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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, 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 June 30, 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

33-0557266(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)CN 5350, Princeton, New Jersey

08543-5350(Address of principal executive offices)

(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 July 31, 2002Common Stock, $.0001 par value

23,469,709


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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June 30, 2002 and December 31, 2001                                    |  | 3   
|          |  | Statements of OperationsThree and Six Months Ended June 30, 2002 and 2001            |  | 4   
|          |  | Statements of Cash FlowsSix Months Ended June 30, 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                            |  | 13  
|PART II.  |  | OTHER INFORMATION                                                                     |  |     
|Item 1.   |  | Legal Proceedings                                                                     |  | 15  
|Item 2.   |  | Changes in Securities and Use of Proceeds                                             |  | 15  
|Item 3.   |  | Defaults upon Senior Securities                                                       |  | 15  
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                   |  | 15  
|Item 5.   |  | Other Information                                                                     |  | 15  
|Item 6.   |  | Exhibits and Reports on Form 8-K                                                      |  | 15  
|Signature |  | 16                                                                                   

2

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PART I    FINANCIAL INFORMATION

Item 1.    Financial Statements

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

|                                        |                                                                                          | June 30,
2002              |                                            | December 31,
2001 |        
|--------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ----------------- | -------
|
|ASSETS                                  |                                                                                          |                            |                                            |                   |        
|Current assets:                         |                                                                                          |                            |                                            |                   |        
|                                        | Cash and cash equivalents                                                                |                            | $                                          | 17,870            |        
|                                        | Marketable securities                                                                    |                            |                                            | 125,735           |        
|                                        | Trade receivables, net of allowance for doubtful accounts of $809 and $914, respectively |                            |                                            | 27,291            |        
|                                        | Prepaid expenses and other current assets                                                |                            |                                            | 7,109             |        
|                                        |                                                                                          |                            |                                            |                   |        
|                                        |                                                                                          | Total current assets       |                                            |                   | 178,005
|Property and equipmentnet              |                                                                                          |                            | 15,400                                     |                   |        
|Goodwillnet                            |                                                                                          |                            | 36,823                                     |                   |        
|Capitalized softwarenet                |                                                                                          |                            | 10,950                                     |                   |        
|Other intangiblesnet                   |                                                                                          |                            | 569                                        |                   |        
|Other assets                            |                                                                                          |                            | 956                                        |                   |        
|                                        |                                                                                          |                            |                                            |                   |        
|                                        |                                                                                          | Total assets               |                                            | $                 | 242,703
|                                        |                                                                                          |                            |                                            |                   |        
|LIABILITIES AND STOCKHOLDERS' EQUITY    |                                                                                          |                            |                                            |                   |        
|Current liabilities:                    |                                                                                          |                            |                                            |                   |        
|                                        | Accounts payable                                                                         |                            | $                                          | 2,173             |        
|                                        | Accrued liabilities                                                                      |                            |                                            | 24,774            |        
|                                        | Deferred revenue, current portion                                                        |                            |                                            | 29,588            |        
|                                        | Notes payable, current portion                                                           |                            |                                            | 16                |        
|                                        |                                                                                          |                            |                                            |                   |        
|                                        |                                                                                          | Total current liabilities  |                                            |                   | 56,551 
|Notes payable and long-term liabilities |                                                                                          |                            | 15                                         |                   |        
|Deferred revenue, long-term             |                                                                                          |                            | 4,398                                      |                   |        
|Stockholders' equity:                   |                                                                                          |                            |                                            |                   |        
|                                        | Capital stock                                                                            |                            |                                            | 2                 |        
|                                        | Additional paid-in capital                                                               |                            |                                            | 283,450           |        
|                                        | Treasury stock                                                                           |                            |                                            | (8,340            | )      
|                                        | Accumulated deficit                                                                      |                            |                                            | (93,277           | )      
|                                        | Accumulated comprehensive income                                                         |                            |                                            | (96               | )      
|                                        |                                                                                          |                            |                                            |                   |        
|                                        |                                                                                          | Total stockholders' equity |                                            |                   | 181,739
|                                        |                                                                                          |                            |                                            |                   |        
|                                        |                                                                                          |                            | 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 June 30, |        | For the Six Months
Ended June 30, |       
|--------------------------------------------------------------- | ----------------------------------- | ----------------------------------- | ------ | --------------------------------- | ------
|
|Revenues:                                                       |                                     |                                     |        |                                   |       
|                                                                | Software license, service and other |                                     | $      | 21,413                            |       
|                                                                | Drug discovery                      |                                     |        | 7,887                             |       
|                                                                |                                     |                                     |        |                                   |       
|                                                                |                                     | Total revenues                      |        |                                   | 29,300
|Cost of revenues:                                               |                                     |                                     |        |                                   |       
|                                                                | Software license, service and other |                                     |        | 5,421                             |       
|                                                                | Drug discovery                      |                                     |        | 5,203                             |       
|                                                                |                                     |                                     |        |                                   |       
|                                                                |                                     | Total cost of revenues              |        |                                   | 10,624
|                                                                |                                     |                                     |        |                                   |       
|Gross margin                                                    |                                     |                                     | 18,676 |                                   |       
|Operating costs and expenses:                                   |                                     |                                     |        |                                   |       
|                                                                | Research and development            |                                     |        | 6,987                             |       
|                                                                | Sales, general and administrative   |                                     |        | 17,240                            |       
|                                                                | Amortization of goodwill            |                                     |        |                                  |       
|                                                                |                                     |                                     |        |                                   |       
|                                                                |                                     | Total operating costs and expenses  |        |                                   | 24,227
|                                                                |                                     |                                     |        |                                   |       
|Operating loss from continuing operations                       |                                     |                                     | (5,551 | )                                 |       
|Discontinued acquisition costs                                  |                                     |                                     |       |                                   |       
|Interest and other income, net                                  |                                     |                                     | 663    |                                   |       
|                                                                |                                     |                                     |        |                                   |       
|Loss from continuing operations before tax provision            |                                     |                                     | (4,888 | )                                 |       
|                                                                | Provision for income taxes          |                                     |        | 192                               |       
|                                                                |                                     |                                     |        |                                   |       
|Loss from continuing operations                                 |                                     |                                     | (5,080 | )                                 |       
|Discontinued operations:                                        |                                     |                                     |        |                                   |       
|                                                                | Income from discontinued operations |                                     |        |                                  |       
|                                                                |                                     |                                     |        |                                   |       
|Net loss                                                        |                                     | $                                   | (5,080 | )                                 | $     
|                                                                |                                     |                                     |        |                                   |       
|Loss per share from continuing operationsBasic and Diluted     |                                     | $                                   | (0.22  | )                                 | $     
|                                                                |                                     |                                     |        |                                   |       
|Income per share from discontinued operationsBasic and Diluted |                                     | $                                   |       |                                   | $     
|                                                                |                                     |                                     |        |                                   |       
|Net loss per shareBasic and Diluted                            |                                     | $                                   | (0.22  | )                                 | $     
|                                                                |                                     |                                     |        |                                   |       
|Weighted average number of common stock outstanding             |                                     |                                     |        |                                   |       
|                                                                | Basic and Diluted                   |                                     |        | 23,373                            |       
|                                                                |                                     |                                     |        |                                   |       

See
accompanying notes to these unaudited financial statements.

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

|                                                |                                                                      | For the Six Months
Ended June 30,        |                                 
|----------------------------------------------- | -------------------------------------------------------------------- | ---------------------------------------- | --------------------------------
|
|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
|                                                |                                                                      |                                          | Other assets                    
|                                                |                                                                      |                                          | Accounts payable                
|                                                |                                                                      |                                          | Accrued liabilities             
|                                                |                                                                      |                                          | Deferred revenue                
|                                                |                                                                      |                                          | Other                           
|                                                |                                                                      |                                          |                                 
|                                                |                                                                      |                                          |                                 
|CASH FLOWS FROM INVESTING ACTIVITIES:           |                                                                      |                                          |                                 
|                                                | Capital expenditures                                                 |                                          |                                 
|                                                | Purchases of marketable securities                                   |                                          |                                 
|                                                | Proceeds from sales of marketable securities                         |                                          |                                 
|                                                | Acquisition of business, net of cash acquired                        |                                          |                                 
|                                                | Increase in capitalized software development costs                   |                                          |                                 
|                                                |                                                                      |                                          |                                 
|                                                |                                                                      |                                          |                                 
|CASH FLOWS FROM FINANCING ACTIVITIES:           |                                                                      |                                          |                                 
|                                                | Proceeds from issuance of common stock                               |                                          |                                 
|                                                | Purchases of treasury stock                                          |                                          |                                 
|                                                | Other                                                                |                                          |                                 
|                                                |                                                                      |                                          |                                 
|                                                |                                                                      |                                          |                                 
|Exchange rate effect on cash and equivalents    |                                                                      |                                          | 102                             
|                                                |                                                                      |                                          |                                 
|Net decrease in cash and equivalents            |                                                                      |                                          | (51,021                         
|Cash and equivalents, beginning of period       |                                                                      |                                          | 68,891                          
|                                                |                                                                      |                                          |                                 
|Cash and equivalents, end of period             |                                                                      | $                                        | 17,870                          
|                                                |                                                                      |                                          |                                 
|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 disclosures 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 disclosures thereto
included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

In
the fourth quarter of 2001, the Company discontinued computer hardware re-sale operations. As such, the revenues, net of expenses, have been included as income from
discontinued operations in the accompanying 2001 statements of operations.

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 potentially-dilutive stock options (common stock equivalents computed using the treasury stock method) would be
anti-dilutive and therefore the weighted-average shares used to calculate both basic and diluted loss per share are the same.

Note 3Segment Information

The Company operates in two industry segments. The Company's software segment, Accelrys Inc., 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 segment, Pharmacopeia Drug Discovery, Inc., provides drug discovery services to pharmaceutical and biotechnology
companies based on proprietary combinatorial chemistry,

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high-throughput screening, and Accelrys technologies. Summarized financial information concerning the industry segments follows (dollars in thousands):

|                                          |               | Three Months Ended
June 30, 2002 |        | Six Months Ended
June 30, 2002 |  
|----------------------------------------- | ------------- | -------------------------------- | ------ | ------------------------------ | -
|
|Revenue:                                  |               |                                  |        |                                |  
|Software licenses, service and other      |               | $                                | 21,413 |                                | $
|Drug discovery                            |               |                                  |       |                                |  
|                                          |               |                                  |        |                                |  
|                                          | Total revenue |                                  | $      | 21,413                         |  
|                                          |               |                                  |        |                                |  
|Operating loss from continuing operations |               | $                                | (4,474 | )                              | $
|                                          |               |                                  |        |                                |  



|                                          |               | Three Months Ended
June 30, 2001 |        | Six Months Ended
June 30, 2001 |  
|----------------------------------------- | ------------- | -------------------------------- | ------ | ------------------------------ | -
|
|Revenue:                                  |               |                                  |        |                                |  
|Software licenses, service and other      |               | $                                | 20,311 |                                | $
|Drug discovery                            |               |                                  |       |                                |  
|                                          |               |                                  |        |                                |  
|                                          | Total revenue |                                  | $      | 20,311                         |  
|                                          |               |                                  |        |                                |  
|Operating loss from continuing operations |               | $                                | (5,509 | )                              | $
|                                          |               |                                  |        |                                |  



|                               |  | Accelrys |         | Drug
Discovery |   | Total  
|------------------------------ |  | -------- | ------- | -------------- | - | -------
|Total assetsJune 30, 2002     |  | $        | 102,336 |                | $ | 140,367
|                               |  |          |         |                |   |        
|Total assetsDecember 31, 2001 |  | $        | 119,538 |                | $ | 150,860
|                               |  |          |         |                |   |        

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

In July 2001, the Financial Accounting Standards Board 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 and concluded that goodwill was not impaired at January 1, 2002. During 2002, there have been no indications of impairment, accordingly the
value of the goodwill recorded on the Company's books is not impaired as of June 30, 2002.

As
required by SFAS 141, during the quarter ended March 31, 2002, 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 classified as sales, general and administrative expense, has

7

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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
June 30, |        | Six Months Ended
June 30, |  
|------------------------------------ | ------------------------------ | --------------------------- | ------ | ------------------------- | -
|
|Reported net loss                    |                                | $                           | (5,080 | )                         | $
|Addback: Goodwill amortization       |                                |                             |       |                           |  
|                                     |                                |                             |        |                           |  
|Adjusted net loss                    |                                | $                           | (5,080 | )                         | $
|                                     |                                |                             |        |                           |  
|Basic and Diluted net loss per share |                                |                             |        |                           |  
|                                     | Reported net loss per share    |                             | $      | (0.22                     | )
|                                     | Addback: Goodwill amortization |                             |        |                          |  
|                                     |                                |                             |        |                           |  
|                                     | Adjusted net loss per share    |                             | $      | (0.22                     | )
|                                     |                                |                             |        |                           |  

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 June 30, 2002, the Company had repurchased a total of 643,900 shares for $8.3 million.

Note 6New Accounting Pronouncement

In June 2002, the Financial Accounting Standards Board issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal" ("SFAS
No. 146"). SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). The principal
difference between SFAS No. 146 and EITF 94-3 relates to SFAS No. 146's requirements for recognition of a liability for a cost associated with an exit or disposal activity.
SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit
cost as generally defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application encouraged. The Company does not expect that the adoption of SFAS No. 146 will have a material impact on the
consolidated financial statements.

Note 7Subsequent Event

On August 6, 2002, the Company announced a restructuring plan whereby it will reduce its staff by approximately 80 employees, or approximately 10% of its
workforce. The Company expects to complete this action in the quarter ending September 30, 2002, and that it will incur a restructuring charge currently estimated at $4.0 million.

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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 disclosures included elsewhere in this Form 10-Q, and also in conjunction with the Consolidated Financial
Statements and related disclosures included in the Company's Form 10-K for the year ended December 31, 2001.

This
Report on form 10-Q, 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 statement
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 unit 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 business, Pharmacopeia Drug Discovery, Inc., 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 JUNE 30, 2002 AND 2001

Total revenue increased 8% to $29.3 million in the second quarter of 2002 compared to $27.2 million in the second quarter of 2001.

Software
license, service and other revenue increased 5% to $21.4 million in the second quarter of 2002 compared to $20.3 million in the second quarter of 2001. Revenue
increased 1% in the European and US regions combined, including revenue from a strategic alliance. Excluding the revenue from the strategic alliance, revenue in the European and US regions combined
decreased slightly, due primarily to delayed purchasing decisions by customers considering informatics products, partially offset by increased revenues from customers of core modeling and simulation
products. Revenue in Asia increased 32%, which was attributable to the Company's direct sales in Japan in the current year period as compared to discounted distributor sales in the comparable prior
year period.

Drug
Discovery revenue increased 14% to $7.9 million in the second quarter of 2002 compared to $6.9 million in the second quarter of 2001. The increase was due primarily to
additional revenue earned under our collaborative discovery agreements, including milestone revenues. Excluding the revenue from milestones, revenue was unchanged from period to period.

Software
license, service and other gross margin decreased 1% to $16.0 million (75% of related revenue) in the second quarter of 2002 compared to $16.2 million (80% of
related revenue) in the second quarter of 2001. The decrease in gross margin resulted from additional costs incurred in the current year period related to enhancements of the post sales support
function, and additional direct costs associated with the revenue from a strategic alliance.

Drug
Discovery gross margin increased 79% to $2.7 million (34% of related revenue) in the second quarter of 2002 compared to $1.5 million (22% of related revenue) in the
second quarter of 2001. The increase in gross margin resulted from the higher revenue level including milestone revenue, which carries no associated cost of revenue. Excluding the effect of the
milestone revenue on gross margin, total gross margin increased by 16%, which is attributable to planned cost reductions in the Drug Discovery business.

Research
and development expenses decreased by 15% to $7.0 million in the second quarter of 2002 compared to $8.3 million in the second quarter of 2001. Research and
development costs include software development costs and costs associated with internal drug discovery programs. The decrease in research and development expenses is primarily attributable to cost
efficiencies realized at Accelrys due to the consolidation of research efforts on its expanded software product line, and further reductions in research and development expense are anticipated due to
standardization of Accelrys' products on a common platform. Research and development expenses in the Drug Discovery business have also decreased due to the reduction or delay of internally funded drug
discovery programs; however; certain of these programs are expected to be accelerated in the future which will result in higher costs.

Sales,
general and administrative expenses increased by 11% to $17.2 million in the second quarter of 2002 compared to $15.5 million in the second 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 expected higher costs associated with
direct sales efforts. Additionally, expenses associated with a new facility, severance, and unabsorbed consulting infrastructure in the current year totalled approximately $0.9 million with no
corresponding expense in the comparable prior year 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 year period.

10

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

Interest
and other income, net, decreased 78% to $0.7 million in the second quarter of 2002 compared to $3.0 million in the second quarter of 2001. Interest and other
income, net, in the comparable prior year period included a $0.7 million gain related to the sale of an investment. Approximately $1.1 million of the decrease is due to decreases in
average investment balances and decreases in market interest rates, and the remaining difference relates to translation of certain current assets denominated in foreign currencies.

The
Company recorded an income tax provision of $0.2 million in the second quarter of 2002 compared to $0.5 million in the second 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 second quarter of 2002 compared to $0.2 million in the second quarter of 2001. These hardware
re-sale operations were discontinued in 2001.

As
a result of the factors described above, the Company generated a net loss of $5.1 million ($0.22 per diluted share) in the second quarter of 2002 compared to a net loss of
$5.4 million ($0.23 per diluted share) in the second quarter of 2001. Net loss in the prior year period was made up of a net loss from continuing operations of $5.6 million ($0.24 per
diluted share) partially offset by income from discontinued operations of $0.2 million ($0.01 per diluted share). See Notes to Consolidated Financial Statements (Unaudited).

SIX MONTHS ENDED JUNE 30, 2002 AND 2001

Total revenue increased 6% to $56.1 million in the first half of 2002 compared to $52.8 million in the first half of 2001.

Software
license, service and other revenue increased 4% to $41.0 million in the second quarter of 2002 compared to $39.5 million in the second quarter of 2001. Revenue
increased 3% in the European and US regions combined including revenue from a strategic alliance. Excluding the revenue from the strategic alliance, revenue in the European and US regions combined
decreased by 1% due primarily to market conditions. Revenue in Asia increased 8%, which was attributable to the Company's direct sales in Japan in the current year period as compared to discounted
distributor sales in the comparable prior year period.

Drug
Discovery revenue increased 14% to $15.1 million in the first half of 2002 compared to $13.3 million in the first half of 2001. The increase was primarily due to
additional revenue earned
under our collaborative discovery agreements, including milestone revenues. Excluding the revenue from milestones, revenue from collaborations increased 7%.

Software
license, service and other gross margin was unchanged at $30.9 million (75% of related revenue) in the first half of 2002 compared to $30.8 million (78% of related
revenue) in the first half of 2001. Gross margin from increased revenue in the current year was offset by additional costs incurred related to enhancements of the post sales support function, and
additional direct costs associated with the revenue from a strategic alliance.

Drug
Discovery gross margin increased 88% to $5.0 million (33% of related revenue) in the first half of 2002 compared to $2.7 million (20% of related revenue) in the first
half of 2001. The increase in gross margin resulted from the higher revenue level including milestone revenue, which carries no

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associated cost of revenue. Excluding the effect of the milestone revenue on gross margin, total gross margin increased by 65%, which is attributable to planned cost reductions.

Research
and development expenses decreased by 11% to $14.3 million in the first half of 2002 compared to $16.1 million in the first half of 2001. Research and development
costs include software development costs and costs associated with internal drug discovery programs. 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 further reductions in research and development expense are anticipated due to standardization of
Accelrys' products on a common platform. Research and development expenses in the Drug Discovery business have also decreased due to the reduction or delay of internally funded drug discovery
programs; however, certain of these programs are expected to be accelerated in the future which will result in higher costs.

Sales,
general and administrative expenses increased by 20% to $34.3 million in the first half of 2002 compared to $28.6 million in the first half 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 expected higher costs associated with direct sales
efforts. Additionally, expenses associated with a new facility and facility consolidation, severance, and unabsorbed consulting infrastructure in the current year totalled approximately
$1.9 million with no corresponding expense in the comparable prior year period. Additionally, approximately $1.0 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 year period.

No
goodwill amortization was recorded in the first half of 2002 compared to $4.0 million in the first half 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 half of 2002 compared to $0.4 million in the first half of 2001. Prior period amounts were reclassified from sales,
general and administrative expenses.

Interest
and other income, net, decreased 61% to $1.9 million in the first half of 2002 compared to $4.9 million in the first half of 2001. Interest and other income, net,
in the comparable prior year period included a $0.7 million capital gain related to the sale of an investment. Approximately $2.1 million of the decrease is due to decreases in average
investment balances and decreases in market interest rates, and the remaining difference relates to translation of certain current assets denominated in foreign currencies.

The
Company recorded an income tax provision of $0.3 million in the first half of 2002 compared to $0.7 million in the first half 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 half of 2002 compared to $0.3 million in the first half of 2001. These hardware re-sale
operations were discontinued in 2001.

As
a result of the factors described above, the Company generated a net loss of $11.1 million ($0.47 per diluted share) in the first half of 2002, compared to a net loss of
$11.2 million ($0.47 per diluted share) in the first half of 2001. Net loss in the prior year period was made up of a net loss from continuing operations of $11.5 million ($0.48 per
diluted share) partially offset by income from discontinued operations of $0.3 million ($0.01 per diluted share). See Notes to Consolidated Financial Statements (Unaudited).

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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 June 30, 2002, the Company had cash, cash equivalents, and marketable securities of $143.6 million, a decrease of $12.2 million, compared to
$155.8 million as of December 31, 2001.

Cash
provided by operations decreased by $0.8 million in the first half of 2002 compared to the first half of 2001. The decrease is primarily attributable to the larger loss in
the current period, excluding
the effect of the change in accounting rules on amortization of goodwill. Cash used in investing activities increased by $19.6 million in the first half of 2002 compared to the first half of
2001 due to increased expenditures for information technology infrastructure, leasehold improvements at the new Accelrys facility in the UK, and due to the timing of investments in marketable
securities, many of which were mature at year end and not reinvested until subsequent to year end. Cash used in financing activities increased by $8.5 million in the first half of 2002 compared
to the first half 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 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.

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 half of 2002, approximately 47% of the Company's consolidated revenue was derived from customers outside the United States (including 30% from customers
in Europe and 17% 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 June 30, 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.

13

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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 June 30, 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.

14

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PART II

OTHER INFORMATION

Item 1.Legal Proceedings



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



FOR
VOTES

AGAINST OR
WITHHELD

BROKER
NON-VOTESJoseph A. Mollica, Ph.D.

20,493,031

661,548

0Gary E. Costley, Ph.D.

20,493,031

661,548

0




FOR

AGAINST

ABSTAIN

BROKER
NON-VOTES14,236,633

6,905,241

12,705

0




FOR

AGAINST

ABSTAIN

BROKER
NON-VOTES19,488,936

1,660,532

5,111

0


Item 5.Other InformationNone

Item 6.Exhibits and Reports on Form 8-K



15

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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:               
| |  |                   

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