company issued 7,143 shares of
restricted stock at a weighted average purchase price per share of $6.30 under
the Plans during the year ended December 31, 2000. The Company reacquired 6,697
unvested, restricted shares at a purchase price of $19,000 during 2000.

   As of December 31, 2001, 2,689,242 common shares were available for future
grants under the 2000 Plan.

   The Company records expense for option grants to non-employees in the amount
of the fair value per share, as computed using the Black-Scholes option-pricing
model and variable plan accounting over the vesting period. The Company
recognized non-cash expense of $433,000, $392,000 and $18,000 for the years
ended December 31, 2001, 2000 and 1999, respectively in conjunction with such
non-employee option grants.

   During the year ended December 31, 2001, the Company recorded charges
totaling $365,000 resulting from changes in terms of certain stock options to
former employees, directors and consultants.

   During the year ended December 31, 2000, in connection with the grant of
options to employees and directors and the change in status of an option holder
from a consultant to an employee, the Company recorded deferred stock
compensation of $3,983,000, representing the difference between the exercise
price and the market value of the Company's common stock on the dates such
stock options were granted or status was changed. Deferred compensation is
included as a component of stockholders' equity (deficit) and is being
amortized to expense over the vesting period of the stock options. For the
years ended December 31, 2001 and 2000, the Company incurred deferred stock
compensation expense of $1,000,000 and $360,000, respectively.

NOTE J--401(K) PLAN

   The Company maintains a defined contribution 401(k) plan available to
eligible employees. Employee contributions are voluntary and are determined on
an individual basis, limited to the maximum amount allowable under federal tax
regulations. During the year ended December 31, 2001, the Company began making
matching contributions in the amount of 50% of employee contributions up to 6%.
The Company, at its discretion, may also make certain contributions to the
plan. For the years ended December 31, 2001 and 2000, the Company contributed
$266,000 as matching contributions and $226,000 as a discretionary contribution
to the plan, respectively. The Company made no contributions during 1999.

NOTE K--COMMITMENTS AND CONTINGENCIES

 [1] Leases:

   The Company currently occupies approximately 104,500 square feet of space,
including its corporate headquarters and clinical development offices in
Yardley, Pennsylvania and two research facilities located in Exton,
Pennsylvania and Cranbury, New Jersey. The Yardley facility includes 20,500
square feet of office space, which the Company occupied in October 2001 and
which is leased through March 2006. The Company leases approximately 41,000
square feet of space in Exton, Pennsylvania which houses one of the Company's
research and development facilities, including approximately 10,000 square
feet, adjacent to its initial space, which the Company occupied in December
2000. The initial 31,000 square feet of the Exton facility is leased through
June 2008 and the additional 10,000 square feet is subject to options allowing
the Company to extend that portion of the lease term through June 2008. The
Company's other research and development facility includes approximately 43,000
square feet of space in Cranbury, New Jersey. The Cranbury facility is leased
through May 2007. At December 31, 2001 minimum annual rentals under the leases
are as follows:

                                      F-18
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                         NOTES TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
         Year Ending December 31,                      Amount
         ------------------------                    -----------
         <S>                                         <C>
             2002................................... $ 2,418,000
             2003...................................   2,460,000
             2004...................................   2,503,000
             2005...................................   2,469,000
             2006...................................   2,412,000
           Thereafter...............................   1,207,000
                                                     -----------
                                                     $13,469,000
                                                     ===========
</TABLE>

   The leases provide for scheduled rental increases and escalations for
increases in real estate taxes and certain operating expenses. At December 31,
2001, the Company has recorded a deferred rent liability in the amount of
$84,000.

   Rent expense was $2,224,000, $547,000 and $516,000 for the years ended
December 31, 2001,2000 and 1999, respectively.

 [2] Letter of Credit:

   The Company had an outstanding letter of credit at December 31, 2001,
totaling $0.8 million pursuant to the lease for the Cranbury research
facility. (Note B[3])

 [3] Contingencies:

   The Company may be, from time to time, a party to various legal proceedings
arising from normal business activities. Although the amount of any liability
that could arise with respect to currently pending actions cannot be
accurately predicted, management believes that the ultimate resolution of
these matters will not have a material adverse effect on the Company's
financial condition or result of operations.

NOTE L--INCOME TAXES

   As of December 31, 2001, the Company has a net operating loss carryforward
and a research and development credit carryforward for federal income tax
purposes of approximately $49,680,000 and $2,909,000 respectively, which begin
to expire in 2016. In addition, the Company has an alternative minimum tax
credit carryforward of $120,000 as of December 31, 2001.

   Deferred tax assets, which represent the tax effects of loss and credit
carryforwards and temporary differences between the financial statement
amounts and the tax basis of assets and liabilities consist of:

<TABLE>
<CAPTION>
                                                        As of December 31,
                                                      ------------------------
                                                         2001         2000
                                                      -----------  -----------
   <S>                                                <C>          <C>
   Net operating loss carryforwards.................  $18,210,000  $14,760,000
   Research and development credit carryforwards....    2,909,000    1,321,000
   Alternative minimum tax credit carryforward......      120,000      117,000
   Income deferred for financial statement purposes,
    taxable when received for tax purposes..........    4,930,000    6,652,000
   Operating expenses, capitalized and amortized as
    start up costs for tax purposes.................          --       247,000
   Other--depreciation and expenses not currently
    deductible......................................      806,000      376,000
                                                      -----------  -----------
   Total deferred tax asset.........................   26,975,000   23,473,000
   Valuation allowance..............................  (26,975,000) (23,473,000)
                                                      -----------  -----------
       Net deferred tax asset.......................  $       --   $       --
                                                      ===========  ===========
</TABLE>

                                     F-19
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                         NOTES TO FINANCIAL STATEMENTS


   The Company has not recorded a benefit from its carryforwards or deductible
temporary differences because realization of the benefit is uncertain and,
therefore, a valuation allowance has been provided for the deferred tax asset
at December 31, 2001 and 2000, respectively. The provision for income taxes
for the year ended December 31, 2000 represents a provision for the federal
alternative minimum tax and state income tax. The difference between the tax
benefit computed at the statutory tax rate of 34% and the Company's effective
tax rate is due to the increase in the valuation allowance of $3,502,000,
$4,305,000 and $6,805,000 for the years ended December 31, 2001, 2000 and
1999, respectively, and the provision for the federal alternative minimum tax
and state income tax of $159,000 for the year ended December 31, 2000. In
subsequent years, the Company may be subject to an annual limitation on the
utilization of its net operating loss and research and development tax credit
carryforwards under Section 382 of the Internal Revenue Code.

NOTE M--SETTLEMENT OF LITIGATION

   In October 1998, a complaint was filed in the United States District Court
for the District of Delaware by Anadys Pharmaceuticals, Inc. alleging that the
Company infringed two Anadys U.S. Patents. On March 7, 2000, the Company and
Anadys entered into a Settlement Agreement for a total of $1.5 million which
was paid by the Company for settlement of the litigation.

NOTE N--QUARTERLY RESULTS  (unaudited):

<TABLE>
<CAPTION>
                                          Quarter ended
                         --------------------------------------------------
                                                    September
                          March 31      June 30        30       December 31   Total Year
                         -----------  -----------  -----------  -----------  ------------
<S>                      <C>          <C>          <C>          <C>          <C>
          2001
Revenues................ $ 5,796,000  $ 6,643,000  $ 5,788,000  $10,172,000  $ 28,399,000
Net loss................  (1,641,000)  (3,094,000)  (4,965,000)  (1,742,000)  (11,442,000)
Basic net loss per
 common share--
 historical*............ $     (0.08) $     (0.14) $     (0.23) $     (0.08) $      (0.53)
Diluted net loss per
 common share--
 historical*............ $     (0.08) $     (0.14) $     (0.23) $     (0.08) $      (0.53)
                         ===========  ===========  ===========  ===========  ============
          2000
Revenues................ $ 1,484,000  $ 2,131,000  $ 4,994,000  $ 3,800,000  $ 12,409,000
Net income (loss).......  (3,742,000)  (2,477,000)     409,000   (2,342,000)   (8,152,000)
Basic net income (loss)
 per common share--
 historical*............ $     (5.92) $     (3.76) $      0.03  $     (0.11) $      (0.97)
Diluted net income
 (loss) per common
 share--historical*..... $     (5.92) $     (3.76) $      0.02  $     (0.11) $      (0.97)
Basic net income (loss)
 per common share--pro
 forma.................. $     (0.36) $     (0.18) $      0.02  $     (0.11) $      (0.52)
Diluted net income
 (loss) per common
 share--pro forma....... $     (0.36) $     (0.18) $      0.02  $     (0.11) $      (0.52)
                         ===========  ===========  ===========  ===========  ============
</TABLE>
--------
*  Per common share amounts for the quarters and full years have been
   calculated separately. Accordingly, quarterly amounts do not add to the
   annual amounts because of differences in the weighted average common shares
   outstanding during each period principally due to the effect of the
   Company's issuing shares of its common stock during the year.
(1) During the quarter ended December 31, 2000, revenues included a $0.4
    million adjustment resulting from a modification of the agreement with
    BMS.

                                     F-20
<PAGE>

NOTE O--TPO MIMETIC PROGRAM:

   In January 2002, the Company acquired worldwide rights to a pre-clinical
compound, 3DP-3534, from GlaxoSmithKline Plc, or GSK, for the prevention and
treatment of thrombocytopenia, or low blood platelet count. All payments for
the compound will be made to GSK in shares of the Company's stock. The Company
made an initial payment of 0.5 million shares and is obligated to issue up to
1.9 million additional shares should the compound achieve certain key
development and regulatory milestone events. With respect to the initial 0.5
million shares issued, the Company will recognize a non-cash in-process
research and development charge in the first quarter of 2002 of $4.1 million.

                                     F-21
<PAGE>

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

   On September 24, 2001, upon the recommendation of the Audit Committee and
the Board of Directors, the Company dismissed Richard A. Eisner & Company, LLP
(Eisner) as the Company's independent accountants. Eisner's reports on the
financial statements of the Company for each of the fiscal years ended
December 31, 2000 and 1999 did not contain an adverse opinion or a disclaimer
of opinion, and were not qualified or modified as to uncertainty, audit scope,
or accounting principles. During the Company's 2000 and 1999 fiscal years and
the interim period ended September 24, 2001, the Company did not have any
disagreements with Eisner on any matter relating to accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Eisner, would have
caused Eisner to make reference to the subject matter of the disagreement in
connection with its report.

   On September 24, 2001, the Board of Directors approved the Company's
retention of Arthur Andersen LLP to act as the Company's independent
accountants. During the Company's 2000 and 1999 fiscal years and the interim
period ended September 24, 2001, the Company did not consult Arthur Andersen
LLP regarding either the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the financial statements of the Company. Additionally,
the Company did not consult Arthur Andersen LLP during the Company's 2000 and
1999 fiscal years or the interim period ended September 24, 2001, regarding
any matter that was the subject of a disagreement or a reportable event.

                                   PART III

Item 10. Directors and Executive Officers of the Registrant

   The response to this item is contained in part under the caption "Executive
Officers of the Registrant" in Part I of this Annual Report on Form 10-K and
the remainder is incorporated by reference from the discussion under the
caption "Nomination and Election of Directors" from our Proxy Statement
relating to our Annual Meeting of Stockholders scheduled for May 17, 2002,
which will be filed within 120 days after the close of the Company's fiscal
year covered by this Report.

Item 11. Executive Compensation

   This information will be included in our Proxy Statement relating to our
Annual Meeting of Stockholders scheduled for May 17, 2002, which will be filed
within 120 days after the close of our fiscal year covered by this Report, and
is incorporated herein by reference to such Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

   This information will be included in our Proxy Statement relating to our
Annual Meeting of Stockholders scheduled for May 17, 2002, which will be filed
within 120 days after the close of our fiscal year covered by this Report, and
is incorporated herein by reference to such Proxy Statement.

Item 13. Certain Relationships and Related Transactions

   This information will be included in our Proxy Statement relating to our
Annual Meeting of Stockholders scheduled for May 17, 2002, which will be filed
within 120 days after the close of our fiscal year covered by this Report, and
is incorporated herein by reference to such Proxy Statement.

                                     F-22
<PAGE>

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

     (a)  Documents filed as part of this report:

       (1)  Financial Statements

   The financial statements are included under Item 8 of this Report.

       (2)  Financial Statement Schedules

     The financial statement schedules listed under Item 8 of this Report are
  omitted because they are not applicable or required information, and are
  shown in the financial statements or the notes thereto.

       (3)  List of Exhibits.

   The following is a list of exhibits filed as part of this annual report on
Form 10-K. Where so indicated in parentheses, exhibits which were previously
filed are incorporated herein by reference.

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  3 (i)  Ninth Restated Certificate of Incorporation of the Company
         (incorporated by reference to Exhibit 3.4 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606)).
  3 (ii) Amended and Restated Bylaws of the Company (incorporated by reference
         to Exhibit 3.5 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
  4.1    Form of Common Stock Certificate of Company (incorporated by reference
         to Exhibit 4.1 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
 10.1    3-Dimensional Pharmaceuticals, Inc. Equity Compensation Plan, as
         amended (incorporated by reference to Exhibit 10.1 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606))./1/
 10.2    Third Amended and Restated Stockholders' Agreement by and among the
         Company and the Stockholders identified therein, dated March 31, 2000
         (incorporated by reference to Exhibit 10.2 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606)).
 10.3    Series B Preferred Stock Purchase Agreement between the Company and
         Merck KGaA, dated October 11, 1996 (incorporated by reference to
         Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File
         No. 333-37606)).
 10.4    Series C Preferred Stock Purchase Agreement between the Company and
         American Home Products Corporation, dated June 13, 1997 (incorporated
         by reference to Exhibit 10.4 to the Company's Registration Statement
         on Form S-1 (File No. 333-37606)).
 10.5    Series D Preferred Stock Purchase Agreement between the Company and
         Schering Berlin Venture Corporation, dated May 17, 2000 (incorporated
         by reference to Exhibit 10.5 to the Company's Registration Statement
         on Form S-1 (File No. 333-37606)).
 10.6    Warrant to Purchase Common Stock of the Company issued to HealthCare
         Ventures III, L.P., dated November 18, 1999 (incorporated by reference
         to Exhibit 10.6 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
 10.7    Warrant to Purchase Common Stock of the Company issued to HealthCare
         Ventures IV, L.P., dated November 18, 1999 (incorporated by reference
         to Exhibit 10.7 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
 10.8    Warrant to Purchase Common Stock of the Company issued to Rho
         Management Trust II, dated November 18, 1999 (incorporated by
         reference to Exhibit 10.8 to the Company's Registration Statement on
         Form S-1 (File No. 333-37606)).
</TABLE>


                                      F-23
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  10.9   Warrant to Purchase Common Stock of the Company issued to Aetna Life
         Insurance Company, dated November 18, 1999 (incorporated by reference
         to Exhibit 10.9 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
  10.10  Warrant to Purchase Common Stock of the Company issued to Henry
         Rothman, dated November 18, 1999 (incorporated by reference to Exhibit
         10.10 to the Company's Registration Statement on Form S-1 (File No.
         333-37606)).
  10.11  Warrant to Purchase Common Stock of the Company issued to Abingworth
         Bioventures SICAV, dated November 18, 1999 (incorporated by reference
         to Exhibit 10.11 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
  10.12  Warrant to Purchase Common Stock of the Company issued to Sentron
         Medical, Inc., dated November 18, 1999 (incorporated by reference to
         Exhibit 10.12 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
  10.13  Warrant to Purchase Common Stock of the Company issued to Biotech
         Growth S.A., dated November 18, 1999 (incorporated by reference to
         Exhibit 10.13 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
  10.14  Employment Offer Letter to David C. U'Prichard, dated September 1,
         1999 (incorporated by reference to Exhibit 10.14 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606))./1/
  10.15  Settlement Agreement between the Company and Anadys Pharmaceuticals,
         Inc. (Formerly Scriptgen Pharmaceuticals, Inc.), dated March 7, 2000
         (incorporated by reference to Exhibit 10.15 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606))./2/
  10.16  Research Collaboration Agreement between the Company and BioCryst
         Pharmaceuticals, Inc., dated October 18, 1996, and Amendment No.1
         thereto, dated October 18, 1996 (incorporated by reference to Exhibit
         10.16 to the Company's Registration Statement on Form S-1 (File No.
         333-37606))./2/
  10.17  Collaborative Discovery and Lead Optimization Agreement between the
         Company and Boehringer Ingelheim Pharmaceuticals, Inc., dated December
         17, 1999 (incorporated by reference to Exhibit 10.17 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606))./2/
  10.18  Collaborative Research and License Agreement between the Company and
         Hoechst Schering AgrEvo GmbH, now Aventis CropScience GmbH, dated
         October 18, 1999 (incorporated by reference to Exhibit 10.18 to the
         Company's Registration Statement on Form S-1 (File No. 333-37606))./2/
  10.19  Collaborative Research and License Agreement between the Company and
         E.I. DuPont de Nemours & Co., dated October 12, 1998 (incorporated by
         reference to Exhibit 10.19 to the Company's Registration Statement on
         Form S-1 (File No. 333-37606))./2/
  10.20  Collaborative Discovery and Lead Optimization Agreement between the
         Company and DuPont Pharmaceuticals Company, dated February 11, 2000
         (incorporated by reference to Exhibit 10.20 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606))./2/
  10.21  Nonexclusive Patent License Agreement between the Company and DuPont
         Pharmaceuticals Company, dated February 11, 2000 (incorporated by
         reference to Exhibit 10.21 to the Company's Registration Statement on
         Form S-1 (File No. 333-37606))./2/
  10.22  Research and License Agreement between the Company and the Heska
         Corporation, dated December 18, 1997, and Amendment No.1 thereto,
         dated December 18, 1997 (incorporated by reference to Exhibit 10.22 to
         the Company's Registration Statement on Form S-1 (File
         No. 333-37606))./2/
  10.23  License and Research Agreement between the Company and Schering AG,
         Germany, dated May 17, 2000 (incorporated by reference to Exhibit
         10.23 to the Company's Registration Statement on Form S-1 (File No.
         333-37606))./2/
</TABLE>


                                      F-24
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  10.24  Master Loan and Security Agreement between the Company and Phoenixcor,
         Inc., dated June 18, 1998 (incorporated by reference to Exhibit 10.24
         to the Company's Registration Statement on Form S-1 (File No. 333-
         37606)).
  10.25  Amended and Restated Lease for Combination Office/Laboratory/Light
         Manufacturing Space at Eagleview Corporate Center Lot 28 between the
         Company and Eagleview Technology Partners, dated December 12, 1997
         (incorporated by reference to Exhibit 10.25 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606)).
  10.26  Master Lease Agreement between the Company and Transamerica Business
         Credit Corporation, dated June 12, 1997 (incorporated by reference to
         Exhibit 10.26 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
  10.27  Warrant to Purchase Common Stock of the Company issued to Transamerica
         Business Credit Corporation, dated June 12, 1997 (incorporated by
         reference to Exhibit 10.27 to the Company's Registration Statement on
         Form S-1 (File No. 333-37606)).
  10.28  Master Lease Agreement, Loan Agreement and Subordination Agreement
         between the Company and Comdisco, Inc., dated March 7, 1994
         (incorporated by reference to Exhibit 10.28 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606)).
  10.29  Warrant to Purchase Series A Preferred Stock, originally dated March
         7, 1994 and reissued to CDC Realty, Inc., dated July 21, 1998
         (incorporated by reference to Exhibit 10.29 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606)).
  10.30  Warrant to Purchase Series A Preferred Stock, originally dated March
         7, 1994 and reissued to Gregory Stento, dated July 21, 1998
         (incorporated by reference to Exhibit 10.30 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606)).
  10.31  Warrant to Purchase Series A Preferred Stock, originally dated April
         25, 1995 and reissued to Comdisco, Inc., dated July 21, 1998
         (incorporated by reference to Exhibit 10.31 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606)).
  10.32  Warrant to Purchase Series A Preferred Stock, originally dated April
         25, 1995 and reissued to Gregory Stento, dated July 21, 1998
         (incorporated by reference to Exhibit 10.32 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606)).
  10.33  Form of Warrant to Purchase Common Stock (along with Schedule of
         Holders of Certain Warrants to Purchase Common Stock) (incorporated by
         reference to Exhibit 10.33 to the Company's Registration Statement on
         Form S-1 (File No. 333-37606)).
  10.34  3-Dimensional Pharmaceuticals, Inc. 2000 Equity Compensation Plan
         (incorporated by reference to Exhibit 10.34 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606))./1/
  10.35  DiscoverWorks(TM) Drug Discovery Collaboration Agreement between the
         Company and Bristol-Myers Squibb Company, dated July 7, 2000
         (incorporated by reference to Exhibit 10.35 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606))./2/
  10.36  DiscoverWorks(TM) Nonexclusive License and Purchase Agreement between
         the Company and Bristol-Myers Squibb Company, dated July 7, 2000
         (incorporated by reference to Exhibit 10.36 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606))./2/
  10.37  Letter agreement between the Company and Bristol-Myers Squibb Company,
         dated December 18, 2000 (incorporated by reference to Exhibit 10.37 to
         the Company's Annual Report on Form 10-K (File No. 000-309992)).
  10.38  Research, Development and Commercialization Agreement between the
         Company and Centocor, Inc., dated as of December 29, 2000
         (incorporated by reference to Exhibit 10.38 to the Company's Annual
         Report on Form 10-K (File No. 000-30992))./2/
</TABLE>


                                      F-25
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  10.39  First Amendment to Lease between the Company and Eagleview Technology
         Partners dated October 24, 2000 (incorporated by reference to Exhibit
         10.39 to the Company's Annual Report on Form 10-K (File No. 000-
         30992))./2/
  10.40  Agreement of Sublease between the Company and Advanced Medicine, Inc.,
         dated December 13, 2000 (incorporated by reference to Exhibit 10.40 to
         the Company's Annual Report on Form 10-K (File No. 000-30992))./2/
  10.41  Additional and Alternative Target Agreement between the Company and
         Boehringer Ingelheim Pharmaceuticals, Inc. dated April 20, 2001
         (incorporated by reference to Exhibit 10.41 to the Company's Quarterly
         Report on Form 10-Q for the fiscal quarter period ended June 30, 2001
         (File No. 000-30992))./2/
  10.42  Amendment No. 1 dated May 16, 2001, to Discoverworks Drug Discovery
         Collaboration Agreement between the Company and Bristol-Myers Squibb
         Company, dated July 7, 2000 (incorporated by reference to Exhibit
         10.42 to the Company's Quarterly Report on Form 10-Q for the fiscal
         quarter period ended June 30, 2001 (File No. 000-30992))./2/
  10.43  Agreement of Lease dated June 14, 2001, between the Company and Cedar
         Brook Corporate Center, L.P. (incorporated by reference to Exhibit
         10.43 to the Company's Quarterly Report on Form 10-Q for the fiscal
         quarter period ended June 30, 2001 (File No. 000-30992)).
  10.44  Amendment No. 2 dated October 4, 2001, to Research, Development and
         Commercialization Agreement between the Company and Centocor, Inc.,
         dated December 29, 2000 (incorporated by reference to Exhibit 10.44 to
         the Company's Quarterly Report on Form 10-Q for the fiscal quarter
         period ended September 30, 2001 (File No. 000-30992))./2/
  10.45  Agreement of Lease dated August 8, 2002, between the Company and
         Newtown Office Development III, L.P. (incorporated by reference to
         Exhibit 10.45 to the Company's Quarterly Report on Form 10-Q for the
         fiscal quarter period ended September 30, 2001 (File No. 000-30992)).
  10.46  Collaboration Research and Development Agreement dated October 25,
         2001 between the Company and Athersys, Inc./3/,/4/.
  10.47  Discoverworks Drug Discovery Collaboration Agreement dated December
         28, 2001 between the Company and Janssen Pharmaceuticals and the R.W.
         Johnson Pharmaceutical Research Institute/3/,/4/.
  10.48  License Agreement dated January 7, 2002 between the Company and
         GlaxoSmithKline plc, including Exhibit D consisting of a Stock
         Purchase Agreement and a Registration Rights Agreement between the
         Company and GlaxoSmithKline plc./3/,/4/.
  11.1   Statements or computation of per share income (loss)./3/
  21.1   Subsidiaries of the Registrant (incorporated by reference to the
         Company's Annual Report on Form 10-K (File No. 000-30992)).
  23.1   Consent of Arthur Andersen LLP./3/
  23.2   Consent of Richard A. Eisner & Company, LLP./3/
  99.1   Letter relating to Arthur Andersen LLP./3/
</TABLE>

--------
/1/Compensation plans or arrangements in which directors and executive
   officers are eligible to participate.
/2/Confidential treatment granted with respect to portions of this exhibit.
   Omitted portions were filed separately with the Securities and Exchange
   Commission.
/3/Filed herewith.
/4/Confidential treatment has been requested with respect to portions of this
   exhibit. Omitted portions have been filed separately with the Securities
   and Exchange Commission.

     (b)  Reports on Form 8-K:

     None

                                     F-26
<PAGE>

                                  SIGNATURES

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


Date: March 29, 2002                      3-Dimensional Pharmaceuticals, Inc.

                                                  /s/ David C. U'Prichard
                                          By: _________________________________
                                             David C. U'Prichard, Ph.D. Chief
                                              Executive Officer and Director

<TABLE>
<CAPTION>
           Name                            Title                    Date
           ----                            -----                    ----
<S>                                   <C>                     <C>
     /s/ David C. U'Prichard           Chief Executive          March 29, 2002
-------------------------------------   Officer and
     David C. U'Prichard, Ph.D.         Director (Principal
                                        Executive Officer)

         /s/ John M. Gill              Chief Operating          March 29, 2002
-------------------------------------   Officer and
            John M. Gill                Director (Principal
                                        Financial Officer)

       /s/ Scott M. Horvitz            Vice President,          March 29, 2002
-------------------------------------   Finance and
          Scott M. Horvitz              Administration
                                        (Principal
                                        Accounting Officer)

      /s/ F. Raymond Salemme           President, Chief         March 29, 2002
-------------------------------------   Scientific Officer
      F. Raymond Salemme, Ph.D.         and Director

      /s/ James H. Cavanaugh           Director                 March 29, 2002
-------------------------------------
-------------------------------------
      James H. Cavanaugh, Ph.D.
      James H. Cavanaugh, Ph.D.

    /s/ William Claypool. M.D.         Director                 March 29, 2002
-------------------------------------
-------------------------------------
       William Claypool, M.D.

       /s/ Zola P. Horovitz            Director                 March 29, 2002
-------------------------------------
-------------------------------------
       Zola P. Horovitz, Ph.D

        /s/ David R. King              Director                 March 29, 2002
-------------------------------------
-------------------------------------
            David R. King

         /s/ Joshua Ruch               Director                 March 29, 2002
-------------------------------------
-------------------------------------
             Joshua Ruch

       /s/ Harold R. Werner            Director                 March 29, 2002
-------------------------------------
-------------------------------------
          Harold R. Werner
</TABLE>
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  3 (i)  Ninth Restated Certificate of Incorporation of the Company
         (incorporated by reference to Exhibit 3.4 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606)).
  3 (ii) Amended and Restated Bylaws of the Company (incorporated by reference
         to Exhibit 3.5 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
  4.1    Form of Common Stock Certificate of Company (incorporated by reference
         to Exhibit 4.1 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
 10.1    3-Dimensional Pharmaceuticals, Inc. Equity Compensation Plan, as
         amended (incorporated by reference to Exhibit 10.1 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606))./1/
 10.2    Third Amended and Restated Stockholders' Agreement by and among the
         Company and the Stockholders identified therein, dated March 31, 2000
         (incorporated by reference to Exhibit 10.2 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606)).
 10.3    Series B Preferred Stock Purchase Agreement between the Company and
         Merck KGaA, dated October 11, 1996 (incorporated by reference to
         Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File
         No. 333-37606)).
 10.4    Series C Preferred Stock Purchase Agreement between the Company and
         American Home Products Corporation, dated June 13, 1997 (incorporated
         by reference to Exhibit 10.4 to the Company's Registration Statement
         on Form S-1 (File No. 333-37606)).
 10.5    Series D Preferred Stock Purchase Agreement between the Company and
         Schering Berlin Venture Corporation, dated May 17, 2000 (incorporated
         by reference to Exhibit 10.5 to the Company's Registration Statement
         on Form S-1 (File No. 333-37606)).
 10.6    Warrant to Purchase Common Stock of the Company issued to HealthCare
         Ventures III, L.P., dated November 18, 1999 (incorporated by reference
         to Exhibit 10.6 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
 10.7    Warrant to Purchase Common Stock of the Company issued to HealthCare
         Ventures IV, L.P., dated November 18, 1999 (incorporated by reference
         to Exhibit 10.7 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
 10.8    Warrant to Purchase Common Stock of the Company issued to Rho
         Management Trust II, dated November 18, 1999 (incorporated by
         reference to Exhibit 10.8 to the Company's Registration Statement on
         Form S-1 (File No. 333-37606)).
 10.9    Warrant to Purchase Common Stock of the Company issued to Aetna Life
         Insurance Company, dated November 18, 1999 (incorporated by reference
         to Exhibit 10.9 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
 10.10   Warrant to Purchase Common Stock of the Company issued to Henry
         Rothman, dated November 18, 1999 (incorporated by reference to Exhibit
         10.10 to the Company's Registration Statement on Form S-1 (File No.
         333-37606)).
 10.11   Warrant to Purchase Common Stock of the Company issued to Abingworth
         Bioventures SICAV, dated November 18, 1999 (incorporated by reference
         to Exhibit 10.11 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
 10.12   Warrant to Purchase Common Stock of the Company issued to Sentron
         Medical, Inc., dated November 18, 1999 (incorporated by reference to
         Exhibit 10.12 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  10.13  Warrant to Purchase Common Stock of the Company issued to Biotech
         Growth S.A., dated November 18, 1999 (incorporated by reference to
         Exhibit 10.13 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
  10.14  Employment Offer Letter to David C. U'Prichard, dated September 1,
         1999 (incorporated by reference to Exhibit 10.14 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606))./1/
  10.15  Settlement Agreement between the Company and Anadys Pharmaceuticals,
         Inc. (Formerly Scriptgen Pharmaceuticals, Inc.), dated March 7, 2000
         (incorporated by reference to Exhibit 10.15 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606))./2/
  10.16  Research Collaboration Agreement between the Company and BioCryst
         Pharmaceuticals, Inc., dated October 18, 1996, and Amendment No.1
         thereto, dated October 18, 1996 (incorporated by reference to Exhibit
         10.16 to the Company's Registration Statement on Form S-1 (File No.
         333-37606))./2/
  10.17  Collaborative Discovery and Lead Optimization Agreement between the
         Company and Boehringer Ingelheim Pharmaceuticals, Inc., dated December
         17, 1999 (incorporated by reference to Exhibit 10.17 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606))./2/
  10.18  Collaborative Research and License Agreement between the Company and
         Hoechst Schering AgrEvo GmbH, now Aventis CropScience GmbH, dated
         October 18, 1999 (incorporated by reference to Exhibit 10.18 to the
         Company's Registration Statement on Form S-1 (File No. 333-37606))./2/
  10.19  Collaborative Research and License Agreement between the Company and
         E.I. DuPont de Nemours & Co., dated October 12, 1998 (incorporated by
         reference to Exhibit 10.19 to the Company's Registration Statement on
         Form S-1 (File No. 333-37606))./2/
  10.20  Collaborative Discovery and Lead Optimization Agreement between the
         Company and DuPont Pharmaceuticals Company, dated February 11, 2000
         (incorporated by reference to Exhibit 10.20 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606))./2/
  10.21  Nonexclusive Patent License Agreement between the Company and DuPont
         Pharmaceuticals Company, dated February 11, 2000 (incorporated by
         reference to Exhibit 10.21 to the Company's Registration Statement on
         Form S-1 (File No. 333-37606))./2/
  10.22  Research and License Agreement between the Company and the Heska
         Corporation, dated December 18, 1997, and Amendment No.1 thereto,
         dated December 18, 1997 (incorporated by reference to Exhibit 10.22 to
         the Company's Registration Statement on Form S-1 (File
         No. 333-37606))./2/
  10.23  License and Research Agreement between the Company and Schering AG,
         Germany, dated May 17, 2000 (incorporated by reference to Exhibit
         10.23 to the Company's Registration Statement on Form S-1 (File No.
         333-37606))./2/
  10.24  Master Loan and Security Agreement between the Company and Phoenixcor,
         Inc., dated June 18, 1998 (incorporated by reference to Exhibit 10.24
         to the Company's Registration Statement on Form S-1 (File No. 333-
         37606)).
  10.25  Amended and Restated Lease for Combination Office/Laboratory/Light
         Manufacturing Space at Eagleview Corporate Center Lot 28 between the
         Company and Eagleview Technology Partners, dated December 12, 1997
         (incorporated by reference to Exhibit 10.25 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606)).
  10.26  Master Lease Agreement between the Company and Transamerica Business
         Credit Corporation, dated June 12, 1997 (incorporated by reference to
         Exhibit 10.26 to the Company's Registration Statement on Form S-1
         (File No. 333-37606)).
  10.27  Warrant to Purchase Common Stock of the Company issued to Transamerica
         Business Credit Corporation, dated June 12, 1997 (incorporated by
         reference to Exhibit 10.27 to the Company's Registration Statement on
         Form S-1 (File No. 333-37606)).
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  10.28  Master Lease Agreement, Loan Agreement and Subordination Agreement
         between the Company and Comdisco, Inc., dated March 7, 1994
         (incorporated by reference to Exhibit 10.28 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606)).
  10.29  Warrant to Purchase Series A Preferred Stock, originally dated March
         7, 1994 and reissued to CDC Realty, Inc., dated July 21, 1998
         (incorporated by reference to Exhibit 10.29 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606)).
  10.30  Warrant to Purchase Series A Preferred Stock, originally dated March
         7, 1994 and reissued to Gregory Stento, dated July 21, 1998
         (incorporated by reference to Exhibit 10.30 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606)).
  10.31  Warrant to Purchase Series A Preferred Stock, originally dated April
         25, 1995 and reissued to Comdisco, Inc., dated July 21, 1998
         (incorporated by reference to Exhibit 10.31 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606)).
  10.32  Warrant to Purchase Series A Preferred Stock, originally dated April
         25, 1995 and reissued to Gregory Stento, dated July 21, 1998
         (incorporated by reference to Exhibit 10.32 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606)).
  10.33  Form of Warrant to Purchase Common Stock (along with Schedule of
         Holders of Certain Warrants to Purchase Common Stock) (incorporated by
         reference to Exhibit 10.33 to the Company's Registration Statement on
         Form S-1 (File No. 333-37606)).
  10.34  3-Dimensional Pharmaceuticals, Inc. 2000 Equity Compensation Plan
         (incorporated by reference to Exhibit 10.34 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606))./1/
  10.35  DiscoverWorks(TM) Drug Discovery Collaboration Agreement between the
         Company and Bristol-Myers Squibb Company, dated July 7, 2000
         (incorporated by reference to Exhibit 10.35 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606))./2/
  10.36  DiscoverWorks(TM) Nonexclusive License and Purchase Agreement between
         the Company and Bristol-Myers Squibb Company, dated July 7, 2000
         (incorporated by reference to Exhibit 10.36 to the Company's
         Registration Statement on Form S-1 (File No. 333-37606))./2/
  10.37  Letter agreement between the Company and Bristol-Myers Squibb Company,
         dated December 18, 2000 (incorporated by reference to Exhibit 10.37 to
         the Company's Annual Report on Form 10-K (File No. 000-309992)).
  10.38  Research, Development and Commercialization Agreement between the
         Company and Centocor, Inc., dated as of December 29, 2000
         (incorporated by reference to Exhibit 10.38 to the Company's Annual
         Report on Form 10-K (File No. 000-30992))./2/
  10.39  First Amendment to Lease between the Company and Eagleview Technology
         Partners dated October 24, 2000 (incorporated by reference to Exhibit
         10.39 to the Company's Annual Report on Form 10-K (File No. 000-
         30992))./2/
  10.40  Agreement of Sublease between the Company and Advanced Medicine, Inc.,
         dated December 13, 2000 (incorporated by reference to Exhibit 10.40 to
         the Company's Annual Report on Form 10-K (File No. 000-30992))./2/
  10.41  Additional and Alternative Target Agreement between the Company and
         Boehringer Ingelheim Pharmaceuticals, Inc. dated April 20, 2001
         (incorporated by reference to Exhibit 10.41 to the Company's Quarterly
         Report on Form 10-Q for the fiscal quarter period ended June 30, 2001
         (File No. 000-30992))./2/
  10.42  Amendment No. 1 dated May 16, 2001, to Discoverworks Drug Discovery
         Collaboration Agreement between the Company and Bristol-Myers Squibb
         Company, dated July 7, 2000 (incorporated by reference to Exhibit
         10.42 to the Company's Quarterly Report on Form 10-Q for the fiscal
         quarter period ended June 30, 2001 (File No. 000-30992))./2/
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  10.43  Agreement of Lease dated June 14, 2001, between the Company and Cedar
         Brook Corporate Center, L.P. (incorporated by reference to Exhibit
         10.43 to the Company's Quarterly Report on Form 10-Q for the fiscal
         quarter period ended June 30, 2001 (File No. 000-30992)).
  10.44  Amendment No. 2 dated October 4, 2001, to Research, Development and
         Commercialization Agreement between the Company and Centocor, Inc.,
         dated December 29, 2000 (incorporated by reference to Exhibit 10.44 to
         the Company's Quarterly Report on Form 10-Q for the fiscal quarter
         period ended September 30, 2001 (File No. 000-30992))./2/
  10.45  Agreement of Lease dated August 8, 2002, between the Company and
         Newtown Office Development III, L.P. (incorporated by reference to
         Exhibit 10.45 to the Company's Quarterly Report on Form 10-Q for the
         fiscal quarter period ended September 30, 2001 (File No. 000-30992)).
  10.46  Collaboration Research and Development Agreement dated October 25,
         2001 between the Company and Athersys, Inc./3/,/4/.
  10.47  Discoverworks Drug Discovery Collaboration Agreement dated December
         28, 2001 between the Company and Janssen Pharmaceuticals and the R.W.
         Johnson Pharmaceutical Research Institute/3/,/4/.
  10.48  License Agreement dated January 7, 2002 between the Company and
         GlaxoSmithKline plc, including Exhibit D consisting of a Stock
         Purchase Agreement and a Registration Rights Agreement between the
         Company and GlaxoSmithKline plc./3/,/4/.
  11.1   Statements or computation of per share income (loss)./3/
  21.1   Subsidiaries of the Registrant (incorporated by reference to the
         Company's Annual Report on Form 10-K (File No. 000-30992)).
  23.1   Consent of Arthur Andersen LLP./3/
  23.2   Consent of Richard A. Eisner & Company, LLP./3/
  99.1   Letter relating to Arthur Andersen LLP./3/
</TABLE>

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/1/Compensation plans or arrangements in which directors and executive
   officers are eligible to participate.
/2/Confidential treatment granted with respect to portions of this exhibit.
   Omitted portions were filed separately with the Securities and Exchange
   Commission.
/3/Filed herewith.
/4/Confidential treatment has been requested with respect to portions of this
   exhibit. Omitted portions have been filed separately with the Securities
   and Exchange Commission.