UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

(Mark One)

|ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2002

or

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission File Number: 0-27118

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

|Delaware(State or other jurisdiction of
incorporation or organization) | 33-0557266(I.R.S. Employer Identification No.)
|---------------------------------------------------------------------- | ----------------------------------------------
|                                                                       |                                               
|                                                                       |                                               
|CN 5350, Princeton, New Jersey(Address of principal executive offices) | 08543-5350(Zip code)                          

(609) 452-3600(Registrant's telephone number, including area code)

Not Applicable(Former name, former address and former fiscal year, if changed since last report)

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 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 ý    No o

Indicate
the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

Class
Outstanding at April 30, 2002Common Stock, $.0001 par value
23,351,650 shares


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PHARMACOPEIA, INC.

Form 10-Q

Table of Contents

|Item                          |  |                                                                                       |  | Page
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I. FINANCIAL INFORMATION |  |                                                                                      
|Item 1.                       |  | Consolidated Unaudited Financial Statements:                                          |  |     
|                              |  | Balance SheetsMarch 31, 2002 and December 31, 2001                                   |  | 3   
|                              |  | Statements of OperationsThree Months Ended March 31, 2002 and 2001                   |  | 4   
|                              |  | Statements of Cash FlowsThree Months Ended March 31, 2002 and 2001                   |  | 5   
|                              |  | Notes to Consolidated Unaudited Financial Statements                                  |  | 6   
|Item 2.                       |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 9   
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 12  
|PART II. OTHER INFORMATION    |  |                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                     |  | 13  
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                             |  | 13  
|Item 3.                       |  | Defaults upon Senior Securities                                                       |  | 13  
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                   |  | 13  
|Item 5.                       |  | Other Information                                                                     |  | 13  
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                      |  | 13  
|Signature                     |  | 14                                                                                   
|Index to Exhibits             |  | 15                                                                                   

2

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Pharmacopeia, Inc.        Consolidated Balance Sheets        (Dollars in thousands)

|                                        |                                                                                         | March 31,
2002             |                                            | December 31,
2001 |        
|--------------------------------------- | --------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ----------------- | -------
|
|ASSETS                                  |                                                                                         |                            |                                            |                   |        
|Current assets:                         |                                                                                         |                            |                                            |                   |        
|                                        | Cash and cash equivalents                                                               |                            | $                                          | 33,314            |        
|                                        | Marketable securities                                                                   |                            |                                            | 116,838           |        
|                                        | Trade receivables, net of allowance for doubtful accounts of $824 and $914 respectively |                            |                                            | 22,893            |        
|                                        | Prepaid expenses and other current assets                                               |                            |                                            | 7,830             |        
|                                        |                                                                                         |                            |                                            |                   |        
|                                        |                                                                                         | Total current assets       |                                            |                   | 180,875
|Property and equipmentnet              |                                                                                         |                            | 12,294                                     |                   |        
|Goodwillnet                            |                                                                                         |                            | 36,823                                     |                   |        
|Capitalized softwarenet                |                                                                                         |                            | 12,051                                     |                   |        
|Other intangiblesnet                   |                                                                                         |                            | 796                                        |                   |        
|Other assets                            |                                                                                         |                            | 1,164                                      |                   |        
|                                        |                                                                                         |                            |                                            |                   |        
|                                        |                                                                                         | Total assets               |                                            | $                 | 244,003
|                                        |                                                                                         |                            |                                            |                   |        
|LIABILITIES AND STOCKHOLDERS' EQUITY    |                                                                                         |                            |                                            |                   |        
|Current liabilities:                    |                                                                                         |                            |                                            |                   |        
|                                        | Accounts payable                                                                        |                            | $                                          | 2,535             |        
|                                        | Accrued liabilities                                                                     |                            |                                            | 24,860            |        
|                                        | Deferred revenue, current portion                                                       |                            |                                            | 27,663            |        
|                                        | Notes payable, current portion                                                          |                            |                                            | 16                |        
|                                        |                                                                                         |                            |                                            |                   |        
|                                        |                                                                                         | Total current liabilities  |                                            |                   | 55,074 
|Notes payable and long-term liabilities |                                                                                         |                            | 27                                         |                   |        
|Deferred revenue, long-term             |                                                                                         |                            | 4,082                                      |                   |        
|Commitments and contingencies           |                                                                                         |                            |                                            |                   |        
|Stockholders' equity:                   |                                                                                         |                            |                                            |                   |        
|                                        | Capital stock                                                                           |                            |                                            | 2                 |        
|                                        | Additional paid-in capital                                                              |                            |                                            | 282,151           |        
|                                        | Treasury stock                                                                          |                            |                                            | (8,195            | )      
|                                        | Accumulated deficit                                                                     |                            |                                            | (88,197           | )      
|                                        | Accumulated comprehensive income                                                        |                            |                                            | (941              | )      
|                                        |                                                                                         |                            |                                            |                   |        
|                                        |                                                                                         | Total stockholders' equity |                                            |                   | 184,820
|                                        |                                                                                         |                            |                                            |                   |        
|                                        |                                                                                         |                            | Total liabilities and stockholders' equity |                   | $      
|                                        |                                                                                         |                            |                                            |                   |        

See
accompanying notes to these unaudited financial statements.

3

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Pharmacopeia, Inc.        Consolidated Statements of Operations        (Unaudited, dollars in thousands, except per share data)

|                                                                  |                                              | For the Three Months
Ended March 31, |       
|----------------------------------------------------------------- | -------------------------------------------- | ------------------------------------ | ------
|
|Revenues:                                                         |                                              |                                      |       
|                                                                  | Software license, service and other          |                                      | $     
|                                                                  | Drug discovery services                      |                                      |       
|                                                                  |                                              |                                      |       
|                                                                  |                                              | Total revenues                       |       
|Cost of revenues:                                                 |                                              |                                      |       
|                                                                  | Software license, service and other          |                                      |       
|                                                                  | Drug discovery services                      |                                      |       
|                                                                  |                                              |                                      |       
|                                                                  |                                              | Total cost of revenues               |       
|                                                                  |                                              |                                      |       
|Gross margin                                                      |                                              |                                      | 17,223
|Operating costs and expenses:                                     |                                              |                                      |       
|                                                                  | Research and development                     |                                      |       
|                                                                  | Sales, general and administrative            |                                      |       
|                                                                  | Amortization of goodwill                     |                                      |       
|                                                                  |                                              |                                      |       
|                                                                  |                                              | Total operating costs and expenses   |       
|                                                                  |                                              |                                      |       
|Operating loss from continuing operations                         |                                              |                                      | (7,162
|Discontinued acquisition costs                                    |                                              |                                      |      
|Interest and other income, net                                    |                                              |                                      | 1,280 
|                                                                  |                                              |                                      |       
|Loss from continuing operations before provision for income taxes |                                              |                                      | (5,882
|Provision for income taxes                                        |                                              |                                      | 121   
|                                                                  |                                              |                                      |       
|Net loss from continuing operations                               |                                              |                                      | (6,003
|Discontinued operations:                                          |                                              |                                      |       
|                                                                  | Income from discontinued hardware operations |                                      |       
|                                                                  |                                              |                                      |       
|Net loss                                                          |                                              | $                                    | (6,003
|                                                                  |                                              |                                      |       
|Net loss per shareBasic                                          |                                              | $                                    | (0.25 
|                                                                  |                                              |                                      |       
|Net loss per shareDiluted                                        |                                              | $                                    | (0.25 
|                                                                  |                                              |                                      |       
|Weighted average number of common stock outstanding               |                                              |                                      |       
|                                                                  | Basic                                        |                                      |       
|                                                                  |                                              |                                      |       
|                                                                  | Diluted                                      |                                      |       
|                                                                  |                                              |                                      |       

See
accompanying notes to these unaudited financial statements.

4

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Pharmacopeia, Inc.        Consolidated Statements of Cash Flows        (Unaudited, dollars in thousands)

|                                                |                                                                      | For the Three Months
Ended March 31,     |                                 
|----------------------------------------------- | -------------------------------------------------------------------- | ---------------------------------------- | --------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:           |                                                                      |                                          |                                 
|                                                | Net loss                                                             |                                          | $                               
|                                                | Adjustments to reconcile net loss to net cash provided by operations |                                          |                                 
|                                                |                                                                      | Depreciation                             |                                 
|                                                |                                                                      | Amortization                             |                                 
|                                                |                                                                      | Contribution of stock to 401 (k) members |                                 
|                                                |                                                                      | Changes in assets and liabilities:       |                                 
|                                                |                                                                      |                                          | Accounts receivable             
|                                                |                                                                      |                                          | Prepaid and other current assets
|                                                |                                                                      |                                          | Accounts payable                
|                                                |                                                                      |                                          | Accrued liabilities             
|                                                |                                                                      |                                          | Deferred revenue                
|                                                |                                                                      |                                          | Other assets                    
|                                                |                                                                      |                                          |                                 
|                                                |                                                                      |                                          |                                 
|CASH FLOWS FROM INVESTING ACTIVITIES:           |                                                                      |                                          |                                 
|                                                | Capital expenditures                                                 |                                          |                                 
|                                                | Purchases of marketable securities                                   |                                          |                                 
|                                                | Proceeds from sales of marketable securities                         |                                          |                                 
|                                                | Increase in capitalized software development costs                   |                                          |                                 
|                                                |                                                                      |                                          |                                 
|                                                |                                                                      |                                          |                                 
|CASH FLOWS FROM FINANCING ACTIVITIES:           |                                                                      |                                          |                                 
|                                                | Proceeds from issuance of common stock                               |                                          |                                 
|                                                | Purchases of treasury stock                                          |                                          |                                 
|                                                | Principal payments under capital lease obligations                   |                                          |                                 
|                                                |                                                                      |                                          |                                 
|                                                |                                                                      |                                          |                                 
|Exchange rate effect on cash and equivalents    |                                                                      |                                          | (36                             
|                                                |                                                                      |                                          |                                 
|Net increase (decrease) in cash and equivalents |                                                                      |                                          | (35,577                         
|Cash and equivalents, beginning of period       |                                                                      |                                          | 68,891                          
|                                                |                                                                      |                                          |                                 
|Cash and equivalents, end of period             |                                                                      | $                                        | 33,314                          
|                                                |                                                                      |                                          |                                 
|SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: |                                                                      |                                          |                                 
|Cash paid during the period for:                |                                                                      |                                          |                                 
|                                                | Interest                                                             |                                          | $                               
|                                                |                                                                      |                                          |                                 
|                                                | Income taxes                                                         |                                          | $                               
|                                                |                                                                      |                                          |                                 

See
accompanying notes to these unaudited financial statements.

5

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Pharmacopeia, Inc.        Notes to Consolidated Financial Statements        (Unaudited)

Note 1Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information
and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these unaudited financial statements do not include all of the
information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the financial statements have been included.

Interim
results are not necessarily indicative of the results that may be expected for the year. For further information, refer to the financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

Certain
amounts in prior periods have been reclassified to conform with current period presentation.

Note 2Net Loss Per Share

The Company computes net loss per share in accordance with Statement of Financial Accounting Standard (SFAS) No. 128, Earnings Per Share. Under the
provisions of SFAS No. 128, basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted-average number of common shares outstanding during the
period. Diluted net income per share is computed by
dividing the net income for the period by the weighted-average number of common and common equivalent shares outstanding during the period. Diluted earnings per share are required to be calculated to
include the potentially dilutive effect of the conversion of outstanding stock options. Because the Company has a net loss for the periods presented, the inclusion of outstanding stock options would
be anti-dilutive and therefore the weighted-average shares used to calculate both basic and diluted loss per share are the same.

Income
from discontinued hardware operations in the prior year had no effect on net loss per share. Accordingly, loss from continuing operations per share, and income from discontinued
hardware operations per share have not been presented.

Note 3Segment Information

The Company operates in two industry segments. The Company's Software segment, Accelrys, provides molecular modeling and simulation, bioinformatics and
cheminformatics software, and related consulting services that facilitate the discovery and development of new drug and chemical products and processes in the pharmaceutical, biotechnology, chemical,
petrochemical and materials industries. The Company's Drug Discovery Services segment provides drug discovery services to pharmaceutical and biotechnology companies based on proprietary combinatorial
chemistry, high-throughput screening,

6

---

and Accelrys technologies. Summarized financial information concerning the industry segment follows (dollars in thousands):

Three Months Ended
March 31, 2002Accelrys

Drug
Discovery
Services

TotalRevenue:Software licenses, service and other

$
19,621

$


$
19,621Drug discovery services





7,219


7,219Total revenue

$
19,621

$
7,219

$
26,840Operating loss from continuing operations

$
(5,709
)
$
(1,453
)
$
(7,162
)


Three Months Ended
March 31, 2001Accelrys

Drug
Discovery
Services

TotalRevenue:Software licenses, service and other

$
19,190

$


$
19,190Drug discovery services





6,373


6,373Total revenue

$
19,190

$
6,373

$
25,563Operating loss from continuing operations

$
(4,222
)
$
(2,995
)
$
(7,217
)


Accelrys

Drug
Discovery
Services

TotalTotal assetsMarch 31, 2002

$
100,453

$
143,550

$
244,003Total assetsDecember 31, 2001

$
119,538

$
150,860

$
270,398


Note 4Goodwill and Other Intangible AssetsAdoption of Statement 142

In
July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. The Company adopted SFAS 142 effective January 1, 2002 and completed the first step of the transitional goodwill impairment test during the
quarter ended March 31, 2002. Based on the results of this test, the Company does not believe that the value of the goodwill recorded on the Company's books is impaired as of March 31,
2002.

As
required by SFAS 141, the Company reclassified $1.8 million of intangible assets with indefinite lives to goodwill. The related amortization expense in the prior period,
which had been previously

7

---

classified as sales, general and administrative expense has been reclassified to amortization of goodwill. All such reclassified intangibles and related amortization are associated with Accelrys.

The
effect of excluding amortization of goodwill on the Company's net loss and net loss per share, based on the implementation of SFAS 142, are as follows (dollars in thousands,
except per share amounts):

Three Months Ended
March 31,2002

2001Reported net loss

$
(6,003
)
$
(5,780
)Addback: Goodwill amortization





2,048Adjusted net loss

$
(6,003
)
$
(3,732
)Basic net loss per shareReported net loss per share

$
(0.25
)
$
(0.25
)Addback: Goodwill amortization





0.09Adjusted net loss per share

$
(0.25
)
$
(0.16
)Diluted net loss per shareReported net loss per share

$
(0.25
)
$
(0.25
)Addback: Goodwill amortization





0.09Adjusted net loss per share

$
(0.25
)
$
(0.16
)


Note 5Treasury Stock

During the third quarter of 2001, the Company's Board of Directors authorized a stock repurchase program under which up to 1,000,000 shares of Pharmacopeia common
stock with a market value up to $16 million may be acquired in the open market. As of March 31, 2002, the Company had repurchased a total of 633,300 shares for $8.2 million.

8

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations of Pharmacopeia, Inc. ("Pharmacopeia" or the "Company") should be
read in conjunction with the Unaudited Financial Statements and related notes included elsewhere in this Form 10-Q, and also in conjunction with the Consolidated Financial
Statements and related notes included in the Company's Form 10-K for the year ended December 31, 2001.

This
report, including, without limitation, this section regarding Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking
statements regarding the Company and its business, financial condition, results of operations, and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Report. Additionally,
statements concerning future matters such as the development of new products, enhancements of technologies, possible changes in legislation, and other statements regarding matters that are not
historical are forward-looking statements.

Although
forward-looking statements in this Report reflect the good faith judgment of the Company's management, such statements can only be based on facts and factors currently known by
the Company. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in
or anticipated by the forward-looking statements. The Company undertakes no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise
after the date of this Report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report.

The
Company's registration statements on Form S-1 (Reg. No. 33-98246) and most recent Form 10-K describe certain risk factors and
uncertainties that may cause actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements
expressed or implied by such forward-looking statements. These risk factors and uncertainties should be considered in connection with any investment in the Company's common stock. These uncertainties
include the acceptance by potential customers of combinatorial chemistry and analysis of compounds provided by the Company as an effective tool in drug discovery, the ability of the Company to
establish additional collaborative or licensing arrangements on terms favorable to the Company, the expertise of third parties in developing and commercializing products based on library compounds
produced and lead compounds discovered by the Company, the ability of
the Company's software to achieve increased market acceptance and penetration, the effect of seasonality on the business, and the impact of life science research funding priorities of major and
potential customers.

BUSINESS OVERVIEW

Pharmacopeia designs, develops, markets, and supports science- and technology-based products and services intended to improve and accelerate the processes of drug
discovery and chemical development. The Company's Software business, Accelrys Inc. ("Accelrys"), provides molecular modeling and simulation, bioinformatics and cheminformatics software
solutions, and related consulting services that facilitate the discovery and development of new drug and chemical products and processes in the pharmaceutical, biotechnology, chemical, petrochemical,
and materials industries. The Company's Drug Discovery Services business provides drug discovery services to pharmaceutical and biotechnology companies based on proprietary combinatorial chemistry and
high throughput screening and Accelrys technologies.

9

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RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2002 AND 2001

Total revenue increased 5% to $26.8 million in the first quarter of 2002 compared to $25.6 million in the first quarter of 2001.

Accelrys
software license, service and other revenue increased 2% to $19.6 million in the first quarter of 2002 compared to $19.2 million in the first quarter of 2001.
Revenue increased 5% to $16.3 million in the first quarter of 2002 in the European and US regions combined including revenue from a strategic alliance. Excluding the revenue from the strategic
alliance and consistent with seasonal trends, revenue in the European and US regions combined decreased by 2%. Revenue in Asia, which was not expected to increase due to the reorganization of the
distribution channel in Japan, decreased 10% to $3.3 million in the first quarter of 2002.

Drug
Discovery Services revenue increased 13% to $7.2 million in the first quarter of 2002 compared to $6.4 million in the first quarter of 2001. The increase was due
primarily to revenue from new drug
discovery and lead optimization collaborations, offset by decreased chemistry services and outlicensing revenues. Milestone revenues were consistent from period to period.

Accelrys
license, service and other gross margin increased 2% to $14.9 million (76% of related revenues) in the first quarter of 2002 compared to $14.6 million (76% of
related revenues) in the first quarter of 2001. The increase in the amount of gross margin dollars resulted from the net increase in software license, service and other revenue described above.

Gross
margin generated from Drug Discovery Services increased 98% to $2.4 million (33% of related revenues) in the first quarter of 2002 compared to $1.2 million (19% of
related revenues) in the first quarter of 2001. The increase resulted from the higher revenue level, which caused fixed costs to be spread over a larger revenue base.

Research
and development expenses decreased by 7% to $7.3 million in the first quarter of 2002 compared to $7.9 million in the first quarter of 2001. Research and
development costs include costs associated with internal drug discovery programs and software development. The decrease in research and development expenses is attributable to cost efficiencies
realized at Accelrys due to the consolidation of research efforts on its expanded software product line, and to the reduction of internally funded drug discovery programs in the Drug Discovery
Services business.

Sales,
general and administrative expenses increased by 31% to $17.1 million in the first quarter of 2002 compared to $13.1 million in the first quarter of 2001. The
increase in sales, general and administrative expenses is attributable to increases in Sales staff and Management infrastructure, particularly in Japan due to the reorganization of the distribution
channel. Expenses associated with facility consolidation and severance in the current year totalled approximately $1.0 million with no corresponding expense in the comparable prior period.
Additionally, approximately $0.5 million of the increase is attributable to the sales, general and administrative expenses of Synomics Limited, acquired in June 2001, for which there
were no expenses in the comparable prior period.

No
goodwill amortization was recorded in the first quarter of 2002 compared to $2.0 million in the first quarter of 2001. The decrease is attributable to changes in accounting
rules. See Notes to Consolidated Financial Statements (Unaudited).

No
discontinued acquisition costs were recorded in the first quarter of 2002 compared to $0.4 million in the first quarter of 2001. Prior period amounts were reclassified from
sales, general and administrative expenses.

10

---

Net
interest and other income decreased 33% to $1.3 million in the first quarter of 2002 compared to $1.9 million in the first quarter of 2001. The decrease is due to
decreases in average investment balances and decreases in market interest rates.

The
Company recorded an income tax provision of $0.1 million for both the first quarter of 2002 and the first quarter of 2001. The 2002 and 2001 tax provisions are primarily due
to foreign taxable income generated by Accelrys. These provisions differ from the Federal tax rate primarily because of the effect of permanent book-tax differences, net operating loss
carryforwards, and net operating loss carrybacks.

No
net income from discontinued hardware operations was recorded in the first quarter of 2002 compared to $0.1 million in the first quarter of 2001. These hardware
re-sale operations were discontinued in 2001.

As
a result of the increased revenues and increased costs described above, the Company generated a net loss of $6.0 million ($0.25 per diluted share) in the first quarter of 2002
compared to a net loss of $5.8 million ($0.25 per diluted share) in the first quarter of 2001.

LIQUIDITY AND CAPITAL RESOURCES

The Company has funded its activities to date primarily through the sale of equity securities, software licenses, software maintenance services, and drug
discovery services. As of March 31, 2002, the Company had cash, cash equivalents, and marketable securities of $150.2 million compared to $155.8 million as of December 31,
2001.

Cash
provided by operations decreased by $3.2 million in the first quarter of 2002 compared to the first quarter of 2001. Excluding the effect of the change in accounting rules on
amortization of goodwill, the decrease is primarily attributable to the larger loss in the current period. Cash used in investing activities increased by $29.2 million in the first quarter of
2002 compared to the first quarter of 2001 due to the timing of investments, many of which were mature at year end and not reinvested until subsequent to year end. Cash used in financing activities
increased by $8.3 million in the first quarter of 2002 compared to the first quarter of 2001 due to purchases of treasury stock.

The
Company anticipates that its capital requirements may increase in future periods as a result of seasonal sales trends, additional research and development activities, the expansion
of its facilities, and the acquisition of additional equipment. The Company's capital requirements may also increase in future periods as the Company seeks to expand its technology platform through
investments, licensing arrangements, technology alliances, or acquisitions.

The
Company anticipates that its existing capital resources will be adequate to fund the Company's operations at least through 2003. However, there can be no assurance that changes will
not occur that would consume available capital resources before then. The Company's capital requirements depend on numerous factors, including the ability of the Company to continue to generate
software sales, the ability of the Company to extend existing Drug Discovery Services agreements and to enter into additional arrangements, competing technological and market developments, changes in
the Company's existing collaborative relationships, the cost of filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights and the outcome of related
litigation, the purchase of additional capital equipment, acquisitions of other businesses or technologies, and the progress of the Company's customers' milestone and royalty producing activities.
There can be no assurance that additional funding, if necessary, will be available on favorable terms, if at all. The Company's forecasts of the period of time through which its financial resources
will be adequate to support its operations is forward looking information, and actual results could vary. The factors described earlier in this paragraph will impact the Company's future capital
requirements and the adequacy of its available funds.

11

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to various market risks consisting primarily of changes in foreign currency exchange rates. The Company's international sales generally are
denominated in local currencies. In the first quarter of 2002, approximately 52% of the Company's consolidated revenue was derived from customers outside the United States (including 34% from
customers in Europe and 18% from customers in the Asia/Pacific region). As such, the Company's exchange rate risk is greatest for Dollar/Euro and Dollar/Yen fluctuations. When deemed appropriate, the
Company engages in exchange rate-hedging transactions in an attempt to mitigate the impact of adverse exchange rate fluctuations. At March 31, 2002, the Company had no hedging
transactions in effect.

The
Company does not use derivative financial instruments for trading or speculative purposes. However, the Company regularly invests excess cash in overnight repurchase agreements that
are subject to changes in short-term interest rates. The Company believes that the market risk arising from holding these financial instruments is minimal.

The
Company's exposure to market risks associated with changes in interest rates relates primarily to the increase or decrease in the amount of interest income earned on its investment
portfolio since the Company has minimal debt. The Company ensures the safety and preservation of invested funds by limiting default risks, market risk, and reinvestment risk. The Company mitigates
default risk 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 the Company's interest sensitive financial instruments at March 31, 2002. However, declines in interest rates that occurred in 2001 have resulted in and will continue to result in
significant decreases to the Company's interest income in 2002 compared to the amounts earned in 2001.

12

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PART II    OTHER INFORMATION

|Item 1. |  | Legal Proceedings                                                                                            
|------- |  | -------------------------------------------------------------------------------------------------------------
|        |  | The Company is not a party to any material litigation and is not aware of any threatened material litigation.
|Item 2. |  | Changes in Securities and Use of ProceedsNone                                                               
|Item 3. |  | Defaults upon Senior SecuritiesNone                                                                         
|Item 4. |  | Submission of Matters to a Vote of Security HoldersNone                                                     
|Item 5. |  | Other InformationNone                                                                                       
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                             



13

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SIGNATURE

Pursuant to the requirements 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.

| |  | PHARMACOPEIA, INC.
| |  | ------------------
| |  |                   
| |  | By:               
| |  |                   
| |  |                   

14

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PHARMACOPEIA, INC.    INDEX TO EXHIBITS

|No.      |  | EXHIBIT                                          
|-------- |  | -------------------------------------------------
|10.1(i)# |  | Amendment No. 9 to the 1994 Incentive Stock Plan.
|         |  |                                                  

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