<PAGE>
 
================================================================================
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                   FORM 10-K/A-2     

          (Mark One)
          [X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities
               Exchange Act of 1934

                  For the Fiscal Year Ended December 31, 1997

          [_]  Transition report pursuant to Section 13 or 15(d) of the
               Securities Exchange Act of 1934
                 For the Period From _________ to __________.

                       Commission File Number:  0-27188
                                                -------
                              PHARMACOPEIA, INC.
            (Exact name of Registrant as specified in its charter)



 
          Delaware                                       33-0557266
(State or other jurisdiction of               (I.R.S. employer identification
 incorporation or organization)                           number)


                  101 College Road East, Princeton, NJ 08540
             (Address of principal executive offices and zip code)

                                (609) 452-3600
             (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:  None
                                                             ----
Securities registered pursuant to Section 12(g) of the Act: Common Stock $.0001
                                                            -------------------
Par Value
---------

     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 periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                    YES   X      NO 
                                        -----       ------

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
    
     The approximate aggregate market value of voting stock held by
nonaffiliates of the Registrant was $183,003,600 based on the last sale price of
Common Stock reported on The Nasdaq National Market on March 31, 1998.
2,050,887 shares of Common Stock held by  officers, directors, and holders of 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates.  This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

     As of March 31, 1998, the number of outstanding shares of the Registrant's
Common Stock was 11,811,079.    

================================================================================
<PAGE>
     
                                   PART III     

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     (a)  The information required by this Item concerning Pharmacopeia's 
directors is set forth below.

          Frank Baldino, Jr., Ph.D., age 44, has served as a director of 
Pharmacopeia since October 1996. Dr. Baldino has served as the President and 
Chief Executive Officer of Cephalon, Inc. a biopharmaceutical company, since 
1987. Dr. Baldino is currently a director of Cephalon, Inc., Integrated Systems 
Consulting Group, and ViroPharma, Inc., and certain other closely held companies
and charitable organizations.

          Samuel D. Colella, age 57, has served as a director of Pharmacopeia
since July 1993. Mr. Colella has been a general partner of Institutional Venture
Partners, a venture capital firm, since 1984. Mr. Colella is currently a
director of CV Therapeutics, Inc., Integrated Medical Resources, Onyx
Pharmaceuticals, Inc., and several closely held companies.

          Gary E. Costley, Ph.D., age 54, has served as a director of 
Pharmacopeia since February 1996. Dr. Costley has served as the Chairman of the 
Board of Directors, President and Chief Executive Officer of International 
Multifoods Corporation, a food company, since January 1997. From May 1995 
through January 1997, Dr. Costley was the Dean of the Babcock Graduate School of
Management, Wake Forest University. For more than five years prior to that time,
Dr. Costley held various management positions with Kellogg Company, most 
recently as Executive Vice President. Dr. Costley is currently a director of 
International Multifoods Corporation and Candlewood Hotel Co. Inc.

          Edith W. Martin, Ph.D., age 52, has served as a director of 
Pharmacopeia since May 1997. Dr. Martin is the President of Advanced Global 
Technologies, a private consulting firm in the technology advisory area. Between
January 1996 and December 1997, Dr. Martin was the Chief Information Officer and
Vice President of Eastman Kodak Company. Between September 1994 and February 
1996, Dr. Martin was the Executive Vice President and Chief Technology Officer 
of the Student Loan Marketing Association ("Sallie Mae"). Prior to joining 
Sallie Mae, Dr. Martin had been Vice President and Chief Information Officer of 
the International Telecommunications Satellite Organization ("INTELSAT") since 
1992. Dr. Martin serves as a director of Information Resources, Inc. and Immunex
Corporation.

          Joseph A. Mollica, Ph.D., age 57, has served as the Chairman of the 
Board of Directors and Chief Executive Officer of Pharmacopeia since February 
1994 and was appointed President in August 1996. From 1987 to December 1993, Dr.
Mollica was employed initially by the DuPont Company and then by The DuPont
Merck Pharmaceutical Company, most recently as President and Chief Executive
Officer. Dr. Mollica is a director of USP, Inc., ImPath, Inc., and Neurocrine
BioSciences, Inc.

                                       2
<PAGE>
 
          Eileen M. More, age 52, has served as a director of Pharmacopeia since
June 1994. Ms. More has been a managing member of Oak Investment Partners, a
venture capital firm, since 1980. Ms. More is currently a director of Alexion
Pharmaceuticals, Inc. and several closely held companies.

          Charles A. Sanders, M.D., age 66, has served as a director of 
Pharmacopeia since July 1997. From 1989 until his retirement in 1995, Dr. 
Sanders held the position of Chairman of the Board of Directors and Chief 
Executive Officer of Glaxo Inc. Dr. Sanders serves on the Boards of Directors of
Kendle International Inc., Magainin Pharmaceuticals, Scios Inc., Staffmark, Inc.
Trimeris, Inc. and Vertex Pharmaceuticals and certain other closely held
companies and charitable organizations.

          There is no family relationship among any of the directors or 
executive officers of Pharmacopeia. 

     (b)  The executive officers of Pharmacopeia are as follows:

               NAME                     AGE            POSITION
               ----                     ---            --------

          Joseph A. Mollica, Ph.D       57     Chairman of the Board, President
                                               and Chief Executive Officer

          Stephen A. Spearman, Ph.D.    48     Executive Vice President of 
                                               Operations

          Lewis J. Shuster              42     Executive Vice President,
                                               Corporate Development and Chief
                                               Financial Officer

          Nolan H. Sigal, M.D., Ph.D.   48     Senior Vice President of Drug
                                               Discovery

          John J. Baldwin, Ph.D.        63     Senior Vice President of 
                                               Chemistry 

          Dr. Mollica has served as the Chairman of the Board and Chief 
Executive Officer of Pharmacopeia since February 1994 and was appointed 
President in August 1996. From 1987 to December 1993, Dr. Mollica was employed 
initially by the DuPont Company and then by The Dupont Merck Pharmaceutical 
Company, most recently as President and Chief Executive Officer. Dr. Mollica is 
a director of USP, Inc., ImPath, Inc. and Neurocrine BioSciences, Inc. Dr. 
Mollica received a Ph.D from the University of Wisconsin, and a Doctor of 
Science, h.c., from the University of Rhode Island.

          Dr. Spearman has served as Executive Vice President, Operations since 
August 1996. From 1975 to August 1996, Dr. Spearman held several positions at 
CIBA-GEIGY

                                       3
<PAGE>
 
Corporation, most recently as Project Leader. Dr. Spearman received his Ph.D. 
and M.S. from Emory University. Dr Spearman also holds an M.B.A. in Finance 
from Bryant College.

          Mr. Shuster has served as Chief Financial Officer since November 1994 
and was appointed Executive Vice President, Corporate Development and Chief 
Financial Officer in August 1996. Mr. Shuster served as Executive Vice
President, Operations and Finance for Human Genome Sciences, Inc., a
biotechnology company, from September 1992 to November 1994. From 1986 to June
1992, Mr. Shuster was with Microbiological Associates, Inc., a biological safety
testing services company, most recently as President and Chief Executive
Officer. Mr. Shuster received an M.B.A. from Stanford University Graduate School
of Business.
    
          Mr. Sigal has served as Vice President of Biology since January 1994 
and was appointed Senior Vice President, Drug Discovery in August 1996. From 
1983 to December 1993, Dr. Sigal held several positions at Merck Research
Laboratories, most recently, as Executive Director of the Department of
Immunology Research. Dr. Sigal received an M.D. and Ph.D. from the University of
Pennsylvania.     

          Dr. Baldwin has served as Vice President of Chemistry since July 1993 
and was appointed Senior Vice President of Chemistry in August 1996. For a 
period of thirty years, prior to joining the Company, Dr. Baldwin held a variety
of scientific and management positions with Merck Sharp & Dohme Research 
Laboratories, most recently as Distinguished Senior Scientist. Dr. Baldwin holds
more than 140 U.S. patents and is the inventor of Trusopt, a drug for preventing
glaucoma. Dr. Baldwin received a Ph.D. in Organic Chemistry from the University
of Minnesota.

     (c)  On the basis of reports and representations submitted by or on behalf 
of the directors, executive officers and ten percent stockholders of 
Pharmacopeia, all Forms 3, 4 and 5 showing ownership of and change of ownership 
in Pharmacopeia's equity securities during 1997 were timely filed with the 
Commission as required by Section 16(a) of the Exchange Act.

                                       4
<PAGE>
 
ITEM 11 EXECUTIVE COMPENSATION

COMPENSATION TABLES
 
  Summary Compensation Table. The following table sets forth the compensation
awarded to, earned by or paid to the Chief Executive Officer and each of the
other four most highly compensated executive officers of Pharmacopeia (the
"Pharmacopeia Named Executive Officers") for services rendered to Pharmacopeia
in each of the three fiscal years ended December 31, 1997:
 
<TABLE>
<CAPTION>
                                                                  LONG-TERM COMPENSATION
                                    ANNUAL COMPENSATION                  AWARDS(1)
                              ----------------------------------- --------------------------
                                                                  RESTRICTED
                                                     OTHER ANNUAL    STOCK      SECURITIES      ALL OTHER
   NAME AND PRINCIPAL                                COMPENSATION   AWARDS       UNDERLYNG     COMPENSATION
        POSITION         YEAR SALARY($)  BONUS($)       ($)(2)      ($)(3)      OPTIONS(#)         ($)
   ------------------    ---- ---------  --------    ------------ -----------   ------------   ------------
<S>                      <C>  <C>        <C>         <C>          <C>           <C>            <C>
Joseph A. Mollica....... 1997  362,833   140,000          --                --          50,000        --
 President and Chief     1996  336,875   135,000          --                --          55,000        --
 Executive Officer       1995  312,375   110,000          --                --          20,000        --
Stephen A. Spearman..... 1997  234,167    60,000          --                --          15,000    31,582(6)
 Executive Vice          1996   87,837(4) 55,000(5)       --                --          50,000   121,262(6)
 President of Operations
John J. Baldwin......... 1997  241,083    50,000          --                --          20,000        --
 Senior Vice President   1996  230,250    50,000          --                --          25,000        --
 of Chemistry            1995  221,263    42,000          --                --           7,500        --
Nolan H. Sigal.......... 1997  223,667    40,000          --                --          20,000        --
 Senior Vice President   1996  208,250    50,000          --                --          25,000        --
 of Drug Discovery       1995  199,333    42,000          --                --           7,500        --
Lewis J. Shuster........ 1997  199,008    50,000          --                --          20,000        --
 Executive Vice          1996  186,925    50,000          --                --          25,000        --
 President, Corporate    1995  174,000    44,000          --                --          15,000    49,424(6)
 Development & CFO
</TABLE>
--------
(1) Pharmacopeia did not grant any stock appreciation rights or make any long-
    term incentive plan payments to any Pharmacopeia Named Executive Officer
    in 1995, 1996 or 1997.
(2) Unless otherwise disclosed, the value of certain perquisites or personal
    benefits is not included in the amounts disclosed because it did not
    exceed for any Pharmacopeia Named Executive Officer the lesser of either
    $50,000 or 10% of total annual salary and bonus reported for the
    Pharmacopeia Named Executive Officer.
(3) During 1995, 1996, and 1997 no shares of restricted Common Stock were
    awarded or sold to the Pharmacopeia Named Executive Officers. The
    restricted Common Stock was sold at a price which was equal to the then
    current market value as determined by the Board of Directors. The
    restricted shares of Common Stock are subject to a repurchase right of
    Pharmacopeia in the event these individuals' employment terminates. The
    repurchase right terminated with respect to one-fourth of the amount of
    the restricted Common Stock held by each Pharmacopeia Named Executive
    Officer one year after the individual's first date of employment, and
    terminated and will terminate at a rate of one-forty-eighth of the total
    amount for each month thereafter. Such restricted Common Stock is eligible
    to receive dividends at the same rate as those paid on Common Stock
    although Pharmacopeia has not declared or paid dividends on Common Stock.
    As of December 31, 1997, Dr. Mollica held 202,400 shares of restricted
    Common Stock with an aggregate value of $3,238,400, Dr. Baldwin held
    135,750 shares of restricted Common Stock with an aggregate value of
    $2,172,000, Dr. Sigal held 123,400 shares of restricted Common Stock with
    an aggregate value of $1,974,400, and Mr. Shuster and Dr. Spearman held no
    shares of restricted Common Stock.
(4) Dr. Spearman became employed by Pharmacopeia in August 1996 at an annual
    salary of $225,000.
(5) Represents a $25,000 signing bonus and a $30,000 performance bonus.
(6) Represents relocation expenses.
 
                                       5
<PAGE>
 
  Option Grants in Last Fiscal Year. The following table sets forth each grant
of stock options made during the year ended December 31, 1997 to each of the
Pharmacopeia Named Executive Officers:
 
<TABLE>
<CAPTION>
                                   % OF TOTAL                        POTENTIAL REALIZABLE VALUE AT
                         OPTIONS OPTIONS GRANTED                        ASSUMED ANNUAL RATE OF
                         GRANTED TO EMPLOYEES IN EXERCISE EXPIRATION    STOCK APPRECIATION FOR
      NAME                #(1)     FISCAL YEAR    PRICE      DATE           OPTION TERM(2)
      ----               ------- --------------- -------- ---------- -----------------------------
                                                                          5%             10%
                                                                     -----------------------------
<S>                      <C>     <C>             <C>      <C>        <C>           <C>
Joseph A. Mollica....... 50,000         10%       $16.00    5/9/07   $     503,116 $     1,274,994
John J. Baldwin......... 20,000          4%       $16.00    5/9/07         201,246         509,998
Nolan H. Sigal.......... 20,000          4%       $16.00    5/9/07         201,246         509,998
Lewis J. Shuster........ 20,000          4%       $16.00    5/9/07         201,246         509,998
Stephen A. Spearman..... 15,000          3%       $16.00    5/9/07         150,935         382,498
</TABLE>
--------
(1) The listed options become exercisable as follows: one-fourth of the total
    number of shares subject to the options are exercisable one year from the
    grant date and an additional one forty-eighth of the total number of
    shares are exercisable each full month thereafter based on the optionee's
    continuing to be employed by Pharmacopeia.
(2) Potential realizable value is based on an assumption that the stock price
    appreciates at the annual rate shown (compounded annually) from the date
    of grant until the end of the ten-year option term. These numbers are
    calculated based on the requirements promulgated by the Commission and do
    not reflect Pharmacopeia's estimate of future stock price growth.
 
  Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values. The following table sets forth for each of the Pharmacopeia Named
Executive Officers options exercised during 1997 and the fiscal year-end value
of unexercised options.
 
<TABLE>
<CAPTION>
                          SHARES
                         ACQUIRED
                            ON       VALUE                                VALUE OF UNEXERCISED
                         EXERCISE REALIZED($)   NUMBER OF UNEXERCISED         IN-THE-MONEY
      NAME                 (#)        (1)      OPTIONS AT YEAR-END(#)   OPTIONS AT YEAR-END($)(1)
      ----               -------- ----------- ------------------------- -------------------------
                                              EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
                                              ----------- ------------- ----------- -------------
<S>                      <C>      <C>         <C>         <C>           <C>         <C>
Joseph A. Mollica.......   --         --        32,395       92,605      $190,640     $104,560
John J. Baldwin.........   --         --        13,697       38,803        71,483       39,217
Nolan H. Sigal..........   --         --        13,697       38,803        71,483       39,217
Lewis J. Shuster........   --         --        63,685       55,315       843,260      293,820
Stephen A. Spearman.....   --         --        16,666       48,334           --           --
</TABLE>
--------
(1) Market value of underlying securities at exercise date or year-end, as the
    case may be, minus the exercise price.
 
REPORT OF THE COMPENSATION COMMITTEE
 
  The following is a report of the Compensation Committee of Pharmacopeia
describing the compensation policies and rationale applicable to
Pharmacopeia's executive officers with respect to the compensation paid to
such executive officers for the year ended December 31, 1997. The information
contained in this report shall not be deemed to be "soliciting material" or to
be "filed" with the Commission nor shall such information be incorporated by
reference into any future filing under the Securities Act or the Exchange Act,
except to the extent that Pharmacopeia specifically incorporates it by
reference into any such filing.
 
  The Compensation Committee (the "Committee") of the Pharmacopeia Board of
Directors reviews and approves Pharmacopeia's executive compensation policies.
The following is the report of the Committee describing the compensation
policies and rationales applicable to Pharmacopeia's executive officers with
respect to the compensation paid to such executive officers for the fiscal
year ended December 31, 1997.
 
                                       6
<PAGE>
 
  Compensation Philosophy. Pharmacopeia's philosophy in setting its
compensation policies for executive officers is to maximize stockholder value
over time. The primary goal of Pharmacopeia's executive compensation program
is therefore to closely align the interests of the executive officers with
those of Pharmacopeia's stockholders. To achieve this goal, Pharmacopeia seeks
to offer its executive officers competitive compensation based upon their
performance, and the performance of Pharmacopeia. The executive compensation
program is designed to attract and retain executive talent that contributes to
Pharmacopeia's long-term success, to reward the achievement of Pharmacopeia's
short-term and long-term strategic goals, to recognize and reward individual
contributions to Pharmacopeia's performance, and to link executive officer
compensation and stockholder interests through equity-based plans.
Pharmacopeia currently uses three integrated components--Base Salary, Variable
Annual Incentives and Long-Term Incentives--to meet these goals.
 
  Base Salary. The base salary component of the total compensation is designed
to compensate executives competitively within the industry. The Committee
reviewed and approved fiscal 1997 base salaries for the Chief Executive
Officer and other executive officers at the beginning of the fiscal year. Base
salaries were established by the Committee based upon competitive compensation
data, the executive's job responsibilities, level of experience, individual
performance and contribution to the business. Executive officer base salaries
have been targeted at or above the average rates paid by competitors to enable
Pharmacopeia to attract, motivate, reward and retain highly skilled
executives. In order to evaluate Pharmacopeia's competitive posture in the
industry, the Committee reviewed and analyzed the compensation packages,
including base salary levels, offered by other biotechnology and
pharmaceutical companies. The competitive information was obtained from
surveys prepared by consulting companies or industry associations (e.g., the
Radford Biotechnology Compensation survey and the Top Five Data Services
Report on Executive Compensation in the Biopharmaceutical Industry). In making
base salary decisions, the Committee exercised its discretion and judgment
based upon these factors. No specific formula was applied to determine the
weight of each factor.
 
  Variable Annual Incentives. Variable incentive bonuses for executive
officers are intended to reflect the Committee's belief that a portion of the
compensation of each executive officer should be contingent upon the
performance of Pharmacopeia as well as the individual contribution of each
executive officer. To carry out this philosophy, Pharmacopeia has implemented
a compensation policy (the "Compensation Policy") which compensates officers
in the form of annual bonuses which may be paid in cash or, at the option of
the officer, up to 25% in stock. At the beginning of fiscal 1997, the
Committee established target bonuses for each executive officer relative to
the officer's base salary. The Compensation Policy is intended to motivate and
reward executive officers by directly linking the amount of any cash bonus to
specific company-based performance targets and specific individual-based
performance evaluations. Pharmacopeia-based performance goals are tied to
different indicators of company performance, such as achievement of revenue,
research and development, manufacturing, and other operating objectives. These
company-based performance goals vary from year to year, are somewhat
subjective in nature, and account for 50% of the bonus amount. The individual
officer's performance goals account for 50% of the bonus amount, are tied to
different indicators of the individual officer's performance (such as having
achieved a research and development project milestone) and, except in the case
of the Chief Executive Officer, are based upon the evaluation of the Chief
Executive Officer. The Chief Executive Officer's achievement of individual
performance goals is determined by the Committee. The Committee evaluates the
achievement level of Pharmacopeia annual goals and approves a performance
rating relative to the goals. At the beginning of each year, Pharmacopeia
objectives are assigned a relative weighting factor to assist in the priority
setting and subsequent evaluation of performance against objectives is
conducted at the end of the year. This evaluation is subjective and is
influenced by the Committee's perception of the importance of the various
corporate goals. The aggregate amount of bonus payments can range from 50-150%
of the total individual target amounts based upon achievement of individual
goals, provided that if less than 75% of the annual Pharmacopeia objectives
are met no bonus amounts will be paid. For 1997, the Board of Directors
awarded Pharmacopeia's executive officers incentive bonuses based upon the
officers and Pharmacopeia's having achieved the goals and objectives set for
1997 performance. The Committee believes that Pharmacopeia's Compensation
Policy provides an excellent link between Pharmacopeia's performance and the
incentives paid to executives.
 
                                       7
<PAGE>
 
  Long-Term Incentives. The Committee provides Pharmacopeia's executive
officers with long-term incentive compensation through grants of stock options
under Pharmacopeia's 1994 Incentive Stock Plan and the opportunity to purchase
stock under the 1995 Employee Stock Purchase Plan (the "Purchase Plan"). The
Pharmacopeia Board of Directors believes that stock options provide
Pharmacopeia's executive officers with the opportunity to purchase and
maintain an equity interest in Pharmacopeia and to share in the appreciation
of the value of Pharmacopeia Common Stock. The Pharmacopeia Board of Directors
believes that stock options directly motivate an executive to maximize long-
term stockholder value. The options also utilize vesting periods (generally
four years) that encourage key executives to continue in the employ of
Pharmacopeia. All options granted to executive officers to date have been
granted at the fair market value of Pharmacopeia Common Stock on the date of
grant. The Pharmacopeia Board of Directors considers the grant of each option
subjectively, considering factors such as the individual performance of the
executive officer and the anticipated contribution of the executive officer to
the attainment of Pharmacopeia's long-term strategic performance goals. Long-
term incentives granted in prior years are also taken into consideration. The
Committee has not yet made a determination with respect to long-term incentive
grants based on 1997 performance.
 
  Pharmacopeia established the Purchase Plan both to encourage employees to
continue in the employ of Pharmacopeia and to motivate employees through
ownership interest in Pharmacopeia. Under the Purchase Plan, employees,
including officers, may have up to 10% of their earnings withheld for
purchases of Pharmacopeia Common Stock on certain dates specified by the
Pharmacopeia Board of Directors. The price of Pharmacopeia Common Stock
purchased will be equal to 85% of the lower of the fair market value of the
Pharmacopeia Common Stock on the date of commencement of participation in each
six-month offering period or on each specified purchase date.
 
  Chief Executive Officer Compensation. The compensation of the Chief
Executive Officer is reviewed annually on the same basis as discussed above
for all executive officers. Joseph A. Mollica's base salary for 1997 was set
at $365,000. Dr. Mollica's base salary was established in part by comparing
the base salaries of chief executive officers at other biotechnology and
pharmaceutical companies of similar size. In 1997, Dr. Mollica was granted
options to purchase 50,000 shares of Pharmacopeia Common Stock based on 1996
performance. The Compensation Committee has not yet made a determination with
respect to option grants to Dr. Mollica based on 1997 performance. Under the
Compensation Policy, Dr. Mollica received a $140,000 bonus for 1997
performance, which performance exceeded the goals and objectives set by the
Pharmacopeia Board of Directors at the beginning of 1997. Dr. Mollica's total
compensation was based on Pharmacopeia's accomplishments and his contribution
thereto, including the proactive acquisition strategy launched during 1997,
culminating in the executed Merger Agreement with MSI. In addition, in 1997,
Dr. Mollica was instrumental in (i) attracting new executive talent and
directors to Pharmacopeia, (ii) signing a Collaboration and License Agreement
with Bristol-Myers Squibb Company ("BMS") pursuant to which BMS undertook
sponsorship of internal research program(s), and (iii) Pharmacopeia's
exceeding 1997 financial measurements in terms of lower expenses, lower net
loss and a significantly improved balance sheet and earnings per share.
 
SECTION 162(M)
 
  The Board has considered the potential future effects of Section 162(m) of
the Internal Revenue Code on the compensation paid to Pharmacopeia's executive
officers. Section 162(m) disallows a tax deduction for any publicly-held
corporation for individual compensation exceeding $1.0 million in any taxable
year for any of the executive officers named in the proxy statement, unless
compensation is performance-based. Pharmacopeia has adopted a policy that,
where reasonably practicable, Pharmacopeia will seek to qualify the variable
compensation paid to its executive officers for an exemption from the
deductibility limitations of Section 162(m).
 
                                       8
<PAGE>
 
     In approving the amount and form of compensation for Pharmacopeia's 
executive officers, the Committee will continue to consider all element of the 
cost to Pharmacopeia of providing such compensation, including the potential 
impact of Section 162 (m).


                                             Respectfully submitted by:

                                             COMPENSATION COMMITTEE

                                             Frank Baldino, Jr., Ph.D.
                                             Samuel D. Colella
                                             Gary E. Costley, Ph.D.

    
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION     

     The members of the Compensation Committee during 1997 were Samuel D.
Colella, Gary E. Costley and Frank Baldino, Jr. since July, 1997. No such member
of the Compensation Committee was a former or current officer or employee of
Pharmacopeia.

BOARD COMPENSATION
    
     Non-employee directors are reimbursed for expenses incurred in connection
with performing their respective duties as directors of Pharmacopeia. In
addition, Pharmacopeia has agreed to pay directors Gary E. Costley, Frank
Baldino, Jr., Edith W. Martin and Charles A. Sanders and any other non-employee
director who becomes a member of the Pharmacopeia Board of Directors for the
first time after 1995 a cash fee of $1,000 for each meeting of the Pharmacopeia
Board of Directors or a committee thereof attended by such director. Each non-
employee director participates in Pharmacopeia's 1995 Director Stock Option
Plan. Each individual who becomes a non-employee Board member for the first time
on or after October 26, 1995 will automatically be granted an option to purchase
10,000 shares of Pharmacopeia Common Stock on the date of his or her election or
appointment to the Pharmacopeia Board of Directors, provided such individual has
not been in the prior employ of Pharmacopeia. Thereafter, at each annual
stockholders' meeting, each non-employee director with at least six months of
service on the Pharmacopeia Board of Directors reelected to the Board will
automatically be granted an option to purchase 5,000 shares of Pharmacopeia
Common Stock.     

EMPLOYMENT AGREEMENTS

     Effective November 1, 1997, Pharmacopeia and Joseph A. Mollica entered into
a three-year employment agreement, subject to extension by mutual agreement, 
whereby, Dr. Mollica is employed as Chairman of the Board of Directors and Chief
Executive Officer. Pursuant to his agreement, Dr. Mollica receives a minimum 
annual base salary of $365,000, and is eligible to receive a discretionary bonus
of up to 35% of his base salary. In the event Pharmacopeia terminates Dr. 
Mollica's employment without "cause," as defined in his agreement, Pharmacopeia 
will continue to pay as severance benefits his base salary, bonus and benefits 
for the earlier of (i) fifteen months or (ii) Dr. Mollica's obtaining full-time 
employment. Also, upon an acquisition of Pharmacopeia, if the successor acquiror
fails to assume or observe the obligations of the agreement or if Dr. Mollica's 
employment is subsequently terminated without cause, Dr. Mollica will be 
entitled to full severance benefits.

     In June 1996, Pharmacopeia and Stephen A. Spearman entered into an
agreement whereby Dr. Spearman is employed as Executive Vice President of
Operations. Pursuant to his agreement, Dr. Spearman receives an annual base
salary $225,000 and is eligible for an annual bonus of up to 20% of his annual
base salary to be awarded at the discretion of the Pharmacopeia Board of
Directors. The agreement does not specify a term of employment. Dr. Spearman's
agreement also provides that an interest free loan would be made available to
assist Dr. Spearman with certain relocation expenses. Currently, there are no
loans outstanding from Pharmacopeia to Dr. Spearman. In the event that
Pharmacopeia terminates Dr. Spearman's employment without "cause," as defined in
his agreement, between twelve months and twenty-four months from the date he
commenced employment with Pharmacopeia, then Pharmacopeia will pay Dr. Spearman
his base salary through the earlier of (i) the end of such twenty-four month
period and (ii) Dr. Spearman's obtaining full-time employment.

PERFORMANCE GRAPH

     The following is a line graph comparing the cumulative total return to 
stockholders of Pharmacopeia Common Stock from December 5, 1995 (the date of 
Pharmacopeia's initial public offering) through December 31, 1997 with the 
cumulative total return over such period of (i) The Nasdaq Stock market (U.S. 
Companies) Index and (ii) the Dow Jones Biotechnology Industry Group Index. The 
information contained in the Performance Graph shall not be deemed to be 
"soliciting material" or to be  "filed" with the Commission, nor shall 
information be incorporated by reference into any filing under the Securities 
Act or the Exchange Act, except to the extent that Pharmacopeia specifically 
incorporates it by reference to any such filing.

[GRAPH APPEARS HERE]
<TABLE> 
<CAPTION> 
                               12/5/95  12/31/95     12/31/96  12/31/97         
<S>                            <C>      <C>          <C>       <C>         
Pharmacopeia                   100      151.96       121.09    100         
Dow Jones Biotechnology        100      111.47       115.13    121.60       
  Industry Group Index
Nasdaq Market Index            100         99.63       123.81    151.45
</TABLE> 
ASSUMES $100 INVESTED ON DEC. 05, 1995
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DECEMBER   31, 1997

                                       9
<PAGE>
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The following table sets forth the beneficial ownership of Pharmacopeia
Common Stock as of January 31, 1998 (i) by all persons known to Pharmacopeia
to be the beneficial owners of more than 5% of Pharmacopeia Common Stock, (ii)
by each of the executive officers named in the table under "EXECUTIVE
COMPENSATION--Compensation Tables--Summary Compensation Table," (iii) by each
director and nominee for director, and (v) by all current directors and
executive officers as a group:
 
<TABLE>
<CAPTION>
                                                              APPROXIMATE
                                                               PERCENTAGE
                                                 NUMBER         OF TOTAL
      NAME OF PERSON OR ENTITY                OF SHARES(1)    VOTING POWER
      ------------------------                ------------    ------------
<S>                                           <C>             <C>
Schering-Plough Corporation.................     764,248           6.5%
 One Giralda Farms
 Madison, New Jersey 07940-1000
Joseph A. Mollica...........................     255,166(2)        2.2%
John J. Baldwin.............................     151,616(3)        1.3%
Nolan H. Sigal..............................     160,242(4)        1.3%
Lewis J. Shuster............................      70,229(5)          *
Stephen A. Spearman.........................      19,929(6)          *
Frank Baldino, Jr...........................       3,333(7)          *
Samuel D. Colella...........................     424,333(8)        3.6%
Gary E. Costley.............................       6,666(9)          *
Edith W. Martin.............................           0            --
Eileen M. More..............................     267,811(10)       2.3%
Paul A. Bartlett............................     137,500           1.2%
Charles A. Sanders..........................           0            --
All current directors and executive officers   1,496,825(11)      12.5%
 as a group (12 persons) ...................
</TABLE>
--------
  *Less than one percent
 (1) Gives effect to the shares of Pharmacopeia Common Stock issuable within
     60 days of January 31, 1998 upon the exercise of all options and other
     rights beneficially owned by the indicated stockholders on that date.
     Unless otherwise indicated, the persons named in the table have sole
     voting and sole investment power with respect to all shares shown as
     being beneficially owned. Beneficial ownership is determined in
     accordance with the rules of the Commission and includes voting and
     investment power with respect to shares.
 (2) Includes 15,000 shares held by Dr. Mollica's wife and children, although
     Dr. Mollica disclaims beneficial ownership of such shares. Includes
     37,082 shares of Pharmacopeia Common Stock subject to options exercisable
     within 60 days of January 31, 1998.
 (3) Includes 15,728 shares of Pharmacopeia Common Stock subject to options
     exercisable within 60 days of January 31, 1998.
 (4) Includes 21,000 shares held by David Baer as custodian for Dr. Sigal's
     children, although Dr. Sigal disclaims beneficial ownership of such
     shares. Includes 15,728 shares of Pharmacopeia Common Stock subject to
     options exercisable within 60 days of January 31, 1998.
 (5) Mr. Shuster holds options to purchase 70,091 shares of Pharmacopeia
     Common Stock exercisable within 60 days of January 31, 1998.
 (6) Mr. Spearman holds options to purchase 19,791 shares of Pharmacopeia
     Common Stock exercisable within 60 days of January 31, 1998.
 (7) Dr. Baldino holds options to purchase 3,333 shares of Pharmacopeia Common
     Stock exercisable within 60 days of January 31, 1998.
 (8) Includes 27,226 shares of Pharmacopeia Common Stock owned directly by Mr.
     Colella. Also includes 383,203 shares of Pharmacopeia Common Stock held
     directly by Institutional Venture Partners V ("IVP V") and 10,264 shares
     of Pharmacopeia Common Stock held directly by Institutional Venture
     Management V ("IVM V"), the general partner of IVP V. Mr. Colella is a
     general partner of IVM V and, in such capacity, Mr. Colella may be deemed
     to be the beneficial owner of such shares, although he disclaims such
     beneficial ownership except to the extent of his individual partnership
     interest. Also includes 1,974 shares of Pharmacopeia Common Stock held
     directly by the Colella Family Partners, of which Mr. Colella is a
     general partner and 1,666 shares of Pharmacopeia Common Stock subject to
     options held by Mr. Colella exercisable within 60 days of January 31,
     1998.
 (9) Mr. Costley holds options to purchase 6,666 shares of Pharmacopeia Common
     Stock exercisable within 60 days of January 31, 1998.
(10) Ms. More is a managing member of Oak Associates V, L.L.C., the general
     partner of Oak Investment Partners V, Limited Partnership, which holds
     254,687 shares of Pharmacopeia Common Stock. Ms. More is also a general
     partner of Oak V Affiliates, the general partner of Oak V Affiliates
     Fund, Limited Partnership, which holds 11,458 shares of Pharmacopeia
     Common Stock. In such capacities, Ms. More may be deemed to be the
     beneficial owner of such shares, although she disclaims such beneficial
     ownership except to the extent of her pecuniary interest therein, if any.
     Also includes 1,666 shares of Pharmacopeia Common Stock subject to
     options held by Ms. More exercisable within 60 days of January 31, 1998.
(11) Includes 171,751 shares of Pharmacopeia Common Stock subject to options
     exercisable within 60 days of January 31, 1998. See footnotes (2) through
     (10).
 
 
                                      10
<PAGE>
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     In 1997, Pharmacopeia and Schering-Plough Corporation (the beneficial owner
of more than 5% of Pharmacopeia's Common Stock) agreed to extend the Schering-
Plough collaboration agreement for one year. As a result, during December 1997,
Schering-Plough paid Pharmacopeia $3.8 million towards research funding and
other amounts expected to become due to Pharmacopeia during 1998.

                                      11
<PAGE>
 
                                  PART IV

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

(a)(1)  Financial Statements

        The following Financial Statements are included:
        Report of Independent Auditors
        Balance Sheets as of December 31, 1996 and 1997
        Statements of Operations for the years ended December 31, 1995, 1996 and
        1997
        Statements of Stockholders' Equity for the years ended December 31,
        1995, 1996 and 1997
        Statements of Cash Flows for the years ended December 31, 1995, 1996 and
        1997
        Notes to Financial Statements

(a)(2)  Financial Statement Schedules

        All financial statement schedules are omitted because they are not
applicable, or not required, or because the required information is included in
the financial statements or notes thereto.

 
(a)(3)    Exhibits:


<TABLE>    
<C>                 <S>
3.1******           Restated Certificate of Incorporation of the Registrant.
3.3******           Bylaws of the Registrant, as amended.
3.3(a)********      Amendment to Bylaws of Pharmacopeia dated July 31, 1997.
4.3*                Stockholders Rights Agreement, dated February 15, 1995.
10.1*               Series A and Series B Preferred Stock Purchase Agreement,
                    dated July 21, 1993.
10.2*               Series B Preferred Stock Purchase Agreement, dated March
                    11, 1994.
10.3*               Series C Preferred Stock Purchase Agreement, dated December
                    22, 1994.
10.4*               Series D Preferred Stock Purchase Agreement, dated February
                    15, 1995.
10.5**#             Amended 1994 Incentive Stock Plan.
10.5(a)*******#     Amendment No. 3 to the 1994 Incentive Stock Plan dated May
                    9, 1997.
10.6*#              1995 Employee Stock Purchase Plan.
10.7*#              1995 Director Option Plan.
10.8*+              Library Collection Agreement, dated as of October 1, 1995,
                    between Pharmacopeia and Novartis Corporation.
10.9*+              Research, License, and Royalty Agreement, dated as of
                    February 15, 1995, between Pharmacopeia and Berlex
                    Laboratories, Inc.
10.9(a)*******+     Amendment No. 1 to Research, License and Royalty Agreement
                    between the Company and Berlex Laboratories, Inc. dated
                    November 27, 1996.
10.9(b)*******+     Amendment No. 2 to Research, License and Royalty Agreement
                    between the Company and Berlex Laboratories, Inc. dated June
                    30, 1997.
10.9(c)*********++  Amendment No.3 to Research, License and Royalty Agreement
                    between the Company and Berlex Laboratories, Inc. dated
                    November 21, 1997.
10.10*+             License Agreement, dated as of October 6, 1995, among
                    Pharmacopeia, the Trustees of Columbia University in the
                    City of New York and Cold Spring Harbor Laboratory.
10.11*+             Collaboration Agreement, dated as of December 22, 1994,
                    between Pharmacopeia and Schering Corporation and 
                    Schering-Plough, Ltd.
</TABLE>      

                                      12
<PAGE>
 
<TABLE>     
<C>              <S> 
10.11(b)*******+  Amendment No. 2 to Collaboration Agreement and Random Library
                  Agreement between the Company and Schering Corporation and
                  Schering-Plough, Ltd. dated as of April 22, 1996.
10.11(c)*******+  Amendment No. 3 to Collaboration Agreement and Random Library
                  Agreement between the Company and Schering Corporation and
                  Schering-Plough, Ltd. dated as of April 21, 1997.
10.12*+           Random Library Agreement, dated as of December 22, 1994,
                  between Pharmacopeia and Schering Corporation and
                  Schering-Plough, Ltd.
10.13*            Lease Agreement between Pharmacopeia and Eastpark at 8A.
10.13(a)**        Amendment dated as of January 22, 1996 to Lease Agreement
                  between Pharmacopeia and Eastpark at 8A.
10.13(b)****      Third Amendment to Lease Agreement dated March 31, 1996
                  between Pharmacopeia and Eastpark at 8A.
10.14*            Sublease, dated as of December 7, 1994, between Pharmacopeia
                  and Enichem Americas, Inc.
10.15*            Lease, dated as of May 2, 1994, between Pharmacopeia and
                  College Road Associates Limited, as amended.
10.15(a)**        Lease dated as of December 1, 1995 between Pharmacopeia and
                  College Road Associates, as amended.
10.15(b)****      Third Execution and Modification of lease dated June 7, 1996,
                  between Pharmacopeia and College Road Associates Limited.
10.17*#           Employment Agreement, dated October 4, 1994, between the
                  Company and Lewis J. Shuster.
10.18*********#   Employment Agreement effective November 1, 1997 between the
                  Company and Joseph A. Mollica, Ph.D.
10.20*#           Employment Agreement, dated June 3, 1993, between the Company
                  and John J. Baldwin, Ph.D.
10.21*#           Employment Agreement, dated December 2, 1993, between the
                  Company and Nolan H. Sigal, M.D., Ph.D.
10.22*#           Consulting Agreement, dated April 30, 1993, between the
                  Company and W. Clark Still, Ph.D.
10.23*            Warrant to purchase Common Stock issued to Columbia
                  University.
10.24*            Warrant to purchase Common Stock issued to Cold Spring Harbor
                  Laboratory.
10.25**+          Collaboration Agreement effective as of December 31, 1995
                  between Pharmacopeia and Bayer.
10.26**+          Random Library Agreement effective as of December 31, 1995
                  between Pharmacopeia and Bayer.
10.30***+         Collaborative Agreement dated as of March 29, 1996 with
                  Daiichi Pharmaceutical Co., Ltd.
10.30(a)*******+  Amendment No. 1 to Collaboration Agreement between the
                  Company and Daiichi Pharmaceutical Co., Ltd. dated April 14,
                  1997.
10.31****+        Research Agreement, between Pharmacopeia, Inc. and N.V.
                  Organon dated May 31, 1996.
10.32*****#       Employment Agreement, dated June 20, 1996, between the Company
                  and Stephen A. Spearman, Ph.D.
</TABLE>      

                                      13
<PAGE>
 
<TABLE>    
<C>               <S>
10.33*****        Lease Agreement, dated June 21, 1996, between Pharmacopeia and
                  South Brunswick Rental I, Ltd.
10.34++           Collaboration and License Agreement between Pharmacopeia, Inc.
                  and Bristol-Myers Squibb Company dated November 26, 1997.
11.1*             Statement re Computation of Per Share Earnings.
21.0*********     Subsidiaries of Pharmacopeia, Inc.
23.1              Consent of Ernst & Young LLP
24.1*********     Powers of Attorney
27.1*********     Financial Data Schedule
</TABLE>     


* Incorporated by reference to the same numbered exhibit filed with the
Company's Registration Statement on Form S-1 No. 33-93460.

** Incorporated by reference to the same numbered exhibit filed with the
Company's Form 10-K for the year ended December 31, 1995.

*** Incorporated by reference to the same numbered exhibit filed with the
Company's Form 10-Q for the quarter ended March 31, 1996.

**** Incorporated by reference to the same numbered exhibit filed with the
Company's Form 10-Q for the quarter ended June 30, 1996.

***** Incorporated by reference to the same numbered exhibit filed with the
Company's Form 10-Q for the quarter ended September 30, 1996.

****** Incorporated by reference to the same numbered exhibit filed with the
Company's Form 10-K for the year ended December 31, 1996.

******* Incorporated by reference to the same numbered exhibit filed with the
Company's Form 10-Q for the quarter ended June 30, 1997.
    
******** Incorporated by reference to the same numbered exhibit filed with the
Company's Form 10-Q for the quarter ended September 30, 1997.

********* Incorporated by reference to the same numbered exhibit filed with the
Company's Form 10-K for the year ended December 31, 1997.     

+  Confidential treatment granted.

++ Confidential treatment requested.

# Represents a management contract or compensatory plan or arrangement.


(b)  Reports on Form 8-K

     There were no reports on Form 8-K required to be filed for the quarter
     ended December 31, 1997.

(c)  Exhibits

     See Item 14(a)(3) above.

(d)  Financial Statement Schedules

     See Item 14(a)(2) above.

                                      14
<PAGE>
 
                                  SIGNATURES

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

                                    PHARMACOPEIA, INC.


    
                                    By:  /s/ Joseph A. Mollica
                                       -----------------------
                                       Joseph A. Mollica, Ph.D.
                                         Chairman of the Board of Directors, 
                                         President and Chief Executive Officer
                                         (Principal Executive Officer)
 
                                    Date:  April 29, 1998
                                       


                    [Rest of page intentionally left blank]

                                     





                                      15
<PAGE>
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
 
 
Signature                                     Title                    Date
---------                                     -----                    ----                 
<S>                              <C>                                 <C>
 
                                                                                     
  /s/ Joseph A. Mollica          Chairman of the Board of            April 29, 1998 
----------------------------     Directors, President and
(Joseph A. Mollica, Ph.D.)       Chief Executive Officer
                                 (Principal Executive Officer)                                  
                                                                                     
                                                                                     
 /s/ Lewis J. Shuster            Executive Vice President,           April 29, 1998 
----------------------------     Corporate Development and Chief                     
(Lewis J. Shuster)               Financial Officer (Principal                        
                                 Financial and Accounting                            
                                 Officer)                                            
                                                                                     
                                                                                     
                                                                                     
                                                                                     
             *                   Director                            April 29, 1998
-----------------------------                                                        
(Frank Baldino, Jr., Ph.D.)                                                          
                                                                                     
             *                   Director                            April 29, 1998
----------------------------                                                         
(Paul A. Bartlett, Ph.D.)                                                            
                                                                                     
             *                   Director                            April 29, 1998
----------------------------                                                   
(Samuel D. Colella)                                                            
                                                                                     
             *                   Director                            April 29, 1998
---------------------------                                                          
(Gary E. Costley, Ph.D.)                                                             
                                                                                     
             *                   Director                            April 29, 1998
---------------------------                                                          
(Edith W. Martin, Ph.D.)                                                             
                                                                                     
             *                   Director                            April 29, 1998
---------------------------                                                          
(Eileen M. More)                                                                     
                                                                                     
             *                   Director                            April 29, 1998
----------------------------
(Charles A. Sanders, M.D.)
</TABLE>
     
                                              /s/ Joseph A. Mollica
                                        *By:________________________
                                            Joseph A. Mollica
                                            Attorney-in-Fact
     





                                      16
<PAGE>
 
                        Report of Independent Auditors


The Board of Directors and Stockholders
Pharmacopeia, Inc.


We have audited the accompanying balance sheets of Pharmacopeia, Inc. as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pharmacopeia, Inc. at December
31, 1996 and 1997 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.


                                                       ERNST & YOUNG LLP


Princeton, New Jersey
January 27, 1998, except for
 Note 13 as to which the date is February 4, 1998

                                      F-1
<PAGE>
 
                              Pharmacopeia, Inc.

                                Balance Sheets
                   (Dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                                       December 31
                                                                     1996       1997
                                                                  -------------------
<S>                                                               <C>        <C> 
Assets
Current assets:
 Cash and cash equivalents                                        $ 17,059   $  9,590
 Marketable securities                                              64,423     60,166
 Prepaid expenses and other current assets                           1,525      1,890
                                                                  ------------------- 
Total current assets                                                83,007     71,646
                                                                  ------------------- 
 
Non-current investments in marketable securities                               12,865
Property and equipment, net                                          8,295     10,874
Other assets                                                           677        302
                                                                  -------------------
                                                                  $ 91,979   $ 95,687
                                                                  ===================
Liabilities and stockholders' equity
Current liabilities:
 Accounts payable                                                 $    742   $  1,756
 Accrued liabilities                                                 2,240      2,726
 Notes payable, current portion                                        710        690
 Deferred revenue                                                   15,088     16,091
                                                                  ------------------- 
Total current liabilities                                           18,780     21,263
 
Notes payable, long-term portion                                     1,405        712
Deferred revenue, long-term                                          2,046      3,275
 
Commitments
 
Stockholders' equity:
 Preferred stock, $.0001 par value, 2,000,000 shares
  authorized; none issued and outstanding
 Common stock, $.0001 par value; 40,000,000 shares authorized;
  11,267,499 and 11,786,941 shares issued and outstanding at
  December 31, 1996 and 1997, respectively                               1          1
 Additional paid-in capital                                         97,542    104,909
 Accumulated deficit                                               (27,795)   (34,473)
                                                                  -------------------
Total stockholders' equity                                          69,748     70,437
                                                                  -------------------
                                                                  $ 91,979   $ 95,687
                                                                  ===================
</TABLE>

See accompanying notes.

                                      F-2
<PAGE>
 
                               Pharmacopeia, Inc.

                            Statements of Operations
                 (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>

                                                    Year ended December 31
                                                  1995       1996       1997
                                                -----------------------------
<S>                                             <C>       <C>        <C>
Contract revenue                                $ 5,151   $ 14,799   $ 24,523
 
Operating expenses:
 Research and development:
  Collaborative                                   5,563     13,129     16,931
  Proprietary                                     5,468      8,111     12,588
 General and administrative                       3,781      5,617      5,848
                                                -----------------------------
Operating loss                                   (9,661)   (12,058)   (10,844)
 
Interest income                                     798      3,938      4,397
Interest expense                                    (93)      (263)      (231)
                                                -----------------------------
Net loss                                        $(8,956)  $ (8,383)  $ (6,678)
                                                =============================
 
Basic net loss per share                        $ (2.77)  $   (.77)  $   (.58)
                                                =============================
</TABLE>

See accompanying notes.

                                      F-3
<PAGE>
 
                               Pharmacopeia, Inc.

                       Statements of Stockholders' Equity
                    (Dollars in thousands, except share data)


<TABLE> 
<CAPTION> 
                                                   Convertible
                                                 Preferred Stock        Common Stock                   
                                              ---------------------------------------------   Additional   
                                               Number of             Number of                 Paid-in     
                                                 Shares    Amount     Shares      Amount       Capital     
                                              -----------------------------------------------------------
<S>                                           <C>         <C>       <C>           <C>        <C> 
Balance at December 31, 1994                    8,400,880 $      1   2,672,750     $              21,444 
 Sale of Convertible Series D preferred stock     350,000                                          3,500 
 Sales of common stock                                                   1,094                         1 
 Acquisition of treasury stock                                                                           
 Retirement of treasury stock                                          (64,521)                      (11)
 Mandatory conversion of Convertible
    preferred stock to common stock            (8,750,880)      (1)  4,375,446        1                  
 Common stock issued based on anti-dilution
    provisions                                                          43,750                           
 Exercise of warrant                                                    15,750                           
 Issuance of common stock in initial public
    offering, net of expenses                                        2,990,000                    43,808 
 Issuance of common stock for exercise of
    options                                                              5,700                         3 
 Issuance of common stock in private placement                         232,558                     5,000
 Net loss                                                                                                
                                              -----------------------------------------------------------
Balance at December 31, 1995                            -        -  10,272,527        1           73,745 
 Acquisition of  treasury stock                                                                          
 Retirement of treasury stock                                           (7,594)                       (2)
 Issuance of common stock in private
    placements                                                         973,206                    23,641 
 Issuance of common stock for exercise of
    options                                                             22,189                        47 
 Issuance of common stock in employee stock
    purchase plan                                                        7,171                       111 
 Net loss                                                                                                
                                              -----------------------------------------------------------
 Balance at December 31, 1996                           -        -  11,267,499        1           97,542 
 Acquisition of treasury stock                                                                           
 Retirement of treasury stock                                           (1,646)                       (1)
 Issuance of common stock in private
    placements, net                                                    438,323                     6,861 
 Issuance of common stock for exercise
    of options                                                          51,669                        56 
 Issuance of common stock in employee stock
    purchase plan                                                       18,488                       235 
 Issuance of common stock for 401K
    matching                                                            12,608                       216 
 Net loss                                                                                                
                                              -----------------------------------------------------------
 Balance at December 31, 1997                           - $      -  11,786,941    $    1        $104,909    
=========================================================================================================

<CAPTION> 

                                              
                                                 Treasury Stock                           
                                              -----------------------                        Total
                                               Number of                   Accumulated   Stockholders'
                                                Shares       Amount          Deficit         Equity
                                              --------------------------------------------------------
<S>                                           <C>          <C>          <C>            <C> 
Balance at December 31, 1994                     45,000    $     (9)    $    (10,456)   $    10,980
 Sale of Convertible Series D preferred stock                                                 3,500
 Sales of common stock                                                                            1
 Acquisition of treasury stock                   19,521          (2)                             (2)
 Retirement of treasury stock                   (64,521)         11                               -
 Mandatory conversion of Convertible
    preferred stock to common stock                                                               -
 Common stock issued based on anti-dilution
    provisions                                                                                    -
 Exercise of warrant                                                                              -
 Issuance of common stock in initial public
    offering, net of expenses                                                                43,808
 Issuance of common stock for exercise of
    options                                                                                       3
 Issuance of common stock in private placement                                                5,000
 Net loss                                                                     (8,956)        (8,956)
                                              --------------------------------------------------------
Balance at December 31, 1995                          -           -          (19,412)        54,334
 Acquisition of  treasury stock                   7,594          (2)                             (2)
 Retirement of treasury stock                    (7,594)          2
 Issuance of common stock in private
    placements                                                                               23,641
 Issuance of common stock for exercise of
    options                                                                                      47
 Issuance of common stock in employee stock
    purchase plan                                                                               111
 Net loss                                                                     (8,383)        (8,383)
                                              --------------------------------------------------------
 Balance at December 31, 1996                          -          -          (27,795)        69,748
 Acquisition of treasury stock                     1,646         (1)                             (1)
 Retirement of treasury stock                     (1,646)         1
 Issuance of common stock in private
    placements, net                                                                           6,861
 Issuance of common stock for exercise
    of options                                                                                   56
 Issuance of common stock in employee stock
    purchase plan                                                                               235
 Issuance of common stock for 401K
    matching                                                                                    216
 Net loss                                                                     (6,678)        (6,678)
                                              --------------------------------------------------------
 Balance at December 31, 1997                      -           $  -     $    (34,473)      $ 70,437
======================================================================================================
</TABLE> 

                                      F-4
<PAGE>
 
                              Pharmacopeia, Inc.

                           Statements of Cash Flows
                            (Dollars in thousands)



<TABLE>
<CAPTION>
                                                           Year ended December 31
                                                         1995       1996       1997
                                                     --------------------------------
<S>                                                    <C>        <C>        <C> 
Cash flows from operating activities
Net loss                                               $ (8,956)  $ (8,383)  $ (6,678)
Adjustments to reconcile net loss to net cash used
 in operating activities:
  Depreciation                                              554      1,467      2,754
  Amortization                                               40         40         22
  Changes in operating assets and liabilities:
   (Increase) in prepaid expenses and other current        (691)      (370)      (365)
   assets
  (Increase) decrease in other assets                      (238)      (159)       353
  Increase in accounts payable                               26        241      1,014
  Increase in accrued liabilities                         1,046        499        486
  Increase in deferred revenue                            4,599      9,536      2,232
                                                     --------------------------------
Net cash provided by (used in) operating activities      (3,620)     2,871       (182)
 
Cash flows from investing activities
Capital expenditures                                     (2,410)    (6,834)    (5,333)
Purchases of marketable securities                      (41,391)   (95,750)   (90,373)
Proceeds from maturities of marketable securities        13,108     63,615     81,765
(Increase) decrease in segregated cash                      125
                                                     --------------------------------
Net cash used in investing activities                   (30,568)   (38,969)   (13,941)
 
Cash flows from financing activities
Net proceeds from issuance of common stock               48,810     23,797      7,367
Net proceeds from issuance of convertible preferred       3,500
 stock
Increase in notes payable                                 1,233      1,344
Repayments of note payable                                 (228)      (596)      (713)
                                                     --------------------------------
Net cash provided by financing activities                53,315     24,545      6,654
                                                     --------------------------------
  
Increase (decrease) in cash and cash equivalents         19,127    (11,553)    (7,469)
Cash and cash equivalents at beginning of period          9,485     28,612     17,059
                                                     --------------------------------
Cash and cash equivalents at end of period             $ 28,612   $ 17,059   $  9,590
                                                     ================================
 
Interest paid                                          $     93   $    263   $    231
                                                     ================================
</TABLE>

See accompanying notes.

                                      F-5
<PAGE>
 
                              Pharmacopeia, Inc.

                         Notes to Financial Statements
            (Dollars in thousands, except share and per share data)
                               December 31, 1997


1.  Organization and Description of Business

Pharmacopeia, Inc. (the "Company"), which was incorporated in Delaware in March
1993, develops combinatorial chemical libraries and uses these libraries alone,
and through collaborations, to discover new, low molecular weight compounds
principally for use as pharmaceuticals.

Through December 1994, the Company was in the development stage.  Beginning in
January 1995, the Company started receiving and expects to continue to receive
revenue from collaboration agreements (see Note 10).  As a result, the Company
is no longer considered to be in the development stage.  Included in accumulated
deficit is $10,456  accumulated during the development stage.

The Company's approach to drug discovery represents a newly created business for
which there is little precedent.  The Company's expansion of its operations and
enhancements to its drug discovery technology will result in significant
expenses over the next several years that may not be offset by significant
revenues.  The Company expects that any revenues for the foreseeable future and
the Company's ability to achieve profitability will be dependent upon the
ability of the Company to enter into additional collaborative arrangements with
customers.

2.  Significant Accounting Policies

Use of Estimates

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

Cash Equivalents
    
The Company considers all highly-liquid investments with an original maturity of
three months or less to be cash equivalents.  The Company invests its cash in
deposits with major financial institutions, money market funds, and other 
investment grade securities such as prime rated commercial paper.
     
Marketable Securities
    
Marketable securities consist of fixed income investments with a maturity of
greater than three months such as United States treasury securities, obligations
of United States government agencies, other investment grade securities such
as prime rated commercial paper and corporate bonds. Such securities are
carried at amortized cost which approximates market.     
    
The following is a summary of held-to-maturity securities:     

<TABLE>     
<CAPTION> 
                                                
                                      December 31, 1996  December 31, 1997
                                      -----------------  ----------------- 
                                           Current        Current     Non-
                                                                    Current
<S>                                       <C>             <C>        <C>  
U.S. treasury securities                              
 and obligations of U.S. government                   
 agencies                                  $24,267        $31,732    $ 8,501
U.S. corporate debt securities             $40,156        $28,434    $ 4,364
                                           -------        -------    -------
                                           $64,423        $60,166    $12,865
                                           =======        =======    ======= 

At December 31, 1997 all of the Company's non-current held-to-maturity
securities mature at various dates during 1999.
</TABLE>      


                                      F-6
<PAGE>
 
                              Pharmacopeia, Inc.

                         Notes to Financial Statements
            (Dollars in thousands, except share and per share data)
                               December 31, 1997



2.  Significant Accounting Policies (continued)

Property and Equipment

Property and equipment is stated at cost.  Depreciation is provided over the
estimated useful lives of the related assets which range from three to ten years
using the straight-line method. Assets under capital leases are amortized over
the lesser of the useful life of the assets or the applicable lease terms,
whichever is shorter, which approximates 5 years.

Intangible Assets

Intangible assets are included in other assets and consist primarily of licensed
technology which represents the initial payment for certain exclusive licenses
granted to the Company as of the date of incorporation and are being amortized
over four years.  Accumulated amortization at December 31, 1996 and 1997 was
$142 and $164, respectively.

Revenue Recognition
    
Contract revenue from collaborative agreements relates to research and 
development work and is recognized using the percentage of completion method. 
The application of this revenue recognition method is dependent on the 
contractual arrangement of each agreement. Accordingly, revenue is recognized as
research and development labor (based on a contractually agreed upon dollar
amount per person) is expended against a total research and development plan
(based on a total amount of labor as defined in each agreement). Payments
received under these agreements prior to the completion of the related work are
recorded as deferred revenue. Non-refundable milestone payments and up-front
fees are recognized as contract revenue when received as the Company has no
other performance obligations.    

Research and Development

All research and development costs are charged to operations as incurred.

Stock Based Compensation

As permitted by FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (FASB 123), the Company has elected to follow Accounting Principal
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related interpretations in accounting for its employee stock option plans.
Under APB 25, no compensation expense is recognized at the time of option grant
because the exercise price of the Company's employee stock option equals the
fair market value of the underlying common stock on the date of grant.

                                      F-7
<PAGE>
 
                              Pharmacopeia, Inc.

                         Notes to Financial Statements
            (Dollars in thousands, except share and per share data)
                               December 31, 1997



2.  Significant Accounting Policies (continued)

Basic Net Loss Per Share

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share.  Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities.  Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. The effect of adoption of Statement 128 had no financial impact and
accordingly, no restatement of loss per share for prior years was necessary.

The basic net loss per share is based on net loss for the year, divided by the
weighted average number of common shares outstanding during the year.  Common
stock equivalents such as convertible preferred stock, stock options and
warrants are not included as their effect is anti-dilutive. Shares used in
computing basic net loss per share were 3,231,102, 10,833,980 and 11,453,743 for
the years ended December 31, 1995, 1996 and 1997 respectively.

Impact of Recently Issued Accounting Standards

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130").  SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components and is applied to all
enterprises.  SFAS No. 130 is effective for financial statements for fiscal
years beginning after December 15, 1997.  The adoption of SFAS No. 130 will have
no impact on the Company's consolidated results of operations, financial
position or cash flows.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131").  SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders.  It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers.  SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997, and therefore, the Company will adopt the new
requirements retroactively in 1998.  The adoption of SFAS No. 131 will have no
significant impact on the Company's financial reporting.

                                      F-8

<PAGE>
 
                              Pharmacopeia, Inc.

                         Notes to Financial Statements
            (Dollars in thousands, except share and per share data)
                               December 31, 1997
                                        


3.  Property and Equipment

Property and equipment consist of the following:

                                                            December 31      
                                                            1996      1997   
                                                       -------------------   
Laboratory equipment                                     $ 4,904   $ 7,388   
Furniture, fixtures and equipment                          1,227     1,828   
Computers and software                                     1,649     2,559   
Leasehold improvements                                     2,716     3,629   
Construction in progress                                      15       440   
                                                       -------------------
                                                          10,511    15,844   
Less accumulated depreciation and amortization            (2,216)   (4,970)  
                                                       -------------------   
Property and equipment, net                              $ 8,295   $10,874   
                                                       ===================   

4.  Leases

The Company has a total of three operating leases or sub-leases for office and
laboratory space which expire at various dates through November 30, 2005.

The future minimum lease commitments at December 31, 1997 are as follows:


                     1998                              $2,911
                     1999                               2,761
                     2000                               1,471
                     2001                               1,041
                     2002                               1,041
                     Thereafter                         3,037


Rent expense for the years ended December 31, 1995, 1996 and 1997 was $1,255,
$1,783 and $2,828, respectively.


                                      F-9
<PAGE>
 
                              Pharmacopeia, Inc.

                         Notes to Financial Statements
            (Dollars in thousands, except share and per share data)
                               December 31, 1997



5.  Accrued Liabilities
    
Accrued liabilities consist of the following:
                                                                    December 31,
                                                                   1996     1997
                                                              ------------------
Accrued bonus                                                    $  623   $1,005
Accrued vacation                                                    208      322
Accrued relocation                                                  573      219
Accrued licensing costs - related party (Note 12)                   300      377
Other                                                               536      803
                                                              ------------------
                                                                 $2,240   $2,726
                                                              ==================
     
6.  Notes Payable

The Company has entered into Equipment Financing Agreements primarily for the
purchase of certain laboratory and research related equipment. Under the terms
of these agreements, the Company may finance up to $2,850 of equipment and
leasehold improvements.  At December 31, 1997, the Company had sixteen separate
secured notes payable under these agreements. The notes payable expire at
various dates through June 2000.

The following is a schedule, by year, of the future principal payments under
equipment financing agreements as of December 31, 1997:

1998                                                                $  690
1999                                                                   481
2000                                                                   231
                                                                  --------
Total principal payments                                            $1,402
                                                                  ========


7.  Income Taxes

The Company utilizes the liability method to account for income taxes. Deferred
income taxes reflect the net effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.  Significant components of the
Company's net deferred tax asset, which is considered noncurrent, are as
follows:

                                      F-10
<PAGE>
 
                              Pharmacopeia, Inc.

                         Notes to Financial Statements
            (Dollars in thousands, except share and per share data)
                               December 31, 1997



7.  Income Taxes (continued)

<TABLE> 
<CAPTION> 

                                                                    December 31
                                                                  1996       1997
                                                               ---------------------
<S>                                                              <C>        <C> 
Deferred tax assets
Net operating loss carryforward                                  $ 11,218   $ 13,900
Research credit                                                       722      1,334
Deferred tax asset valuation reserve                              (11,940)   (15,234)
                                                               ---------------------
Net deferred tax asset                                           $    -     $     -
                                                               =====================
</TABLE>

In 1995, 1996 and 1997, the Company recorded valuation reserves of $8,145,
$11,940, and $15,234, respectively, principally to offset the benefits of net
operating loss carryforwards at the end of those years.

At December 31, 1997, the Company has federal net operating loss (NOL)
carryforwards of approximately $34,700 which expire in 2008 ($2,131), 2009
($8,475), 2010 ($9,100), 2011 ($8,294) and 2012 ($6,700).  An ownership change
pursuant to Section 382 of the Internal Revenue Code occurred in December 1995
as a result of the public offering of the Company's common stock.  The effect of
the ownership change is that use of approximately $11,800 of the NOL
carryforward is restricted to approximately $6,700 per year.  The Company has
state NOL carryforwards $34,700 at December 31, 1997, which expire in 2000
($2,100), 2001 ($8,500), 2002 ($9,100), 2003 ($8,300) and 2004 ($6,700).

The Company has federal research tax credit carryforwards of approximately $936
at December 31, 1997 which expire from 2008 through 2012. Approximately $476 of
the carryforwards are subject to limitation pursuant to Section 382.  In
addition, the Company has a state research tax credit carryforward of
approximately $466 which expires from 2002 to 2004.

8.  Stockholders' Equity

Common Stock
    
During 1996 the Company received a total of $25,165 in proceeds from the sale to
four corporate partners of 973,206 newly issued shares of Pharmacopeia common
stock.  Of the total proceeds, $23,641 was recognized as equity.  The balance of
$1,524, representing a premium over the fair market value of the Company's
common stock, was initially recorded on the balance sheet as deferred revenue
and is being recognized as revenue over the balance of the term of the
associated corporate collaboration agreements.

During 1997 the Company received a total of $7,165 in proceeds from the sale to
two corporate partners of newly issued shares of Pharmacopeia common stock.  Of
the total proceeds, $6,791 was recognized as equity.  The balance of $374,
representing a premium over the fair market value of Pharmacopeia's common
stock, is currently included in the balance sheet as deferred revenue and will
be recognized as revenue over the balance of the term of the associated
corporate collaboration agreement.    

                                      F-11
<PAGE>
 
                              Pharmacopeia, Inc.

                         Notes to Financial Statements
            (Dollars in thousands, except share and per share data)
                               December 31, 1997

9.  Stock Plans

The Company has three Stock Plans, the 1994 Incentive Stock Plan, the 1995
Employee Stock Purchase Plan and the 1995 Director Option Plan.
    
In accordance with the 1994 Incentive Stock Plan (the "Plan"), the Company may
grant up to 1,750,000 shares of both incentive or non-qualified stock options or
stock purchase rights to officers, directors, employees, sales representatives
and consultants of the Company. The term of each incentive and non-qualified
stock option and stock purchase right is ten years or ten years and one day from
the date of grant. Vesting generally occurs over a period of not greater than
five years.    

At December 31, 1997, 387,544 of the outstanding options and stock purchase
rights were exercisable and there were 303,586 shares available for future
grants.  All stock purchase rights which are not vested are subject to
repurchase by the Company.

In 1995, the Company adopted the 1995 Employee Stock Purchase Plan ("ESPP")
under Section 423 of the Internal Revenue Code.  An aggregate of 250,000 shares
of common stock are reserved for offering under the ESPP.  In 1997, 18,488
shares of common stock were purchased at  prices ranging from $12.54 to $12.96
per share, as determined by the ESPP. At December 31, 1997, there were 224,341
shares available for future purchase.

In accordance with the 1995 Directors Option Plan, the Company may grant up to
150,000 options to purchase shares of common stock to non-employee members of
the Board.  The exercise price of the stock options shall be equal to the fair
market value per share of common stock on the option grant date.  Each option
has a term of ten years from the option grant date and shall become exercisable
in a series of three equal and successive annual installments.  During 1997
50,000 options were granted at exercise prices ranging from $14.13 to $16.00 per
share.  At December 31, 1997, 11,664 of the outstanding options were exercisable
and there were 78,334 shares available for future grants.

FASB 123 requires pro forma information regarding net income and earnings per
share as if the Company has accounted for its employee stock options and
warrants granted subsequent to December 31, 1994 and shares of common stock
purchased by employees in connection with the ESPP ("equity awards") under the
fair value method of FASB 123.  The fair value of these equity awards was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for 1995, 1996, and 1997,
respectively: risk-free interest rates of 6.06%, 6.17%, and 5.44%; expected
volatility of 59.70, 59.70, and 47.00; expected option life of 5.6, 5.6, and 5.8
years from vesting and an expected dividend yield of 0.0%.
                                        

                                      F-12
<PAGE>
 
                              Pharmacopeia, Inc.

                         Notes to Financial Statements
            (Dollars in thousands, except share and per share data)
                               December 31, 1997



9. Stock Plans (continued)

For purposes of pro forma disclosures, the estimated fair value of the equity
awards is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:

                                                     1995       1996      1997
                                                     ----       ----      ----

     Pro forma net loss............................$(9,565)   $(9,474)  $(9,395)
     Pro forma basic net loss per share............$(2.96)    $(.87)    $(.82)


A summary of the Company's stock option activity, and related information for
the years ended December 31, 1995, 1996, and 1997 follows:

<TABLE>
<CAPTION>
                                      1995                             1996                             1997
                            ----------------------------      -------------------------      ---------------------------       
                                               Weighted                        Weighted                        Weighted
                              Common           Average         Common          Average          Common         Average
                               Stock           Exercise         Stock          Exercise          Stock         Exercise
                              Options            Price         Options           Price          Options           Price
                            ---------          ---------      ---------         -------      -----------        --------
<S>                         <C>                <C>            <C>               <C>          <C>                <C> 
Outstanding at                
beginning of year.......      120,000             $ .48        363,575           $ 2.10         921,271           $14.19 
Granted.................      250,900              2.83        598,220            20.90         517,680            16.22
Exercised...............       (6,794)              .49        (22,189)            2.76         (36,669)            1.06
Forfeited...............         (531)              .84        (18,335)            7.83         (46,583)           18.14
                            ---------                         --------                       ----------                     
 
Outstanding at end of   
year                          363,575              2.10        921,271            14.19       1,355,699            15.17
                            =========                         ========                       ==========                      

Exercisable at end of         
year                           36,959                          132,715                          387,544
                            =========                         ========                       ==========                      
 
Weighted average fair
value of options        
granted during the year                            2.81                           13.03                             8.51
 
</TABLE>
 
     Stock options outstanding at December 31, 1997 are summarized as follows:


                                                                      Weighted
                              Outstanding       Weighted Average      Average
       Range of                Options at           Remaining         Exercise
    Exercise Prices         December 31, 1997    Contractual Life       Price 
    ---------------         -----------------    ----------------     --------  
    $  .48                        96,402                 6.9          $   .48
    $ 1.24 - $19.00              971,147                 8.7            14.48
    $19.38 - $26.75              288,150                 8.6            22.38
                            -----------------
    $  .48 - $26.75            1,355,699                 8.6            15.17
                            =================

                                      F-13
<PAGE>
 
                              Pharmacopeia, Inc.

                         Notes to Financial Statements
            (Dollars in thousands, except share and per share data)
                               December 31, 1997


10. Collaborative Agreements
    
On December 22, 1994, the Company entered into a Collaboration Agreement and
Random Library Agreement with Schering Corporation and Schering-Plough Ltd.
(collectively "Schering-Plough") which provides for research funding, product
development milestone payments and royalties on net product sales. Research
funding is received annually in advance with $13,500 paid to date to fund
various research activities through December 1998. The term of these agreements
as amended extend into 1998 and are subject to further extension by agreement of
both parties.     
    
On February 15, 1995, the Company entered into a Research, License and Royalty
Agreement with Berlex Laboratories, Inc. ("Berlex"). The term of the
Collaboration Agreement as amended extends into 1998 and is subject to further
extension by agreement of both parties. Berlex has agreed to pay the Company
research funding, product development milestone payments, and royalties on net
product sales. Research funding is received quarterly in advance with $8,300
paid to date to fund various research activities through February 1998.     
    
On October 1, 1995, the Company entered into a Library Collection Agreement with
Novartis Corporation ("Novartis"), with a three year term, to create libraries
in collaboration with Novartis for screening by Novartis. This Agreement has
been extended for an additional two year term. Under this agreement, the Company
is obligated to provide certain numbers of compounds during each of the five
years of the program. In return, Novartis is obligated to pay the Company
research funding during each year of the agreement. Research funding is received
annually in advance with $6,000 paid to date to fund various research activities
through October 1998 and $2,000 during each subsequent year of the agreement.
Novartis has also agreed to pay the Company milestone payments and royalties on
the sale of any drugs that result from the relationship.    
    
On December 31, 1995, the Company entered into a Collaboration Agreement and
Random Library Agreement with Bayer Corporation ("Bayer"). The agreement
provides for research funding, product development milestone payments and
royalties on net product sales. Research funding is received annually in advance
with $9,500 paid to date to fund various research activities and delivery of
combinatorial libraries through February 1999.    
    
On May 31, 1996, the Company entered into a Research Agreement with N.V. Organon
("Organon"). The agreement provides for research funding, product development
milestone payments and royalties on net product sales. Organon is required to
pay the Company, quarterly in advance, a total of $10,700 in research and
development funding and license fees over the initial three year term, of
which $6,900 has been paid.     
    
On March 29, 1996, the Company entered into a Collaboration Agreement with
Daiichi Pharmaceutical Co., Ltd. ("Daiichi"). The agreement provides for
research funding, product development milestones and royalties on net product
sales. Over the initial three year term of the agreement, Daiichi is obligated
to pay, semi-annually in advance, approximately $14,000 in research and
development funding and license fees, of which $9,700 has been paid.    
    
On December 11, 1997, the Company entered into a three year Collaboration and
License Agreement with Bristol-Myers Squibb Company ("BMS"). The agreement
provides for research funding, product development milestones and royalties on
net product sales. Over the initial three year term of the agreement, BMS is
obligated to pay, quarterly in advance, approximately $10,400 in research and
development funding and license fees, of which $3,400 has been paid.    

Revenue from customers representing 10% or more of total contract revenue for
the years ended December 31, 1995, 1996 and 1997 is as follows:


                                      F-14
<PAGE>
 
                              Pharmacopeia, Inc.

                        Notes to Financial Statements
           (Dollars in thousands, except share and per share data)
                              December 31, 1997


10.  Collaborative Agreements (continued) 

   
       Customer                     1995             1996             1997
-------------------------     --------------    --------------   -------------
Schering-Plough                      58%              36%              21%
Daiichi                               -               16%              21%
NV Organon                            -               14%              15%
Bayer                                 -                -               13%
Bristol-Myers Squibb                  -                 -              13%
Berlex                               42%              19%              11%
    


11.    Employee Tax-Deferred Savings Plan

The Company maintains a 401(k) defined contribution plan (the "Plan") covering
all full time employees.  Employees are eligible to participate on the first day
of the month following their date of hire.  The Plan provides for voluntary
employee contributions from 1% to 20% of annual compensation, subject to a
maximum limit allowed by Internal Revenue Service guidelines.  Matching
contributions in either cash or Company stock may be made at the discretion of
the Company.  Employer contributions vest to participants at a rate of  33 1/3%
per year of service, provided that after three years of service all past and
subsequent employer contributions are 100% vested.  $216 of contributions were
charged to operations for the year ended December 31, 1997.

12.  Commitments
    
On July 16, 1993, the Company entered into a license agreement with the Trustees
of Columbia University and Cold Spring Harbor Laboratory. The agreement grants
to the Company an exclusive, worldwide license to certain technology for making
and using combinatorial chemical libraries. The agreement includes annual
license fees and certain royalties to be made by the Company based on Net Sales
of products developed by the Company as well as a percentage of Other Payments
(as defined in each respective agreement) received by the Company. In October
1995, the Company amended its license agreement with the Trustees of Columbia
University and Cold Spring Harbor Laboratories. In connection with this
amendment, the Company issued warrants to purchase 100,000 shares of common
stock at $10.00 per share, exercisable through October 5, 2000 or earlier as
defined in the warrants. During the years ended December 31, 1995, 1996, and
1997 the Company paid royalties and license fees to Columbia University of $419,
$590, and $500 respectively.
     
In addition, the Company had commitments for construction and equipment of
approximately $172 at December 31, 1997.


                                      F-15
<PAGE>
 
                              Pharmacopeia, Inc.

                         Notes to Financial Statements
            (Dollars in thousands, except share and per share data)
                               December 31, 1997


13. Subsequent Event

On February 4, 1998, the Company and Molecular Simulations Incorporated ("MSI")
announced the execution of a definitive merger agreement under which the Company
will acquire MSI in a tax-free, stock-for-stock transaction to be accounted for
on a pooling basis. The Company will acquire all of the outstanding stock of MSI
and will assume the outstanding MSI options, which will then be exercisable for
shares of the Company's Common Stock. MSI is a provider of molecular modeling
and simulation software. MSI designs, develops, markets and supports software
that facilitates the discovery and development of new products and processes in
the pharmaceutical, biotechnology, chemical, petrochemical and materials
industries. As of December 31, 1997 MSI had total assets of $46,500 and for the
year ended December 31, 1997 MSI had total revenue of $56,700 and net income of
$5,400.


                                     F-16
<PAGE>
 
                              Pharmacopeia, Inc.

                            Report on Form 10-K for
                        the year ended December 31, 1997

                               INDEX TO EXHIBITS

<TABLE>     
<CAPTION> 
 
  Exhibit                                 Exhibit Name                                   Sequentially
  Number                                                                                 Numbered Page
<C>         <S>                                                                          <C> 

10.34       Collaboration and License Agreement between the 
            Company and Bristol-Myers Squibb Company dated 
            November 26, 1997

23.1        Consent of Ernst & Young LLP

</TABLE>