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

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FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2001

or

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

Commission file number 0-27118

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

Delaware(State or other jurisdiction
of incorporation or organization)

33-0557266(IRS 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)

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

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

|ClassCommon Stock, $.0001 par value | Outstanding at August 2, 200125,832,083
|----------------------------------- | ---------------------------------------

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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, 2001 and December 31, 2000                                  |  | 3   
|                              |  | Statements of Operations  Three and Six Months Ended June 30, 2001 and 2000          |  | 4   
|                              |  | Statements of Cash Flows  Six Months Ended June 30, 2001 and 2000                    |  | 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                                                                     |  | 14  
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                             |  | 14  
|Item 3.                       |  | Defaults upon Senior Securities                                                       |  | 14  
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                   |  | 14  
|Item 5.                       |  | Other Information                                                                     |  | 14  
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                      |  | 14  
|Signature                     |  | 15                                                                                   

2

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements

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

|ASSETS                               |                                                                                             | June 30, 2001
2001
(Unaudited) |                                            | December 31,
2000 |        
|------------------------------------ | ------------------------------------------------------------------------------------------- | ------------------------------ | ------------------------------------------ | ----------------- | -------
|Current assets:                      |                                                                                             |                                |                                            |                   |        
|                                     | Cash and cash equivalents                                                                   |                                | $                                          | 47,367            |        
|                                     | Marketable securities                                                                       |                                |                                            | 116,534           |        
|                                     | Trade receivables, net of allowance for doubtful accounts of $1,844 and $2,305 respectively |                                |                                            | 29,130            |        
|                                     | Prepaid expenses and other current assets                                                   |                                |                                            | 6,094             |        
|                                     |                                                                                             |                                |                                            |                   |        
|                                     |                                                                                             | Total current assets           |                                            |                   | 199,125
|Property and equipment  net         |                                                                                             |                                | 11,731                                     |                   |        
|Capitalized software  net           |                                                                                             |                                | 14,683                                     |                   |        
|Goodwill and other intangibles  net |                                                                                             |                                | 42,549                                     |                   |        
|Other assets                         |                                                                                             |                                | 1,567                                      |                   |        
|                                     |                                                                                             |                                |                                            |                   |        
|                                     |                                                                                             | Total assets                   |                                            | $                 | 269,655
|                                     |                                                                                             |                                |                                            |                   |        
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                             |                                |                                            |                   |        
|Current liabilities:                 |                                                                                             |                                |                                            |                   |        
|                                     | Accounts payable                                                                            |                                | $                                          | 3,312             |        
|                                     | Accrued liabilities                                                                         |                                |                                            | 27,670            |        
|                                     | Deferred revenue, current portion                                                           |                                |                                            | 33,280            |        
|                                     | Notes payable, current portion                                                              |                                |                                            | 44                |        
|                                     |                                                                                             |                                |                                            |                   |        
|                                     |                                                                                             | Total current liabilities      |                                            |                   | 64,306 
|Notes payable, long-term portion     |                                                                                             |                                | 165                                        |                   |        
|Other long-term liabilities          |                                                                                             |                                | 83                                         |                   |        
|Deferred revenue, long-term          |                                                                                             |                                | 3,928                                      |                   |        
|Commitments and contingencies        |                                                                                             |                                |                                            |                   |        
|Stockholders' equity:                |                                                                                             |                                |                                            |                   |        
|                                     | Capital stock                                                                               |                                |                                            | 2                 |        
|                                     | Additional paid-in capital                                                                  |                                |                                            | 279,712           |        
|                                     | Accumulated deficit                                                                         |                                |                                            | (79,062           | )      
|                                     | Accumulated comprehensive income                                                            |                                |                                            | 521               |        
|                                     |                                                                                             |                                |                                            |                   |        
|                                     |                                                                                             | Total stockholders' equity     |                                            |                   | 201,173
|                                     |                                                                                             |                                |                                            |                   |        
|                                     |                                                                                             |                                | 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              |                                     | $      | 20,312                            |       
|                                                              | Drug discovery services                          |                                     |        | 6,906                             |       
|                                                              | Hardware                                         |                                     |        | 1,943                             |       
|                                                              |                                                  |                                     |        |                                   |       
|                                                              |                                                  | Total revenues                      |        |                                   | 29,161
|Cost of revenues:                                             |                                                  |                                     |        |                                   |       
|                                                              | Software license, service and other              |                                     |        | 4,127                             |       
|                                                              | Drug discovery services                          |                                     |        | 5,409                             |       
|                                                              | Hardware                                         |                                     |        | 1,691                             |       
|                                                              |                                                  |                                     |        |                                   |       
|                                                              |                                                  | Total cost of revenues              |        |                                   | 11,227
|                                                              |                                                  |                                     |        |                                   |       
|Gross margin                                                  |                                                  |                                     | 17,934 |                                   |       
|Operating costs and expenses:                                 |                                                  |                                     |        |                                   |       
|                                                              | Research and development                         |                                     |        | 8,837                             |       
|                                                              | Sales, general and administrative                |                                     |        | 15,180                            |       
|                                                              | Amortization of goodwill                         |                                     |        | 1,820                             |       
|                                                              | Write-off of in-process research and development |                                     |        |                                  |       
|                                                              |                                                  |                                     |        |                                   |       
|                                                              |                                                  | Total operating costs and expenses  |        |                                   | 25,837
|                                                              |                                                  |                                     |        |                                   |       
|Operating income (loss)                                       |                                                  |                                     | (7,903 | )                                 |       
|Interest and other income, net                                |                                                  |                                     | 3,027  |                                   |       
|                                                              |                                                  |                                     |        |                                   |       
|Income (loss) before provision for income taxes               |                                                  |                                     | (4,876 | )                                 |       
|Provision for income taxes                                    |                                                  |                                     | 532    |                                   |       
|                                                              |                                                  |                                     |        |                                   |       
|Net income (loss)                                             |                                                  | $                                   | (5,408 | )                                 | $     
|                                                              |                                                  |                                     |        |                                   |       
|Net income (loss) per share  Basic                           |                                                  | $                                   | (0.23  | )                                 | $     
|                                                              |                                                  |                                     |        |                                   |       
|Net income (loss) per share  Diluted                         |                                                  | $                                   | (0.23  | )                                 | $     
|                                                              |                                                  |                                     |        |                                   |       
|Weighted average number of common stock outstanding  Basic   |                                                  |                                     | 23,744 |                                   |       
|                                                              |                                                  |                                     |        |                                   |       
|Weighted average number of common stock outstanding  Diluted |                                                  |                                     | 23,744 |                                   |       
|                                                              |                                                  |                                     |        |                                   |       

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 Six Months
Ended June 30                 |                                 
|----------------------------------------------- | ------------------------------------------------------------------------------ | ------------------------------------------------ | --------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:           |                                                                                |                                                  |                                 
|                                                | Net loss                                                                       |                                                  | $                               
|                                                | Adjustments to reconcile net loss to net cash provided by (used in) operations |                                                  |                                 
|                                                |                                                                                | Depreciation                                     |                                 
|                                                |                                                                                | Amortization                                     |                                 
|                                                |                                                                                | Contribution of stock to 401 (k) members         |                                 
|                                                |                                                                                | Write-off of in-process research and development |                                 
|                                                |                                                                                | 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                                   |                                                  |                                 
|                                                | Acquisition of businesses, net of cash acquired                                |                                                  |                                 
|                                                | Increase in capitalized software development costs                             |                                                  |                                 
|                                                |                                                                                |                                                  |                                 
|                                                |                                                                                |                                                  |                                 
|CASH FLOWS FROM FINANCING ACTIVITIES:           |                                                                                |                                                  |                                 
|                                                | Proceeds from issuance of common stock                                         |                                                  |                                 
|                                                | Principal payments on notes payable                                            |                                                  |                                 
|                                                | Principal payments under capital lease obligations                             |                                                  |                                 
|                                                |                                                                                |                                                  |                                 
|                                                |                                                                                |                                                  |                                 
|Exchange rate effect on cash and equivalents    |                                                                                |                                                  | 191                             
|                                                |                                                                                |                                                  |                                 
|Net increase (decrease) in cash and equivalents |                                                                                |                                                  | (21,983                         
|Cash and equivalents, beginning of period       |                                                                                |                                                  | 69,350                          
|                                                |                                                                                |                                                  |                                 
|Cash and equivalents, end of period             |                                                                                | $                                                | 47,367                          
|                                                |                                                                                |                                                  |                                 
|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, 2000.

Note (2)Segment Information

The Company operates in two business segments: drug discovery services and software (which includes software licenses, maintenance, hardware and other).
Summarized information concerning

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industry segment operations for the three and six months ended June 30, 2001 and 2000, and for industry segment assets as of June 30, 2001 and December 31, 2000, is presented
below.

|                                     |               | Three Months Ended
June 30, 2001 |        | Six Months Ended
June 30, 2001 |  
|------------------------------------ | ------------- | -------------------------------- | ------ | ------------------------------ | -
|
|Revenue:                             |               |                                  |        |                                |  
|Software licenses, service and other |               | $                                | 20,312 |                                | $
|Drug discovery services              |               |                                  |       |                                |  
|Hardware                             |               |                                  | 1,943  |                                |  
|                                     |               |                                  |        |                                |  
|                                     | Total revenue |                                  | $      | 22,255                         |  
|                                     |               |                                  |        |                                |  
|Operating income (loss)              |               | $                                | (5,282 | )                              | $
|                                     |               |                                  |        |                                |  

|                                     |               | Three Months Ended
June 30, 2000 |        | Six Months Ended
June 30, 2000 |  
|------------------------------------ | ------------- | -------------------------------- | ------ | ------------------------------ | -
|
|Revenue:                             |               |                                  |        |                                |  
|Software licenses, service and other |               | $                                | 13,990 |                                | $
|Drug discovery services              |               |                                  |       |                                |  
|Hardware                             |               |                                  | 1,764  |                                |  
|                                     |               |                                  |        |                                |  
|                                     | Total revenue |                                  | $      | 15,754                         |  
|                                     |               |                                  |        |                                |  
|Operating income (loss)              |               | $                                | (1,295 | )                              | $
|                                     |               |                                  |        |                                |  

|                                 |  | Software |         | Drug
Discovery
Services |   | Total  
|-------------------------------- |  | -------- | ------- | ----------------------- | - | -------
|Total assets  June 30, 2001     |  | $        | 108,120 |                         | $ | 161,535
|                                 |  |          |         |                         |   |        
|Total assets  December 31, 2000 |  | $        | 119,386 |                         | $ | 165,380
|                                 |  |          |         |                         |   |        

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Note (3)Acquisition of Synomics

On
June 29, 2001, the Company acquired Synomics Ltd. ("Synomics"), a U.K.- based company providing middleware technology and consulting expertise. The Company paid $4.0 million
for Synomics, consisting of $3.5 million cash and $0.5 million in transaction costs.

The
acquisition has been accounted for by the purchase method of accounting and, accordingly, the assets acquired and liabilities assumed have been recorded at their estimated fair values. The
purchase price was allocated $0.3 million to net tangible assets (including cash acquired of $0.1 million) and $3.7 million to goodwill. The goodwill is being amortized over five
years. The operating results of Synomics have been included in the Company's results of operations since the acquisition date.

Assuming
that the acquisition of Synomics had occurred on January 1 of the periods presented below, the pro forma consolidated results of operations would be as follows (in thousands except per
share amounts):

Six Months Ended
June 30,2001

2000Total Revenue

$
56,679

$
52,025Net Loss

$
(13,395
)
$
(4,282
)Loss per Share:Basic

$
(0.57
)
$
(0.19
)Diluted

$
(0.57
)
$
(0.19
)


Note (4)Recently Issued Accounting Pronouncements

In
July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations ("FAS 141") and No. 142, Goodwill
and Other Intangible Assets ("FAS 142"). FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under
FAS 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. Separable
intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of FAS 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect
to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt FAS 142 effective October 1, 2002 but may early adopt in the first fiscal
quarter of 2002. The Company is currently evaluating the effect that adoption of the provisions of FAS 142 that are effective October 1, 2002 will have on its results of operations and
financial position.

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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, 2000. This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this
Form 10-Q contain forward-looking statements that involve risks 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. In some cases, forward-looking statements can be identified
by terminology such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "continue," or the negative of such terms or expressions. All forward-looking
statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements.

The
Company's registration statement on Form S-3 (Reg. No. 333-34478) 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, and the ability of the Company's software segment to achieve increased market acceptance and penetration.

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 segment ("Accelrys") provides molecular modeling and simulation, bioinformatics and cheminformatics software solutions 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 and high throughput screening technologies.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2001 and 2000

Total
revenue increased 5% to $29.2 million in the second quarter of 2001 compared to $27.9 million in the second quarter of 2000.

Software
license, service and other revenue increased 45% to $20.3 million in the second quarter of 2001 compared to $14.0 million in the second quarter of 2000. This increase is due
primarily to revenue generated from last year's acquisitions of Synopsys Scientific Systems Ltd., and the software subsidiaries of Oxford Molecular Group plc in February and September,
respectively ("the Acquisitions"). If the

9

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revenues generated by these acquired companies, as separate companies, had been included in the 2000 second quarter results, then the 2001 second quarter software license, service and other revenue
growth rate would have been about 14%. Hardware revenues, which result from the resale of computers at low margins based on customer requirements which can vary widely
quarter-to-quarter, increased by 10% in the second quarter of 2001 compared to the second quarter in 2000.

Drug
discovery services revenue decreased 43% to $6.9 million in the second quarter of 2001 compared to $12.1 million in the second quarter of 2000. This decrease was primarily due to
the early termination of a significant drug discovery services contract in the second quarter of 2000. Absent the revenue and termination fees generated from this contract in the second quarter of
2000, drug discovery services
revenue in the second quarter of 2001 was approximately equal to revenue in the second quarter of 2000. The Company continues to seek new drug discovery collaborations to replace the decline in drug
discovery services revenue, but there can be no assurance that these efforts will be successful.

As
a result of the continued decline in drug discovery services revenue, the Company is currently considering strategic alternatives to its drug discovery business plan. Alternatives under
consideration include merging with, acquiring or creating a joint venture with one or more organizations that have identified a large number of validated targets but may lack expertise in the areas of
chemistry and biology. Depending on the alternative selected, and if the Company increases its drug discovery activities without associated revenues, then losses from the drug discovery segment would
increase substantially.

Gross
margin generated at Accelrys (software license, service and other revenue and hardware revenue) increased 36% to $16.4 million (74% of related sales) in the second quarter of 2001
compared to $12.1 million (77% of related sales) in the second quarter of 2000. The increase in the amount of gross margin dollars resulted from the increase in software license, service and
other revenue and hardware revenue. The decrease in gross margin as a percentage of related sales was primarily due to the amortization of the developed technology allocated in the Acquisitions.

Gross
margin generated from drug discovery services decreased 75% to $1.5 million (22% of related revenues) in the second quarter of 2001 compared to $5.9 million (49% of related sales)
in the second quarter of 2000. The decrease in the amount of drug discovery services gross margin resulted primarily from the decrease in revenue explained above. The decrease in drug discovery
services gross margin as a percentage of related revenue resulted primarily from two factors. First, the termination fee included in last years' second quarter carried no related cost of revenues.
Second, the decreased volume of work has caused fixed costs to be spread over the lower revenue level.

Research
and development expenses increased by 45% to $8.8 million in the second quarter of 2001 compared to $6.1 million in the second quarter of 2000. Research and development costs at
Accelrys primarily include costs associated with the development of modeling, simulation, analyses, informatics and workflow software. Research and development costs in the drug discovery services
segment currently result primarily from ultra high-throughput screening development. The increase in consolidated research and development expenses occurred primarily at Accelrys and is
primarily attributable to the Acquisitions. In addition, the Company has increased its software and informatics research and development staff in response to the anticipated product integration needs
created by the increased breadth of its software product line. Lastly related to research and development costs, if the Company decides to pursue an internally funded drug discovery business plan from
the strategic alternatives under consideration as described above, then drug discovery segment research and development costs would increase substantially.

Sales,
general and administrative expenses increased by 41% to $15.2 million in the second quarter of 2001 compared to $10.8 million in the second quarter of 2000. The increase in sales,
general and administrative expenses occurred primarily at Accelrys and is primarily attributable to the Acquisitions, including amortization of certain acquired intangible assets. In addition, the
Company has increased its

10

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sales and marketing staff in anticipation of increased future demand for its integrated software product offering.

Goodwill
amortization increased to $1.8 million in the second quarter of 2001 compared to $0.7 million in the second quarter of 2000. The increase is attributable to the Acquisitions.

Interest
and other income, net, remained consistent in the second quarter of 2001 compared to the second quarter of 2000 in spite of lower interest rates because the current second quarter includes a
$0.7 million capital gain related to the sale of a certain investment.

The
provision for income tax increased to $0.5 million in the second quarter of 2001 compared to $0.4 million in the second quarter of 2000. The 2001 and 2000 tax provisions are
primarily due to foreign taxable income generated at 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.

As
a result of the increased revenues offset by increased costs as described above, the Company generated a net loss of $5.4 million ($0.23 per diluted share) in the second quarter of 2001
compared to income of $3.1 million ($0.12 per diluted share) in the second quarter of 2000.

Six Months Ended June 30, 2001 and 2000

Total
revenue increased 9% to $56.3 million in the first half of 2001 compared to $51.7 million in the first half of 2000.

Software
license, service and other revenue increased 51% to $39.5 million in the first half of 2001 compared to $26.2 million in the first half of 2000. The increase is due primarily to
the Acquisitions. If the revenues generated by the acquired companies, as separate companies, had been included in the 2000 first half results, then the 2001 first half revenue growth rate would have
been about 13%.
Hardware revenues, which result from the resale of computers at low margins based on customer requirements increased by 29% in the first half of 2001 compared to the first half in 2000.

Drug
Discovery Services revenue decreased 42% to $13.3 million in the first half of 2001 compared to $22.8 million in the first half of 2000. The first half of 2000 results included
certain non-recurring revenue including an out license fee, and revenue and a termination fee from a contract that terminated at the end of last years' second quarter. Absent these
non-recurring revenues, drug discovery services revenue in the first half of 2001 was approximately equal to revenue in the first half of 2000.

Gross
margin generated at Accelrys (software license, service and other revenue and hardware revenue) increased 38% to $31.1 million (72% of related sales) in the first half of 2001 compared to
$22.6 million (78% of related sales) in the first half of 2000. The increase in the amount of gross margin dollars resulted from the increase in Software license, service and other revenue and
hardware revenue. The decrease in gross margin as a percentage of related sales is primarily due to the amortization of the developed technology allocated in the Acquisitions.

Gross
margin generated from drug discovery services decreased 75% to $2.7 million (20% of related revenues) in the first half of 2001 compared to $10.7 million (47% of related sales) in
the first half of 2000. The decrease in the amount of drug discovery services gross margin resulted primarily from the decrease in revenue explained above. The decrease in drug discovery services
gross margin as a percentage of related revenue resulted primarily from two factors. First, the out-license and termination fees included in last years' first half carried no related cost
of revenues. Second, the decreased volume of work has caused fixed costs to be spread over the lower revenue level.

11

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Research and development expenses increased by 46% to $17.2 million in the first half of 2001 compared to $11.8 million in the first half of 2000. This increase primarily occurred at
Accelrys and is primarily attributable to the Acquisitions. In addition, the Company has increased its software research and development staff in response to the anticipated product integration needs
created by the increased breadth of its software product line.

Sales,
general and administrative expenses increased by 42% to $28.4 million in the first half of 2001 compared to $20.0 million in the first half of 2000. The increase in sales, general
and administrative expenses primarily occurred at Accelrys and is primarily attributable to the Acquisitions, including amortization of certain acquired intangible assets. In addition, the Company has
increased its sales and marketing staff in anticipation of increased future demand for its integrated software product offering.

Goodwill
amortization increased to $3.6 million in the first half of 2001 compared to $1.1 million in the first half of 2000. The increase is attributable to the Acquisitions.

A
write-off of $6.4 million of in-process research and development was recorded in the first half of 2000 related to the acquisition of Synopsys. No comparable
write-offs were made in the first half of 2001.

Interest
and other income, net, increased to $4.9 million in the first half of 2001 compared to $3.9 million for the first half of 2000. The increase resulted primarily from the
investment of the proceeds from a $110 million private placement of the Company's common stock in March 2000. Interest and other income in the first half of 2001 also includes a
$0.5 million write-down for impairment of an investment and a $0.7 million capital gain from the sale of an investment.

The
provision for income tax increased to $0.7 million in the first half of 2001 compared to $0.5 million in the first half of 2000. The 2001 and 2000 tax provisions are primarily due to
foreign taxable income generated from the Software operations. 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.

As
a result of the increased revenues offset by increased costs as described above, the Company generated a net loss of $11.2 million ($0.47 per diluted share) in the first half of 2001
compared to a net loss of $2.7 million ($0.12 per diluted share) in the first half of 2000.

LIQUIDITY AND CAPITAL RESOURCES

The
Company has funded its activities to date primarily through the sale of equity securities, drug discovery services, software licenses, software maintenance services and hardware. As of
June 30, 2001, the Company had working capital of $134.8 million compared to $140.7 million as of December 31, 2000. The decrease is primarily attributable to capital
expenditures and the acquisition of Synomics.

As
of June 30, 2001, the Company's cash, cash equivalents and marketable securities totaled $163.9 million, which are invested in U.S. Treasury and government agency obligations,
investment grade commercial paper and other short-term money market instruments.

The
Company anticipates that its capital requirements may increase in future periods as the Company expands its research and development activities, expands its facilities, and acquires additional
equipment. The Company's capital requirements may also increase in future periods as the Company seeks to expand its technology platform through additional investments, licensing arrangements,
technology alliances or acquisitions. In addition, of the strategic alternatives described above, if the Company decides to pursue an internally funded drug discovery business plan, then the demand on
the Company's capital resources and liquidity would increase substantially.

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The
Company anticipates that its existing capital resources and liquidity will be adequate to fund the Company's operations at least through 2002. However, there can be no assurance that changes will
not occur that would consume available capital resources before such time. 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.

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. 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, 2001, 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 June 30, 2001. Declines in interest rates over
time will, however, reduce the Company's interest income.

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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

The Company held its Annual Meeting of Stockholders (the "Annual Meeting") on May 2, 2001. Of the 23,701,758 shares of Common Stock which could be voted
at the Annual Meeting, 18,098,595 shares of
Common Stock, representing 76%, were represented at the Annual Meeting in person or by proxy, which constituted a quorum. Voting results were as follows:

FOR

AGAINST OR
WITHHELD

ABSTENTIONS OR
BROKER NON-VOTESPaul A. Bartlett, Ph.D.

17,857,574

241,021

5,603,163Charles A. Sanders, M.D.

17,857,574

241,483

5,603,163Ricardo B. Levy, Ph.D.

17,853,995

241,600

5,603,163


FOR

AGAINST

ABSTAIN

BROKER
NON-VOTES16,466,116

1,619,646

12,833

5,603,163


FOR

AGAINST

ABSTAIN

BROKER
NON-VOTES16,564,187

1,514,265

20,142

5,603,163


FOR

AGAINST

ABSTAIN

BROKER
NON-VOTES18,054,777

36,792

7,026

5,603,163


Item 5. Other InformationNone

Item 6. Exhibits and Reports on Form 8-K



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SIGNATURES

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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