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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

(Mark One)

   /X/   Annual Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934

                     FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

   / /   Transition report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934 for the transition period from _________ to
         __________.

                         Commission File Number: 0-27188

                       PHARMACOPEIA, INC. AND SUBSIDIARIES
             (Exact name of Registrant as specified in its charter)


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


                    CN 5350, PRINCETON, NEW JERSEY 08543-5350
              (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 $516,730,156 based on the last sale price of Common Stock
reported on The Nasdaq National Market on January 31, 2000. 6,746,737 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 February 29, 2000, the number of outstanding shares of the Registrant's
Common Stock was 20,715,365.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Certain information required by Part III of Form 10-K is incorporated
by reference from the Registrant's Proxy Statement for the Annual Stockholders
Meeting to be held May 3, 2000 (the "Proxy Statement), which was filed with the
Securities and Exchange Commission on March 27, 2000.

===============================================================================


<PAGE>


                       PHARMACOPEIA, INC. AND SUBSIDIARIES

                                 1999 FORM 10-K

                                TABLE OF CONTENTS

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                                                                                                                PAGE
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<S>                                                                                                             <C>
PART I...........................................................................................................

           ITEM 1.      BUSINESS................................................................................. 1
           ITEM 2.      PROPERTIES...............................................................................22
           ITEM 3.      LEGAL PROCEEDINGS........................................................................22
           ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................22

PART II    ......................................................................................................

           ITEM 5.      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................22
           ITEM 6.      SELECTED FINANCIAL DATA..................................................................23
           ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                        CONDITION AND RESULTS OF OPERATIONS......................................................23
           ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                        RISK.....................................................................................29
           ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............................................30
           ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                        ACCOUNTING AND FINANCIAL DISCLOSURE......................................................45

PART III   ......................................................................................................

           ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................................45
           ITEM 11.     EXECUTIVE COMPENSATION...................................................................45
           ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                        MANAGEMENT...............................................................................45
           ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................................46

PART IV    ......................................................................................................

           ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
           FORM 8-K..............................................................................................46

SIGNATURES.......................................................................................................51

</TABLE>


<PAGE>


                                     PART I

ITEM 1.  BUSINESS

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


      In 1999, Pharmacopeia developed and began implementing a strategic plan
that emphasizes the sale of products and services that enable pharmaceutical,
biotechnology and broader chemical companies to discover drugs and develop
chemicals more quickly and less expensively. This new strategic plan eliminates
continued investment in the self-funded drug discovery projects that
Pharmacopeia had been working on since 1996. The intent of this new strategic
plan is to generate sustainable near term and long term revenue and profit
growth while still remaining eligible for certain milestones and royalties based
on past, current, and expected future drug discovery services.

      When used anywhere in this Report, the words "expects", "believes",
"anticipates", "estimates" and similar expressions are intended to identify
forward-looking statements. The Company has based these forward-looking
statements on its current expectations about future events. Such statements are
subject to risks and uncertainties including, but not limited to, the successful
implementation of the Company's new strategic plan, the acceptance of new
products, the obsolescence of existing products, the resolution of existing and
potential future patent issues, additional competition, changes in economic
conditions, and other risks described in documents the Company has filed with
the Securities and Exchange Commission. All forward-looking statements in this
report are qualified entirely by the cautionary statements included in this
report and such filings. These risks and uncertainties could cause actual
results to differ materially from results expressed or implied by
forward-looking statements contained in this report. These forward-looking
statements speak only as of the date of this Report. The Company disclaims any
undertaking to publicly update or revise any forward-looking statements
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.

      Following are more detailed descriptions of each of the Company's two
business segments.

                         PHARMACOPEIA'S SOFTWARE SEGMENT

      For companies in the pharmaceutical, biotechnology, chemical,
petrochemical and materials industries, innovation in the discovery and
development of new products and the rapid, cost-effective commercialization of
these products is crucial to success. To keep pace with scientific advancement,
companies in these industries invest considerable resources in technologies
designed to help discover, develop and commercialize new products and processes.
The pace of technical progress has resulted in the increased use of computation
to simulate processes, predict the outcome of product designs and decrease the
time to market.

      Many factors that affect a product's performance, including activity,
bioavailability, toxicity, shelf life and environmental impact, are governed by
fundamental, atomic level properties such as molecular shape, structure and
reactivity. Molecular simulation was developed to predict these molecular
properties and help researchers discover new products, sharpen the focus of
experimental activities and improve ultimate product performance. Through its
wholly owned subsidiary Molecular Simulations Inc. ("MSI"), Pharmacopeia is a
leading provider of molecular modeling, simulation, and information management
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.


<PAGE>


Using MSI's software products, researchers are able to increase the speed and
efficiency of the research and development cycle, thereby reducing product
development costs and shortening the time to market for new product
introductions and process improvements. Customers of MSI's software include
leading commercial, governmental and academic organizations. Many of the largest
pharmaceutical, biotechnology, chemical, petroleum and semiconductor companies
worldwide use MSI software.

      MSI has a broad product suite consisting of over 100 application modules
based on proprietary technologies that employ fundamental scientific principles,
advanced computer visualization, molecular modeling techniques and computational
chemistry. MSI's application products allow scientists to perform molecular
level computations of chemical, biological and physical properties, to simulate,
visualize and analyze chemical and biological systems, and to communicate the
results to other scientists. MSI's products are based upon advanced software
architectures that facilitate the development, integration and deployment of new
software products. MSI also offers open access to its core software development
environment, within which customers and third-party licensees can develop,
integrate and distribute their own software applications for computational
chemistry, biology and materials research. MSI markets its products and services
worldwide, principally through its direct sales force based in the United
States, Europe and Asia, excluding Japan, and through an exclusive distributor
in Japan.

      Pharmacopeia plans to continue enhancing its MSI product and service
offerings for simulation specialists, who are the principal users of MSI
products. In addition, Pharmacopeia plans to broaden significantly its user
base of MSI software to include the much larger population of
experimentalists--laboratory scientists and engineers who engage in
experimental activities. MSI has packaged its core simulation technologies
into solutions-oriented applications known as computational instruments.
These products are easier to use than traditional simulation products,
perform specific functions analogous to typical laboratory procedures, and
can be accessed at the computer desktop. MSI's WebLab-Registered Trademark-
family of life sciences products consists of computational instruments
accessible over corporate Intranets. MSI's new Materials Studio-TM- product
line provides high quality simulation on the personal computer (PC) through a
standard user interface running under Microsoft Windows. These instruments
create a "virtual laboratory" for use on desktop computers by a broad range
of scientists to perform computational chemistry, materials research, and
biology experiments.

SOFTWARE SEGMENT BUSINESS STRATEGY

      Through MSI, Pharmacopeia's objective is to strengthen its position as a
leading provider of molecular simulation products and services worldwide by
providing a set of productivity tools that are integral to the research and
development activities of its customers. The key elements of this strategy to
achieve this objective include:

      EXPAND USER BASE. Pharmacopeia plans to increase sales to its key software
      accounts and pursue new software customers within existing markets. In
      addition, software will be targeted not only at a growing number of
      simulation specialists, but also at the much larger group of
      experimentalists (scientists and engineers). Pharmacopeia believes it can
      leverage its strong relationships with simulation specialists to help
      promote use of MSI products by other scientists working in the same
      organization as the specialists.

      LEVERAGE CORE TECHNOLOGY AND MAINTAIN TECHNOLOGY LEADERSHIP. Pharmacopeia
      believes that the core MSI technology has helped position the Company at
      the forefront of simulation technology providers. Pharmacopeia intends to
      continue to make significant investments in research and development in
      order to improve the efficiency and predictive accuracy of the MSI core
      technology and to maintain its technology leadership. Further, the
      strategy for MSI's desktop products is to create a "virtual laboratory"
      that allows access to MSI's validated core technology from desktop
      computers operating within corporate Intranets.

      BECOME THE INDUSTRY STANDARD. MSI has created a development product, the
      Cerius2 Software Developer's Kit ("Cerius2 SDK"), that allows customers
      and third-party licensees to use MSI's open architecture to create their
      own applications for internal use or for distribution. MSI is extending
      this development product to include the WebLab SDK for applications
      development within MSI's WebLab environment. The open architecture
      facilitates communication within and between companies and institutions
      that use MSI's products. MSI intends


                                     - 2 -
<PAGE>


      to continue to promote its development environment as the industry
      standard for use and development of molecular simulation and related
      applications.

      ENHANCE TECHNOLOGY POSITION. MSI strengthens its scientific and technical
      expertise through acquisitions and consortia, and through joint
      development projects with leading academic, governmental and industrial
      researchers. MSI will continue to pursue acquisitions and strategic
      relationships with third parties in order to provide it with early access
      to new technologies, facilitate market acceptance of new products and
      reduce internal research and development investment.

SOFTWARE SEGMENT SCIENCE AND TECHNOLOGY

      MSI's core technology delivers predictive models of chemical, biological
and materials phenomena within MSI's open environment. This technology simulates
interatomic and intermolecular interactions, and a wide range of corresponding
properties, including molecular structure, activity, diversity, stability,
morphology, solubility, adhesion, adsorption, diffusion, color, analytical
spectra, and optical, electrical and mechanical properties. There are four
primary classes of molecular simulation methods, all of which are found in MSI
products:

      QUANTUM METHODS. Quantum methods, the most fundamental of MSI's methods,
compute interatomic interactions at the level of electrons and nuclei. These
methods make the least number of assumptions about the nature of relevant
interactions and require little or no parameterization. These methods are
capable of simulating which combinations of elements are stable, how chemical
reactions occur, and other electronic structural properties such as reactivity,
color and magnetism. These methods are the most computationally demanding and
are applied to small, carefully selected models.

      MOLECULAR METHODS. Molecular methods probe molecular conformations and the
interactions between molecules based on simplified analytical expressions. These
methods include automated procedures for probing how a drug molecule binds to an
active site, what conformations a polymer chain may adopt, and what similarities
exist between a new amino acid sequence and protein sequences for which tertiary
structures are known. They also include tools used to determine structure based
on x-ray diffraction or nuclear magnetic resonance data.

      CORRELATIVE METHODS. Correlative methods identify interrelationships
between structure and properties that can be used predictively. In many cases,
macroscopic properties are known to be determined by molecular-level behavior,
but the analytical details of these relationships are not known. The
quantitative structure activity relationship methods ("QSAR") provide a
framework in which to correlate molecular attributes and macroscopic properties.
The framework can predict, to a reasonable degree of confidence, the properties
of molecules that are comparable with a control set for which properties have
been measured.

       STATISTICAL METHODS. Statistical methods are needed when many different
configurations must be sampled or when macroscopic properties reflect an
averaging over many different states. These include methods for modeling complex
polymer structures, computing thermodynamic parameters and conducting
statistical analyses of real and virtual molecular libraries.

      OPEN ARCHITECTURE. MSI has pioneered an open molecular simulation software
architecture, Cerius2, which includes an efficient data model; libraries of
mathematical, chemical and graphical utilities; and a client/server data and
communications management layer. Cerius2, a modular, object-oriented system, is
written principally in C++ and uses industry-standard protocols such as MOTIF
and TCP/IP. This modular architecture is designed to provide streamlined access
to the various methods, allowing their use in discrete, combined and packaged
ways. The Cerius2 application programming interfaces ("APIs") are used by MSI's
internal developers to create products. The same APIs are made available through
the Cerius2 SDK to customers and third-party licensees. Using the Cerius2 open
architecture and its validated methods, MSI has created its computational
instruments. In each of these computational instruments, a particular
application of one or more methods is precalibrated, parameters and protocols
are predefined and results are delivered in an easily interpretable fashion.
These computational instruments are designed for and used by experimentalists,
such as synthetic, analytical and formulation chemists.


                                     - 3 -
<PAGE>


      WebLab is a Web-enabling extension of the Cerius2 open architecture, and
is the medium by which MSI can deliver desktop products for life sciences
experimentalists. Accessed from a Web browser, these products make use of both
the Cerius2 architecture and MSI's methods running on a server machine. The
server is a UNIX workstation accessed through a corporate Intranet. The client
browser application is created using industry-standard languages and protocols.
The WebLab Viewer, a helper application, provides improved performance in the
display and manipulation of molecular structures. Versions of the WebLab Viewer
have been released for PCs running under Windows 95, Windows 98 and Windows NT.

      MSI's Cerius2 architecture, graphics and interface subsystems are
supported on Silicon Graphics and IBM UNIX workstations. Certain of the methods
are also supported on vector supercomputers and on shared and distributed memory
parallel architectures. Existing and planned WebLab products will run on major
platforms that support standard browser technology.

SOFTWARE SEGMENT PRODUCTS AND SERVICES

      Through MSI, Pharmacopeia offers a broad suite of software products and
services designed to enable its customers to shorten product lead times, reduce
research and development costs, improve product and process performance, collect
and compute otherwise inaccessible information, and communicate more effectively
both inside and outside an organization. MSI products and services incorporate
the following attributes:

      VALIDATED CORE TECHNOLOGY. The core technology underlying MSI products
      consists of a number of fundamental, scientifically proven methods for
      conducting predictive computer modeling of chemical, biological and
      materials phenomena at the atomic and molecular level. This core
      technology is validated by over a decade of industrial use and by the
      publication of hundreds of presentations, papers and articles citing
      applications of this technology.

      BROAD APPLICABILITY. The validated core technology underlying MSI products
      enables Pharmacopeia to offer a wide range of products and services to a
      variety of industries, including the pharmaceutical, biotechnology,
      chemical, petrochemical, electronics, food, paper, agrochemical,
      aerospace, plastics, paint and natural gas industries. MSI products
      simulate and analyze both small molecules that may be candidates for new
      drugs and more complex molecular structures such as proteins or the
      polymers found in advanced materials. These products are used in research
      applications as diverse as drug discovery, protein design and structure
      determination, crystallization and formulation, polymer property
      prediction, catalysis and development of electronic materials.

      OPEN ARCHITECTURE. MSI products are based upon an open architecture that
      allows customers, collaborators and third parties to develop software
      applications in the same development environment used internally by MSI.
      MSI's core molecular modeling functions are included in this open
      environment, which permits developers to focus on their particular
      scientific interests and increase the power and utility of their programs
      by integrating them with MSI's products.

      EASE OF USE. MSI-developed software products are integrated, modular,
      focused on specific research areas or techniques, and accessible by an
      intuitive graphical user interface ("GUI"). This GUI enables
      experimentalists to use molecular simulation in a manner consistent with
      established analytical and laboratory techniques, in a user-friendly
      computational environment.

      INCREASED ACCESS. MSI is developing a desktop product line that targets a
      broader group of users, including laboratory scientists and engineers. Web
      browsers and software products running in the Microsoft Windows
      environment are used increasingly by scientific researchers on desktop
      computers to search for, analyze and communicate scientific data,
      particularly within corporate Intranets. MSI's desktop products use
      familiar technology and are built upon MSI's open architecture and
      validated core technology.


                                     - 4 -
<PAGE>


      Based upon the science, technology and attributes described above,
Pharmacopeia provides a broad suite of MSI software products used throughout the
research and development cycle. Pharmacopeia believes that offering a
"single-shop," integrated molecular simulation solution is a significant benefit
to its customers. The MSI product family consists of over 100 application
modules.

      MSI methods products are powerful, full-featured simulation engines used
primarily by simulation specialists. MSI application packages are targeted,
solutions-oriented modules usually built upon MSI methods. These application
packages are also used by simulation specialists and, in the case of
computational instruments, by experimentalists. The Cerius2 Visualizer has a
flexible card-stack layout and is designed to be user-friendly for the
experimentalist as well as the simulations specialist. MSI's WebLab products are
simple-to-use, desktop products designed for specific research tasks of
experimental chemists, biologists and engineers. MSI methods products,
applications packages, graphical modeling systems and WebLab Viewer are used
throughout the pharmaceutical, biotechnology, chemical, petrochemical and
materials industries.

      Individual MSI software modules are priced from $2,500 to $75,000 for an
industrial customer on a UNIX workstation with a single processor. A typical
commercial product installation for a new user in one application area costs
approximately $50,000. Larger installations might include software modules for
several different application areas and for multiple processors or workstations.
WebLab products have individual user prices of about $1,000 per year per applet;
the WebLab ViewerLite is provided at no charge on a compact disc or may be
downloaded from MSI's Web site.

CUSTOMER APPLICATIONS

      MSI products are used in a variety of research areas within a number of
industries. The principal research and development areas in which MSI products
are used include the following:

      PROTEIN DESIGN. The pharmaceutical, biotechnology, cosmetics and
agrochemical industries use MSI software to understand the relationship between
protein structure and function and to analyze, modify and tailor proteins and
peptides. MSI protein modeling products integrate capabilities in structure
generation, molecular simulation, protein database search and analysis,
molecular visualization and presentation. Products used in protein design
include Cerius2 and Insight II modules, QUANTA, Discover and CHARMm.

       MACROMOLECULAR STRUCTURE DETERMINATION. Protein structure determination
is a prerequisite for a structure-based route to drug discovery in the
pharmaceutical and biotechnology industries. MSI provides complete software
systems that streamline the process of protein structure determination from
X-ray and NMR data. These systems include products for data processing and
reduction, rapid model building, structure refinement, model evaluation,
analysis and graphical display. Products used in protein structure determination
include X-PLOR, Insight II application modules, QUANTA, Discover, CHARMm and
Felix.

      RATIONAL DRUG DESIGN. MSI rational drug design products are used in the
pharmaceutical and biotechnology industries. These products allow the design and
optimization of small, organic therapeutics, based on a protein active site
model or on activity data for a set of compounds. Related techniques are used to
design and assess combinatorial molecular libraries. Products used in drug
design include Catalyst, Cerius2 and Insight II application modules, QSAR and
Discover.

      POLYMER MODELING. Polymer modeling products are used by researchers in the
chemical, plastics, rubber, adhesives, petrochemical, aerospace and automotive
industrial sectors. Polymer researchers seek to analyze and predict polymer
properties and establish the link between these properties and the
molecular-level structure of the material. MSI polymer software products allow
these researchers to construct and characterize models of polymers and predict
key properties, such as blend compatibility, mechanical behavior, cohesion and
adhesion to surfaces. MSI polymer products include Cerius2, Materials Studio,
and Insight II application modules, QSAR and Discover.

       CRYSTALLIZATION. Crystallization phenomena are important to development
and formulation departments in companies in the pharmaceutical, paint and
pigment, petrochemical and chemical industrial sectors. MSI offers


                                     - 5 -
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products to predict crystal structure, polymorphism and crystal shapes, and to
design additives to control or inhibit crystal growth. MSI crystallization
products include Cerius2 and Insight II application modules, and the Polymorph
Predictor.

      ELECTRONICS RESEARCH. The trend toward microminiaturization of electronic
devices has created a need for improved processes and materials. MSI software
products are used by semiconductor and electronics companies to understand
surface chemistry, defects, thin oxide layers, magnetic properties and the
performance of new packaging materials. These products include Cerius2 and
Insight II application modules, Discover, DMol and CASTEP.

      CHEMICAL REACTIONS. Understanding, controlling and improving chemical
conversions is a key research and development objective of petrochemical,
chemical and pharmaceutical companies. MSI offers a range of quantum methods
products for simulating chemical reactivity, conversions and thermochemical
data, including Cerius2 and Insight II application modules, DMol and CASTEP.

      CATALYSIS AND SORPTION. MSI's catalysis and sorption products are used by
companies in the chemical, petrochemical, natural gas and plastics industries
and by catalyst manufacturers to characterize catalysts and sorbent materials
and to simulate thermodynamic and reactivity data. MSI products are used to
characterize and design metallocene catalysts, zeolites and other molecular
sieves, and metal oxides. MSI catalysis and sorption products include Cerius2
and Insight II application modules, Discover, DMol and CASTEP.

      ANALYTICAL SIMULATION. MSI analytical products are used by companies in
each of the markets served by MSI to display and interpret diffraction, electron
microscopy, infrared and other analytical data. MSI's analytical products
include Cerius2, Materials Studio, and Insight II application modules, and
Felix.

      FORMULATIONS. Companies use MSI's formulations products to help match
formulated products to customers need in less time at lower cost. Formulation is
critical to the development of drugs, foods, cosmetics, personal care products,
detergents, plastics, and specialty chemicals. MSI serves formulators through
the FAST informatics software and the systems integration services of the
Formulations Consortium.

      Pharmacopeia is working on new customer applications in the areas of
functional genomics and predictors of bioavailability.

OTHER SOFTWARE PRODUCTS AND SERVICES

      INTEGRATION PRODUCTS. The Cerius2 SDK offers customers and third-party
licensees a standard simulation environment in which to develop and integrate
their own applications. The Cerius2 SDK provides an external developer with
access to Cerius2 APIs used by MSI's own internal development staff. With the
Cerius2 SDK a developer can employ any of the functions, subsystems or methods
embodied in or accessible through Cerius2 to integrate an external program or to
create additional application functionality, with a corresponding Cerius2 GUI.
MSI is extending Cerius2 SDK to include the WebLab SDK for applications
development within MSI's WebLab environment.

      DATABASES. Databases are a close adjunct to MSI software products. MSI
resells a number of scientific databases for use with its product modules,
including Derwent's World Drug Index, MDL Information Systems' Available
Chemical Directory, and the Brookhaven Protein Databank.

      ACCELERATED RESEARCH SERVICES. Through MSI, Pharmacopeia offers
consulting, contract research custom development and systems integration
services. MSI's accelerated research services allow its customers to benefit
from MSI's facilities and the expertise of MSI's staff in outsourcing these
types of specialist functions.

      COMPUTER HARDWARE. As a convenience to its customers, MSI acts as a
value-added reseller of computer hardware in order to deliver a complete
molecular simulation system. MSI purchases substantially all of its hardware for
resale from Silicon Graphics, Inc. ("SGI") or from one of SGI's authorized
distributors. MSI's


                                     - 6 -
<PAGE>


agreement with SGI obligates MSI to meet an annual minimum purchase volume.
Under the agreement, SGI provides installation, support and maintenance with
respect to the computer hardware.

SOFTWARE SEGMENT CUSTOMERS

      MSI's customer base consists of leading commercial, governmental and
academic organizations. No software customer accounted for more than 10% of the
Company's software revenues during the fiscal year ended December 31, 1999.
However, one customer who purchases both software and drug discovery services
from the Company accounted for 12% of fiscal year 1999 consolidated revenues.

      INDUSTRIAL CUSTOMERS. MSI industrial customers include many of the largest
pharmaceutical, biotechnology, chemical, petroleum and semiconductor companies
worldwide. In each of the past three fiscal years, a significant portion of
MSI's total revenue has been derived from pharmaceutical, biotechnology and
chemical companies.

      GOVERNMENTAL CUSTOMERS. Many governmental institutions in the United
States, Canada, Europe and the Asia/Pacific region use MSI's products.

      ACADEMIC CUSTOMERS. Many universities in the United States, Europe and the
Asia/Pacific region use MSI products. This use historically has been for
purposes of academic research, but MSI believes its products increasingly may be
used as a part of formal university teaching curricula. Sales to academic
customers are discounted by about 85%.

SOFTWARE SEGMENT STRATEGIC AND ACADEMIC ALLIANCES

      MSI has entered into a number of strategic alliances relating to product
development, product distribution and joint marketing. MSI plans to continue to
cultivate relationships with academic, governmental and commercial research
organizations for purposes of identifying and licensing new technology to use in
product development. In addition, MSI plans to maintain and expand its alliances
focused on compatibility of MSI's products with databases and database
management systems, other computational chemistry and molecular simulation
products, and products in related markets such as laboratory instrumentation.
MSI also intends to continue to enter into porting and joint marketing
arrangements with hardware vendors on whose systems MSI's products operate.

SOFTWARE SEGMENT CONSORTIA

      Since 1986, MSI has formed a number of consortia with outside parties,
commonly for purposes of market expansion. MSI believes the formation and
management of these consortia helps MSI focus on topical industrial needs and
establishes the consortia members as an initial customer base for its products.
MSI believes its consortia help MSI establish valuable working relationships
with leaders in its target markets.

      These consortia bring together groups of industrial researchers, academic
experts and MSI scientists that focus on developing, validating and applying
simulation to the target industrial research area. Typically, MSI consortia
participants provide funds and a liaison to MSI. Each consortium generally has a
three-year term and has a defined set of objectives and milestones that are
updated and re-prioritized annually by the consortium's members. Some of the
consortia have been extended beyond their initial terms in order to continue the
benefits of the collaborative activities.

      MSI has 5 active consortia in the following research areas: Polymers,
Catalysis, Combinatorial Chemistry, Formulations, and Pharmaceutical
Development. Consortia agreements are generally one to three years in length and
require the consortium participant to pay MSI an annual fee. In return,
consortium members obtain rights to participate in meetings and non-exclusive
licenses to use software products developed as a result of the consortium
activities. Members also get to vote on product development priorities.


                                     - 7 -
<PAGE>


SOFTWARE SEGMENT SALES AND MARKETING

      MSI markets its products and services worldwide. In the United States,
Europe, and Asia, excluding Japan, MSI has direct sales forces, consisting of
field sales and telesales representatives, some of which focus on the life
science market and some of which focus on the materials science market. In
Japan, MSI distributes its products and services through an exclusive
distributor.

      NORTH AND SOUTH AMERICA; EUROPE; ASIA, EXCLUDING JAPAN. MSI employs direct
sales representatives and telesales representatives to market and sell MSI's
products and services. Certain of the telesales representatives focus
exclusively on sales to academic researchers. The direct sales representatives
and remaining telesales representatives work in teams selling to commercial and
governmental accounts in assigned geographic territories and focus on either the
life science market or the materials sciences market. The direct sales
representatives typically focus on larger accounts and transactions and work
closely with MSI's pre-sales support scientists in order to demonstrate MSI's
products and their applicability to various research and development efforts.

      JAPAN. Prior to March 1999, MSI products in Asia were distributed through
a joint venture owned 50% by MSI and 50% by Teijin, a Japan-based chemical and
pharmaceutical company. The joint venture, called TMSI, contracted with four
sub-distributors in Japan. In March 1999, Pharmacopeia purchased Teijin's
distribution rights to MSI software in Japan and Teijin's 50% interest in TMSI.
Pharmacopeia now owns 100% of TMSI, which was renamed Molecular Simulations Inc.
K.K.

      Also in March 1999, Pharmacopeia named Ryoka Systems Inc. ("Ryoka"), a
wholly owned subsidiary of Mitsubishi Chemical Co., Ltd., as the exclusive
distributor of MSI software products in Japan. Under the terms of this
agreement, which took effect April 1, 1999, Ryoka now acts as the exclusive
distributor of software products to MSI customers in Japan and has committed to
certain sales order levels through March 2001.

      In support of its sales activities, MSI participates in industry trade
shows, publishes its own magazine, places advertisements in other industry
publications, publishes articles in industrial and scientific publications,
conducts direct mail campaigns, sponsors industry conferences and seminars, and
maintains a World Wide Web home page that contains information about MSI and its
product and service offerings.

SOFTWARE SEGMENT PRODUCT DEVELOPMENT

      Development of MSI software is focused on expanding its simulation
software product line, designing enhancements to MSI's core technology and
integrating existing and new products into MSI's principal software
architectures. MSI intends to offer regular updates to its products and to
expand its existing product suite. A key component of MSI's product development
activities is the extension of its core UNIX-based software architecture to
accommodate access to MSI's products from desktop computers.

      MSI licenses products or otherwise has acquired products from
corporate, governmental and academic institutions including BASF AG,
Unilever, Bristol-Myers Squibb, DuPont, California Institute of Technology,
the University of Cambridge and Harvard University. These arrangements
sometimes involve joint development efforts and frequently require the
payment of royalties by MSI. The development and royalty obligations, scope
of distribution rights, duration and other terms of these arrangements vary
depending on the product, the market, resource requirements, the other
parties with which MSI contracts and other factors. MSI has also developed
products with funding and direction from customers through MSI's consortia
activities. See "Software Segment Consortia." MSI intends to continue to
license or otherwise acquire technology or products from third parties and to
develop products as part of its consortia arrangements with customers.

SOFTWARE SEGMENT CUSTOMER SERVICES AND SUPPORT

      MSI is committed to providing customers with superior support including
telephone, electronic mail, fax and Internet-based technical support services;
training; user group conferences; and targeted contract and consulting


                                     - 8 -
<PAGE>


services involving application of MSI's technology and scientific expertise to
particular research needs of customers. MSI believes that a high level of
customer service, support and training is critical to the adoption and
successful utilization of its products.

      Purchases of multi-year licenses to use MSI's software products include
one year of maintenance services, consisting of technical support and software
upgrades. Thereafter, MSI offers renewals of maintenance services on an annual
basis for an annual fee. Annual licenses to use MSI's software products
generally include all maintenance services. Most of MSI's customers contract for
maintenance and support services. These give customers access to new releases,
technical notes, documentation addenda and other support required to utilize
MSI's products more effectively, including access to MSI's technical and
scientific support personnel during extended business hours. Through its
distribution channels, MSI offers training conducted by staff knowledgeable in
both the theory and application of molecular simulation. Technical newsletters
and bulletins and advance notification about future software releases are sent
to customers to keep them informed and to help them with resource allocation and
scheduling. To maintain an ongoing understanding of customer requirements, MSI
sponsors scientific symposia and user group meetings throughout the year.

SOFTWARE SEGMENT COMPETITORS

      The market for MSI's products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. MSI's competitors offer a variety of
products and services to address this market. MSI believes that the principal
competitive factors in this market are product quality, flexibility,
ease-of-use, scientific validation and performance, functionality and features,
open architecture, quality of support and service, reputation and price.
Competition currently comes from the following principal sources: other
molecular simulation software packages and software for analysis of chemical and
biological data; desktop software applications, including chemical drawing,
molecular modeling and analytical data simulation applications; consulting and
outsourcing services; other types of simulation software provided to engineers;
and firms supplying databases, such as chemical or genomic information
databases, database management systems and information technology. In addition,
certain of MSI's licenses grant the right to sublicense MSI's software. As a
result, MSI's customers and third-party licensees could develop specific
simulation applications using the Cerius2 SDK and compete with MSI by
distributing such programs to potential customers of MSI. Customers or licensees
could also develop their own simulation technology and cease using MSI's
products and services. Further, they may choose to sublicense such technology.

      Certain of MSI's competitors and potential competitors have longer
operating histories than MSI and have greater financial, technical, marketing
and other resources. Further, many of MSI's competitors offer products and
services directed at more specific markets than those targeted by MSI, enabling
these competitors to focus a greater proportion of their efforts on such
markets. Certain offerings that are competitive with MSI's products and services
are developed and made available by governmental organizations and academic
institutions, and these entities may be able to devote substantial resources to
product development and also offer their products to users for little or no
charge. There can be no assurance that MSI's current or potential competitors
will not develop products, services or technologies that are comparable to,
superior to, or render obsolete, the products, services and technologies offered
by MSI. There can be no assurance that MSI's competitors will not adapt more
quickly than MSI to technological advances and customer demands, thereby
increasing such competitors' market share relative to that of MSI. Any material
decrease in demand for MSI's technologies or services may have a material
adverse effect on the business, financial condition and results of operations of
MSI.

SOFTWARE SEGMENT SOURCES OF SUPPLY

      MSI purchases substantially all hardware products that it resells to its
licensees from a single vendor, or such vendor's distributors. Management
believes that other vendors could be identified who could provide MSI and its
licensees with similar hardware products at comparable terms. However, any
disruption of supply could cause a temporary adverse effect in MSI's revenues
during any period requiring porting of MSI software products to alternative
hardware platforms or negotiation of alternative supply and distribution
agreements.


                                     - 9 -
<PAGE>


SOFTWARE SEGMENT INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

      MSI relies primarily on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and contractual provisions to protect
its proprietary rights. MSI also has two United States patents. MSI believes
that factors such as the technological and creative skills of its personnel, new
product development, frequent product enhancements, name recognition and
reliable product maintenance are essential to establishing and maintaining a
technological leadership position. MSI seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. Further, there can be no assurance that
MSI's patents will offer any protection or that they will not be challenged,
invalidated or circumvented. Furthermore, there can be no assurance that others
will not develop technologies that are similar or superior to MSI's technology.
Despite MSI's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of MSI's products or to obtain and use information
that MSI regards as proprietary. In limited instances, MSI has licensed source
codes of certain products to customers or collaborators. For these reasons,
policing unauthorized use of MSI's products may be difficult. In addition, the
laws of some foreign countries do not protect proprietary rights as fully as do
the laws of the United States.

      There can be no assurance that MSI's means of protecting its proprietary
rights in the United States or abroad will be adequate. There can be no
assurance that third parties will not claim infringement by MSI of their
intellectual property rights. From time to time MSI receives letters from third
parties claiming or suggesting that its products may infringe patents or other
intellectual property rights. MSI has investigated these matters and believes
that they are immaterial to the operations of MSI. There can be no assurance,
however, that MSI's products do not infringe upon the patent or other
intellectual property rights of third parties, that MSI will not be required to
seek licenses for or otherwise acquire rights to technology as a result of
claims of infringement or that other companies will not bring infringement suits
against MSI. MSI expects in general that simulation software product developers
will increasingly be subject to infringement claims as the number of products
and competitors in MSI's industry segments grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time consuming to defend, result in costly litigation,
divert management's attention and resources, cause product shipment delays or
require MSI to enter into royalty or licensing agreements.

      Such royalty or licensing agreements, if required, may not be available on
terms acceptable to MSI, if at all. In the event of a successful claim of
product infringement against MSI, the failure or inability of MSI to license or
design around the infringed technology would have a material adverse effect on
MSI's business, financial condition and results of operations.


                 PHARMACOPEIA'S DRUG DISCOVERY SERVICES SEGMENT

      Since its inception in March 1993, Pharmacopeia's Drug Discovery Services
segment has primarily focused its research efforts on developing novel,
proprietary science and technologies for accelerating the pace of drug discovery
for its pharmaceutical and biotechnology customers. Pharmacopeia's Drug
Discovery Services segment combines a proprietary combinatorial chemistry
technology, high-throughput screening and the use of modeling, simulation and
information management software to address key challenges in the drug discovery
process.

      One such challenge is the generation of and evaluation of large numbers
of diverse and readily identifiable small molecule compounds to find new,
orally active drugs. Pharmacopeia's encoding technology, Encoded
Combinatorial Libraries on Polymeric Support, or ECLiPS-TM-, enables
Pharmacopeia to generate hundreds of thousands of small molecule compounds at
a fraction of the cost of traditional chemical synthesis methods.
Pharmacopeia uses "Direct Divide" combinatorial chemistry to build
collections, or libraries, of 10,000 to 500,000 or more small molecule
compounds by performing only 50 to 200 individual chemical reactions.
Pharmacopeia's ECLiPS technology offers substantial productivity improvements
as compared to the 10,000 to 500,000 or more reactions that would be required
to prepare similarly sized chemical libraries by synthesizing each compound
individually. The ECLiPS productivity advantage results from the synthesis of
compounds on tiny plastic beads in large mixtures. After each solid phase
synthesis step, proprietary tag sets are attached to the beads to indicate the

                                     - 10 -
<PAGE>


chemical building block and reaction conditions used in that step. These stable,
easily detectable tag sets enable the rapid identification from the mixture of
any compound that is active in a biological screening assay. This tagging
technology is licensed exclusively from Columbia University ("Columbia") and
Cold Spring Harbor Laboratory ("Cold Spring").

      Another challenge addressed by Pharmacopeia's Drug Discovery science and
technologies is the ability to accurately and rapidly test chemical compounds
against biological targets. Pharmacopeia uses 96-well, 384-well, and 1,536-well
screening formats to identify compounds active against its partners' drug
discovery targets. Pharmacopeia's 384-well and 1,536-well formats offer
significant throughput improvements and cost reductions compared to the
industry-standard 96-well format.

      To assist in the modeling of potential drugs, the simulation of
interactions between chemicals and biological targets and the collection,
storage and use of the data generated from its drug discovery activities,
Pharmacopeia's Drug Discovery Services segment makes extensive use of MSI
software as well as software designed in-house by the Company's Drug Discovery
Services segment and purchased from other vendors.

      Pharmacopeia's Drug Discovery technology supports its pharmaceutical and
biotechnology customers in improving their drug discovery productivity.
Pharmacopeia's objective is to be among the industry leaders in the discovery
and optimization of novel drug candidates on behalf of its customers.
Pharmacopeia's commercialization strategy in the Drug Discovery Services segment
is to pursue collaborations with pharmaceutical and biotechnology companies.
Pursuant to collaborative agreements, Pharmacopeia leverages its multimillion
compound sample collection and abilities in high-throughput screening to perform
Lead Discovery and Lead Optimization Services for customers. Pharmacopeia's
technology strategy in the Drug Discovery Services segment is to enhance
productivity through cost reductions and increased throughput, to increase the
size and quality of its library compound collection and its high throughput
screening capabilities, and to build its knowledge base of the relationships
between chemical structures and biological targets for use in future drug
discovery programs.

      Focusing on Lead Discovery and Lead Optimization Services for drug
discovery, Pharmacopeia seeks customers to develop, manufacture, market and sell
resulting drugs. In 1999, Pharmacopeia initiated Lead Discovery Service
contracts with several pharmaceutical customers for collaborations using its
large collection of novel, small molecules and high-throughput screening
including N.V. Organon ("Organon"), Otsuka Pharmaceutical Factory ("Otsuka"),
Pharmacia & Upjohn Inc. ("Pharmacia Upjohn") and Roche Biosciences ("Roche") and
continued performing such services for Schering AG. In 1999, Pharmacopeia
performed Lead Optimization Services for Schering-Plough Ltd.
("Schering-Plough"), Bristol-Myers Squibb ("BMS"), Hoffmann-La Roche, Organon,
and Daiichi Pharmaceutical Co., Ltd. ("Daiichi").

DRUG DISCOVERY SERVICES BUSINESS STRATEGY

      Pharmacopeia's objective is to be an industry leader in the discovery and
optimization of novel drug candidates on an outsourced basis. Pharmacopeia seeks
to minimize its financing requirements and accelerate profitability by pursuing
drug discovery collaborations with multiple pharmaceutical and biotechnology
companies. Pharmacopeia does not currently plan to develop, manufacture and sell
its own pharmaceutical products. Pharmacopeia's business strategy exploits the
emerging trend in the pharmaceutical industry to outsource certain products and
services that can be more efficiently provided by third parties. Pharmacopeia's
commercialization and technology strategy has several components.

COMMERCIALIZATION STRATEGY

      Pharmacopeia's commercialization strategy is to provide lead compounds and
optimized lead compounds to multiple pharmaceutical and biotechnology customers.
Under these arrangements, Pharmacopeia's customers are responsible for the
clinical development and eventual manufacture and sale of any resulting drugs.
Generally, customers compensate Pharmacopeia through (i) funding or fees during
or upon completion of its services and (ii) milestone payments and royalties on
any drugs based on Pharmacopeia's technology and developed by


                                     - 11 -
<PAGE>


Pharmacopeia's customers. Each collaboration is tailored to the individual
customer's needs but is developed within two broad frameworks:

      LEAD DISCOVERY SERVICES - Pharmacopeia identifies compounds active against
collaborators' targets. In this type of program, Pharmacopeia utilizes its
multi-million compound sample collection and expertise in high-throughput and
ultra high-throughput screening.

      LEAD OPTIMIZATION SERVICES - Pharmacopeia performs the optimization of
lead compounds against collaborators' targets. In this type of program,
Pharmacopeia utilizes its broad base of chemistry expertise, including
combinatorial chemistry, medicinal chemistry, and parallel synthesis, together
with advanced biological screening to improve potency and other criteria of lead
compounds.

TECHNOLOGY STRATEGY

      Pharmacopeia's technology strategy is to enhance productivity through cost
reductions and increased throughput and to build Pharmacopeia's library
collection and its knowledge base of the relationships between chemical
structures and biological targets for use in future drug discovery programs.

      ENHANCE PRODUCTIVITY. Pharmacopeia seeks to leverage its existing
technology by increasing productivity through cost reductions and significant
increases in throughput. Pharmacopeia's internal research and development
efforts focus on: (i) advances in Pharmacopeia's automated systems; (ii) the
development of enhanced software; (iii) the development of new materials and
reactions for solid phase synthesis; and (iv) new high throughput screening
formats.

      DEVELOP COLLECTION OF LIBRARIES AND KNOWLEDGE BASE. Pharmacopeia is
building sets of libraries that will eventually aggregate millions of compounds
available for future screening programs. This collection of compounds will
increase as new libraries are created and as outlicensed libraries are returned
to Pharmacopeia upon the expiration of customers' exclusivity periods.
Pharmacopeia believes that this growing library collection will provide a
valuable source of leads for future drug discovery programs. Pharmacopeia also
intends to build a knowledge base of the relationships between classes of
chemical structures and classes of biological targets. This knowledge base will
grow as Pharmacopeia designs, synthesizes and screens large numbers of compounds
against a growing number of targets. Pharmacopeia believes that this knowledge
base will provide a future competitive advantage by enabling Pharmacopeia to
more quickly identify active compounds for newly identified targets.

DRUG DISCOVERY SERVICES PROGRAMS

      Pharmacopeia has several active Lead Discovery and Lead Optimization
programs for drug discovery underway with its customers. Previously,
Pharmacopeia had funded the identification and optimization of lead compounds
for targets that it had chosen in various therapeutic areas. In 1999, a
strategic decision was made to cease work on self-funded drug discovery
programs. Rather, Pharmacopeia is now pursuing only those projects that are
funded by its customers. In 1999, BMS, Hoffman-La Roche, and Organon agreed to
fund three of Pharmacopeia's previously self-funded programs. BMS, Hoffman-La
Roche, and Organon will fund continued development of compounds already
identified by Pharmacopeia and will develop, manufacture, market and sell any
drugs resulting from the collaborations.

DRUG DISCOVERY SERVICES CUSTOMERS

      In 1999, Pharmacopeia performed drug discovery services for
Schering-Plough, Schering AG, Novartis, Daiichi, Organon, BMS, Otsuka, Pharmacia
Upjohn, Roche and AstraZeneca. The loss of one or more of such customers may
have a material adverse effect on Pharmacopeia.


                                     - 12 -
<PAGE>

DRUG DISCOVERY SERVICES TECHNOLOGIES

      A major bottleneck in the drug discovery process is the limited number and
diversity of available chemical compounds. Using traditional manual chemical
synthesis techniques, a chemist is usually able to synthesize only 25 to 50
compounds per year. The low productivity of manual synthesis severely constrains
the number of compounds available for screening in order to identify active
compounds and provide the basis for initial structure-activity relationships
("SAR") analysis. Manual synthesis also slows the optimization process by
limiting the number of analogs synthesized and tested.

      Numerous technologies have been developed to accelerate the synthesis of
chemical compounds. Several early methods were based on either automated or
combinatorial chemical synthesis of oligonucleotides and peptides, which are not
generally useful as oral drugs. Combinatorial chemistry involves the synthesis
of large numbers of different chemical compounds by creating all possible
combinations of a set of chemical components, or building blocks. More recent
methods include robotic synthesis and various combinatorial chemistry approaches
to synthesizing libraries of small molecules, which are generally preferred by
pharmaceutical companies as drug development candidates.

      Pharmacopeia believes that its drug discovery technology offers a unique
solution to the bottleneck that constrains the drug discovery process.
Pharmacopeia's combinatorial chemistry technology generates large, diverse
libraries of the small molecules favored by pharmaceutical companies for
development. Most importantly, Pharmacopeia's technology uses solid phase
synthesis and an encoding system to permit rapid identification of compounds
synthesized in combinatorial mixtures.

      The ECLiPS technology uses a patented "Direct Divide" approach to
combinatorial chemistry to build collections, or libraries, of 10,000 to 500,000
or more small molecule compounds by performing only 50 to 200 individual
chemical reactions. This "Direct Divide" approach yields a more controlled
distribution of final compounds than does the "pool and split" method currently
used by certain other companies in drug discovery and previously practiced by
Pharmacopeia. Pharmacopeia is able to synthesize a large number of widely
diverse libraries of small molecule compounds because its chemists can combine a
nearly unlimited set of chemical building blocks using a wide variety of
reactions. Although large libraries of peptides, oligonucleotides and other
oligomers can be generated, their diversity is constrained by the limited number
of building blocks and the fewer reactions available to combine them.

      Pharmacopeia uses ECLiPS to build libraries of small, low molecular weight
(less than 700 Daltons) compounds, predominantly heterocycles. These low
molecular weight compounds are preferred by pharmaceutical companies because
they are more likely to be orally active (effective as drugs in tablet or
capsule form), tend to have longer duration of action and are less expensive to
manufacture. In contrast, natural peptide and oligonucleotide drugs are usually
degraded by human digestive system enzymes and generally must be administered by
injection. In addition, peptide and oligonucleotide drugs are often quickly
eliminated from the body, which limits their duration of action.

      The ECLiPS technology allows Pharmacopeia to quickly identify the chemical
structure of individual small compounds synthesized in combinatorial mixtures.
This identification is made possible through the use of Pharmacopeia's encoded
solid phase synthesis technology. Solid phase synthesis generally refers to the
synthesis of compounds on tiny plastic beads. Encoding refers to the tag sets
that Pharmacopeia attaches to each bead as a compound is synthesized. These tag
sets allow Pharmacopeia to rapidly identify the chemical structure of each
compound.

      Pharmacopeia's drug discovery approach encompasses its ECLiPS technology,
assay technology, production automation, information systems and quality
assurance programs, as more fully described below.


                                     - 13 -
<PAGE>


ECLIPS TECHNOLOGY

      The ECLiPS technology is a central component of Pharmacopeia's Drug
Discovery Services segment. ECLiPS includes solid phase synthesis, combinatorial
chemistry and sets of encoding molecules.

      SOLID PHASE SYNTHESIS. Pharmacopeia has developed proprietary methods and
procedures for performing a variety of small molecule chemical reactions on tiny
plastic beads. In this approach to chemical synthesis, known as solid phase
synthesis, compounds are bound to these tiny plastic beads using special
linkers. This approach offers several advantages over solution phase synthesis.
Solid phase synthesis can often result in higher yields because the beads can be
repeatedly re-exposed to reactants until the desired reaction product has
reached a satisfactorily high yield. Solid phase synthesis also facilitates the
isolation of individual compounds. Beads can be washed with solvents to remove
byproducts, and an individual compound can then be isolated from a mixture by
removing a single bead and breaking the linkage to detach the compound from the
bead.

      Pharmacopeia believes that its experience in solid phase synthesis of
diverse, heterocyclic, small compounds is a key competitive advantage. Large,
diverse libraries of these small molecules are more difficult to synthesize than
libraries of oligonucleotides or peptides. The great diversity of chemical
building blocks and the variety of chemical reactions that must be used in
synthesizing these small molecules require a wide range of reaction conditions,
including temperature, pH, solvents, catalysts and other variables. Each
chemical reaction must be optimized to achieve high yields of the desired
compound.

      COMBINATORIAL CHEMISTRY. Pharmacopeia's ECLiPS technology employs "Direct
Divide" combinatorial chemistry. For example, a chemist using a five-step
reaction sequence and ten building blocks per step can synthesize a mixture of
100,000 different chemicals by performing only 50 chemical reactions. Using
larger numbers of building blocks or steps can create larger libraries. This
technology offers substantial productivity improvement in comparison to parallel
synthesis and other techniques currently employed to generate chemical
libraries. Parallel synthesis is the performance of a series of individual
chemical reactions, usually several dozen simultaneously, typically using
robotics. In parallel synthesis, 111,110 individual chemical reactions would be
required to synthesize the same 100,000 compounds that Pharmacopeia's technology
can accomplish in 50 reactions. Parallel synthesis requires extensive labor and
time and a significant capital investment in robotics. The labor and time
disadvantage increases exponentially with library size.

      SETS OF ENCODING MOLECULES. Pharmacopeia overcomes the challenge of
identifying active compounds from combinatorial mixtures through its use of a
proprietary collection of chemically stable small molecules, or tag sets, to
encode each bead used in solid phase synthesis. This enables Pharmacopeia to
quickly identify the structure of an active compound prepared using the "Direct
Divide" technique without resorting to deconvolution, a process in which an
active compound must be "reverse engineered" by resynthesizing and testing
various component combinations until the structure of the active compound is
deduced. During each step of Pharmacopeia's solid phase synthesis process,
specific tag sets are attached to the beads to indicate the chemical reagent and
reaction conditions used in that step. By the end of the synthesis process, each
bead has collected tag sets that represent all of the building blocks used to
create the compound on that bead. When an active compound is found in an assay,
the bead from which the active compound was extracted is analyzed. The tag sets
are detached from the bead using specific chemical reactions that break the
linkage between the tag sets and the bead. The detached tag sets are read using
conventional gas chromatography techniques. The results, which resemble a bar
code, are captured in a database that identifies and stores data regarding the
active compound.

Pharmacopeia's proprietary tag sets have the following important
characteristics:

      STABILITY. Pharmacopeia's proprietary tag sets are relatively unreactive.
For this reason the tag sets do not break or decompose as a result of heat,
vigorous shaking or other harsh reaction conditions. Thus, the tag sets rarely
interfere with or limit the solid phase chemical reactions used to create
potential new drug compounds. By contrast, the oligonucleotides and peptides
used as tags by some companies are more fragile because they are more reactive.
These large molecule tags may therefore interfere with chemical reactions or may
be decomposed or altered


                                     - 14 -
<PAGE>


chemically during compound synthesis. These factors constrain the range of
chemicals that can be synthesized in solid phase when oligonucleotide or peptide
tags are used.

      SIZE AND DETECTABILITY. In contrast to the relatively large size of
oligonucleotide and peptide tags, Pharmacopeia's tag sets are small and easy to
attach to and detach from the beads. The highly sensitive detection methods
available for these tag sets allow Pharmacopeia to use them in extremely small
quantities. Pharmacopeia's tag sets do not occupy a significant portion of the
beads' capacity and do not interfere with the extraction or testing of detached
compounds.

      Thus, using its proprietary ECLiPS technology, Pharmacopeia can synthesize
a large combinatorial mixture of compounds and rapidly identify the specific
structure of individual active compounds found in the library. As of December
31, 1999, Pharmacopeia had used its ECLiPS technology to synthesize libraries
containing an aggregate of more than 5.9 million unique chemical compounds. Many
of these libraries have initially been licensed to customers for their exclusive
use for varying periods of time.

ASSAY TECHNOLOGY

      The second component of Pharmacopeia's drug discovery approach is its
proprietary assay technology. Pharmacopeia employs 96-well, 384-well, and,
beginning in 1999, 1,536-well microtiter plate solution phase assays to evaluate
the biological activity of compounds in Pharmacopeia's libraries.

      Each screening well in Pharmacopeia's 1,536-well ultra high-throughput
screening ("UHTS") system accommodates a 1-microliter volume for conducting the
assay. This compares with a 100-microliter volume required in each well of a
96-well plate. Thus, compound and reagent consumption is reduced by 99%. In
addition, each plate represents 1,536 tests rather than 96. Pharmacopeia has
been developing this 1,536-well system internally and through contractors,
vendors and collaborators since 1996.

      Pharmacopeia has improved the 96-well, the 384-well, and the 1,536-well
microtiter plate assays it performs for its collaborators. These improvements
include increasing the sensitivity of detection, increasing the number of assays
that can be run daily, reducing labor and materials required to execute assays
and allowing simultaneous collection of information on the activity of a single
compound against multiple targets.

      In 1999, Pharmacopeia completed several million tests of its library
compounds for activity against biological targets such as receptors or enzymes.
For primary screening, Pharmacopeia often includes 10-20 compounds per well to
perform a quick survey of a library's activity. If assay results suggest that
some compounds in that library are active, then compounds from that library are
tested individually.

PRODUCTION AUTOMATION

      Production automation technology is another important component of
Pharmacopeia's integrated drug discovery approach. Pharmacopeia has developed
proprietary instruments and methods for quickly and cost effectively
manipulating large numbers of small plastic beads and the compounds that are
detached from these beads. Pharmacopeia's proprietary technology includes bead
washing and synthesis vessels that support the synthesis process. The production
automation technology also includes proprietary engineering methods and
automated systems for placing individual compounds in 96 to 1,536-well
microtiter plates and processing these plates in preparation for screening.
Screening a single 50,000 compound library against 20 or more targets can
require the loading, processing and testing of thousands of 96-well microtiter
plates.

INFORMATION SYSTEMS

      Pharmacopeia has developed proprietary software to support its drug
discovery activities. Pharmacopeia's information systems assist Pharmacopeia's
scientists in managing the extensive data generated during library production
and testing. First, the software tracks the chemical building blocks, reaction
steps and tag sets used to create each library. Pharmacopeia's systems then
track the thousands of bar-coded microtiter plates filled and


                                     - 15 -
<PAGE>


processed as libraries are screened. As active compounds are identified and
decoded, Pharmacopeia's software integrates the tag set decoding results with
the original library design database to quickly provide Pharmacopeia's
scientists with the specific chemical structure and synthesis steps for the
active compound.

      Pharmacopeia's information systems also include analytical and database
tools. Databases of available chemical building blocks and reactions are used as
reference sources in the library design process. Molecular modeling, structure
analysis and statistical programs are available for designing optimization
libraries. In addition, analytical and database software is used to collect and
analyze the results of individual assays. The Company uses MSI software, thereby
significantly enhancing its ability to use informatics in the drug discovery
process. See "Pharmacopeia's Software Segment."

      As Pharmacopeia continues to build its chemical libraries and accelerates
its high-throughput screening activities a sizable amount of SAR information is
emerging from these activities, which is being stored in Pharmacopeia's
information systems. Pharmacopeia may have the ability to access this SAR
information for its own internal use or to assist its existing and new customers
in the search of candidate molecules that interact with specific targets. No
assurance can be given as to if and when such access will occur.

QUALITY ASSURANCE

      Pharmacopeia's drug discovery approach includes an extensive quality
assurance program. As libraries are synthesized, representative compounds are
analyzed at each reaction step to assure that yields are high and compounds are
sufficiently pure. During library production, samples are tested at each
reaction step to assure that the tag sets have been satisfactorily attached and
can be decoded. Representative compounds are also tested to identify optimal
solvents and detachment conditions for removing compounds from beads to perform
screening assays. Production plates containing compounds for screening include
control samples to further assure that plates to be screened in assays have been
prepared appropriately.

DRUG DISCOVERY SERVICES COMPETITORS

      Many organizations are actively attempting to identify and optimize
compounds for potential pharmaceutical development. Pharmacopeia competes with
the research departments of pharmaceutical companies, biotechnology companies,
other combinatorial chemistry companies and research and academic institutions.

      Many of these competitors have greater financial and human resources, and
more experience in research and development, than Pharmacopeia. Historically,
pharmaceutical companies have maintained close control over their research
activities, including the synthesis, screening and optimization of chemical
compounds. Many of these companies, which represent the greatest potential
market for Pharmacopeia's products and services, are developing combinatorial
chemistry and other methodologies to improve productivity, including major
investments in robotics technology to permit the automated parallel synthesis of
compounds. In addition, these companies may already have large collections of
compounds previously synthesized or ordered from chemical supply catalogs or
other sources against which they may screen new targets. Other sources of
compounds include compounds extracted from natural products such as plants and
microorganisms and compounds created using rational drug design. Academic
institutions, governmental agencies and other research organizations are also
conducting research in areas in which Pharmacopeia is working, either on their
own or through collaborative efforts.

      Pharmacopeia competes with several alternative technologies in the design
and synthesis of new chemical libraries for drug discovery programs.
Combinatorial chemistry libraries of oligonucleotides and peptides can be
synthesized in extremely large numbers. These molecules are also sequenceable,
making it easy to identify the structure of an individual oligonucleotide or
peptide found to be active in an assay. However, oligonucleotides and peptides
are not usually effective as oral drugs because they are usually not
bioavailable. These molecules are also usually quickly metabolized in the human
bloodstream. Other, unnatural oligomer libraries have also been prepared, but
these are less easily sequenceable than peptides and oligonucleotides. In
addition, unnatural oligomer libraries lack the diversity of structures of the
small molecule libraries prepared by Pharmacopeia.


                                     - 16 -
<PAGE>


      Libraries of small molecule compounds, which are preferred as drug
candidates due to their increased potential for oral bioavailability and long
duration of action, have recently been developed using competitive techniques.
Three such techniques are based on "pool and split" solid phase combinatorial
chemistry. The first uses oligonucleotide or peptide tags on each bead to
identify each synthesis step. These large molecule tags are relatively fragile,
which limits the nature of reaction conditions (temperature, pressure, etc.) and
reagents (acids, bases, etc.) that can be used to build compounds. In addition,
these large molecule tags complicate the synthesis of compounds or beads.
Pharmacopeia's proprietary tag sets, in comparison, are durable, simple to
attach and detach, and allow Pharmacopeia to make larger and more diverse
libraries of small compounds. The second "pool and split" combinatorial
chemistry technique uses deconvolution to identify the chemical structure of
compounds found active in assays. Deconvolution is a slow, labor-intensive
process, and may require several weeks of scientists' time to determine the
structure of a single active compound. Pharmacopeia's tag sets permit hundreds
of structures to be determined each day. The third "pool and split"
combinatorial chemistry technique uses what are referred to as "hard tags" and
is proprietary to a specific large pharmaceutical company.

      A fourth competitive approach is to perform a series of individual
chemical reactions, typically using a robotic system. The result of robotic
synthesis is compounds in individually labeled vessels. Robotic synthesis also
yields larger quantities of each compound than are usually achieved in
combinatorial mixtures such as Pharmacopeia's. Using robotic synthesis, however,
requires extensive labor and time when compared with Direct Divide combinatorial
chemistry. This labor and time disadvantage increases exponentially with library
size.

DRUG DISCOVERY SERVICES - EXCLUSIVE LICENSE WITH COLUMBIA UNIVERSITY AND COLD
SPRING HARBOR LABORATORY

      In 1993, the Company entered into an exclusive license agreement with
Columbia and Cold Spring (jointly, the "Licensors") covering technology related
to tagged combinatorial chemical libraries and methods of preparing and
utilizing such libraries. The licensed technology includes patents and patent
applications filed by Columbia and Cold Spring covering the use of encoding tag
sets to implement the drug discovery process using combinatorial chemistry
libraries. The Company is obligated to pay a minimum annual license fee of
$100,000. The term of the agreement is the later of (i) 20 years or (ii) the
expiration of the last patent relating to the technology, at which time the
Company will have a fully paid license to the technology. The Company is also
obligated to pay royalties to the Licensors based on net sales of pharmaceutical
products developed by the Company as well as a percentage of all other payments
and royalties received by the Company from customers where the Company has
utilized the technology licensed from the Licensors.

DRUG DISCOVERY SERVICES - PATENTS AND PROPRIETARY INFORMATION

      The Company and its licensors currently have 41 issued U.S. patents and a
number of pending U.S. and foreign patent applications relating to various
aspects of the Company's technology, including its molecular tags, certain
screening technologies and its libraries or compounds contained therein. These
patents and patent applications are either owned by the Company or rights under
them are licensed to the Company. Of particular note, the Company is the
exclusive licensee of U.S. patents issued on October 15, 1996, February 24, 1998
and August 4, 1998 which provide broad protection to the Company's use of
encoded combinatorial libraries. The Company's success will depend in large part
on its ability, and the ability of its licensees and its licensors, to obtain
patents for its technologies and the compounds and other products, if any,
resulting from the application of such technologies, defend patents once
obtained, maintain trade secrets and operate without infringing upon the
proprietary rights of others, both in the United States and in foreign
countries.

      The patent positions of pharmaceutical and biotechnology companies,
including the Company, are uncertain and involve complex legal and factual
questions for which important legal questions are not completely resolved.
Certain patent applications, relating to encoded combinatorial libraries, have
been filed by others prior to the Company's patent applications. In February of
1997, the European Patent Office (EPO) granted to Affymax Technologies, N.V., a
subsidiary of Glaxo, a European Patent which, if valid, would have covered the
synthesis of encoded small molecule libraries of the type developed by the
Company. On November 12, 1997, the Company filed an Opposition to this European
Patent, challenging its validity and, on December 2, 1999, the EPO revoked the


                                     - 17 -
<PAGE>


Affymax patent in its entirety, although this decision is subject to appeal. On
January 13, 1998, a U.S. patent was issued to Affymax that contains certain
claims covering a method of preparing an encoded library of chemical compounds.
In a press release issued by Affymax on January 13, 1998, Affymax stated that
these patent claims provide it with "a dominant proprietary position in the area
of tagged chemical libraries." The Company's scientific staff has reviewed these
patent claims and believes that such claims do not cover the ECLiPS technology.
If it is ultimately determined that these claims are valid and enforceable and
that the Company's ECLiPS technology infringes such claims, then the Company may
be subject to monetary damages. In addition, the Company's ability to use its
ECLiPS technology in the United States may be restricted unless the Company
obtains appropriate licenses. However, if any such licenses were required, there
can be no assurance that such licenses would be available to the Company or
would be available upon terms reasonably acceptable to the Company. The Company
does not know of any patents or patent applications by others that would
preclude the Company from practicing its ECLiPS technology or obtaining patent
protection in the United States or elsewhere for its ECLiPS technology. However,
disputes may arise between the Company and other patent holders as to claims of
infringement, which could involve protracted periods of litigation. Some of the
Company's competitors have, or are affiliated with companies having,
substantially greater resources than the Company, and such competitors may be
able to sustain the costs of complex patent litigation to a greater degree and
for longer periods of time than the Company. Uncertainties resulting from the
initiation and continuation of any patent or related litigation could have a
material adverse effect on the Company's ability to compete in the marketplace
pending resolution of the disputed matters.

      There can be no assurance that patents will issue as a result of any
pending applications or that, if issued, such patents will be sufficiently broad
to afford protection against competitors with similar technology. Moreover,
there can be no assurance that the Company or its customers will be able to
obtain patent protection for compounds or pharmaceutical products based upon the
Company's technology. There can be no assurance that any patents issued to the
Company or its collaborative partners, or for which the Company has license
rights, will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide competitive advantages to the Company.
Litigation, which could result in substantial cost to the Company, may be
necessary to enforce the Company's patent and license rights or to determine the
scope and validity of others' proprietary rights. Further, more U.S. patents do
not provide any remedies for infringement that occurred before the patent is
granted.

      The commercial success of the Company will also depend upon avoiding the
infringement of patents issued to competitors and upon maintaining the
technology licenses upon which certain of the Company's current products are, or
any future products under development might be, based. If competitors of the
Company prepare and file patent applications in the United States that claim
technology also claimed by the Company, the Company may have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office
("PTO") to determine the priority of invention, which could result in
substantial cost to the Company, even if the outcome is favorable to the
Company. An adverse outcome could subject the Company to significant liabilities
to third parties and require the Company to obtain a license to disputed rights
from third parties or cease using the technology. A U.S. patent application is
maintained under conditions of confidentiality while the application is pending
in the PTO, so that the Company cannot determine which inventions are claimed in
pending patent applications filed by its competitors with the PTO.

      The Company currently has certain licenses from third parties and in
the future may require additional licenses from other parties to develop,
manufacture and market commercially viable products effectively. In
performing Lead Discovery Services, the Company or its collaborators may need
to obtain licenses to enable the Company to utilize certain assay technology
and to screen against certain targets. The commercial success of the Company
in its Lead Discovery Services may depend on the ability of the Company or
its collaborators to obtain such licenses. There can be no assurance that
such licenses will be obtainable on commercially reasonable terms, if at all,
that the patents underlying such licenses will be valid and enforceable or
that the proprietary nature of the patented technology underlying such
licenses will remain proprietary.

      The Company relies substantially on certain technologies that are not
patentable or proprietary and are therefore available to the Company's
competitors. The Company also relies on certain proprietary trade secrets and
know-how, which are not patentable. Although the Company has taken steps to
protect its unpatented trade secrets and know-how, in part through the use of
confidentiality agreements with its employees, consultants and certain of its


                                     - 18 -
<PAGE>


contractors, there can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
developed or discovered by competitors.

DRUG DISCOVERY SERVICES SEGMENT - GOVERNMENT REGULATION

      Regulation by governmental entities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by a customer of Pharmacopeia or,
in the event Pharmacopeia decides to develop a drug beyond the preclinical
phase, by Pharmacopeia. The nature and the extent to which such regulation may
apply to Pharmacopeia's customers will vary depending on the nature of any such
pharmaceutical products. Virtually all pharmaceutical products developed by
Pharmacopeia's customers will require regulatory approval by governmental
agencies prior to commercialization. In particular, human pharmaceutical
therapeutic products are subject to rigorous preclinical and clinical testing
and other approval procedures by the U.S. Food and Drug Administration ("FDA")
and by foreign regulatory authorities. Various federal and, in some cases, state
statutes and regulations also govern or influence the manufacturing, safety,
labeling, storage, record keeping and marketing of such pharmaceutical products.
The process of obtaining these approvals and the subsequent compliance with
appropriate federal and foreign statutes and regulations are time consuming and
require the expenditure of substantial resources.

      Generally, in order to gain FDA approval, a company must conduct
preclinical studies in the laboratory and in animal models to gain preliminary
information on a compound's efficacy and to identify any safety problems. The
results of these studies are submitted as a part of an Investigational New Drug
application ("IND") that the FDA must review before human clinical trials of an
investigational drug can start. In order to commercialize any products,
Pharmacopeia or its customer will be required to sponsor and file an IND and
will be responsible for initiating and overseeing the clinical studies to
demonstrate the safety and efficacy that are necessary to obtain FDA approval of
any such products. Clinical trials are normally done in three phases and
generally take two to five years, but may take longer, to complete. After
completion of clinical trials of a new product, FDA and foreign regulatory
authority marketing approval must be obtained. If the product is classified as a
new drug, Pharmacopeia or its customer will be required to file a New Drug
Application ("NDA") and receive approval before commercial marketing of the
drug. The testing and approval processes require substantial time and effort and
there can be no assurance that any approval will be granted on a timely basis,
if at all. NDAs submitted to the FDA can take, on average, two to five years to
obtain approval. If questions arise during the FDA review process, approval can
take more than five years. Even if FDA regulatory clearances are obtained, a
marketed product is subject to continual review, and later discovery of
previously unknown problems or failure to comply with the applicable regulatory
requirements may result in restrictions on the marketing of a product or
withdrawal of the product from the market as well as possible civil or criminal
sanctions. For marketing outside the United States, Pharmacopeia will also be
subject to foreign regulatory requirements governing human clinical trials and
marketing approval for pharmaceutical products. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country. The research and development processes of
Pharmacopeia involve the controlled use of hazardous materials. Pharmacopeia is
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of such materials and certain waste
products. Although Pharmacopeia believes that its activities currently comply
with the standards prescribed by such laws and regulations, the risk of
accidental contamination or injury from these materials cannot be eliminated. In
the event of such an accident, Pharmacopeia could be held liable for any damages
that result and any liability could exceed the resources of Pharmacopeia. In
addition, there can be no assurance that Pharmacopeia will not be required to
incur significant costs to comply with environmental laws and regulations in the
future.

DRUG DISCOVERY SERVICES SEGMENT - SOURCES OF SUPPLY

      Pharmacopeia currently relies on two suppliers to provide plastic filter
bottom microtiter plates that are used in the assay plate preparation process.
Should Pharmacopeia be unable to obtain an adequate supply of these or
comparable filter bottom plates at commercially reasonable rates, its ability to
continue to prepare assay plates would be materially and adversely affected.


                                     - 19 -
<PAGE>


DRUG DISCOVERY SERVICES SEGMENT- PHARMACEUTICAL MANUFACTURING AND MARKETING

      Pharmacopeia does not expect to directly manufacture or market any
pharmaceutical products that may be developed under its collaborative
arrangements. However, Pharmacopeia may, in the future, consider undertaking
such activities if it believes they are appropriate under the circumstances.
Pharmacopeia has no experience in developing pharmaceutical products or in
manufacturing or marketing products on a commercial scale. Pharmacopeia may not
have the resources to develop or to manufacture or market by itself on a
commercial scale any products identified by it. In the event Pharmacopeia
decides to establish a manufacturing facility, Pharmacopeia will require
substantial additional funds, and will be required to hire and train significant
additional personnel and comply with the extensive FDA "good manufacturing
practice" regulations applicable to such a facility.

         RISKS ASSOCIATED WITH CONSOLIDATED INTERNATIONAL OPERATIONS

      In 1999, approximately 40% of the Company's consolidated revenue was
derived from customers outside the United States both through international
subsidiaries and on an export basis. Approximately 28% of the Company's revenue
was derived from customers in Europe and approximately 12% was derived from
customers in the Asia/Pacific region. The Company anticipates that international
revenue will continue to account for a significant percentage of revenue in the
future. The Company's international operations are subject to risks inherent in
the conduct of international business, including unexpected changes in
regulatory requirements, longer payment cycles, exchange rate fluctuations,
export license requirements, tariffs and other barriers, political and economic
instability, limited intellectual property protection, difficulties in
collecting trade receivables, difficulties in managing distributors or
representatives, difficulties in staffing and managing foreign subsidiary or
joint venture operations, and potentially adverse tax consequences. In 1999,
certain East Asian countries experienced severe economic turmoil, represented by
depressed business conditions and volatility in local currencies. Such
conditions may adversely impact the Company's financial results as a result of
customers altering their spending plans and by subjecting the Company to greater
foreign exchange exposure. There can be no assurance that the Company will be
able to sustain or increase international revenue and there can be no assurance
that any of the foregoing factors will not have a material adverse effect on the
Company's international operations and therefore its business, financial
condition and results of operations. The Company's direct international sales
generally are denominated in local currencies. Fluctuations in the value of
currencies in which the Company conducts business relative to the United States
dollar result in currency transaction gains and losses, and the impact of future
exchange rate fluctuations cannot be accurately predicted. There can be no
assurance that future fluctuations in currency exchange rates will not have a
material adverse impact on revenue from international sales, and thus the
Company's business, financial condition and results of operations. When deemed
appropriate, the Company engages in currency exchange rate hedging transactions
in an attempt to mitigate the impact of adverse exchange rate fluctuations.

      There can be no assurance that any currency hedging policies will be
successful, or that they will not increase the negative impact of exchange rate
fluctuations.

                    CONSOLIDATED RESEARCH AND DEVELOPMENT

      Pharmacopeia's consolidated expenses for research and development
activities were as follows:

<TABLE>
<CAPTION>

                                                      Year Ended December 31 (in thousands)
                                                     --------------------------------------
                                                         1997          1998        1999
                                                     -----------    ----------  ----------
<S>                                                     <C>          <C>          <C>
Proprietary Research and Development                    $25,251      $28,656      $27,282

</TABLE>

      The decrease in research and development from 1998 to 1999 primarily
reflects the Company's decision to cease investment in self-funded drug
discovery programs.


                                     - 20 -
<PAGE>


                              CONSOLIDATED EMPLOYEES

      As of December 31, 1999, the Company had 510 regular employees, 253 of
whom were in research and development, including 213 chemists, biologists and
engineers holding doctorate degrees. None of the Company's employees is covered
by collective bargaining agreements. Management believes its relations with its
employees are good.

   IMPORTANT RISK FACTORS REGARDING CONSOLIDATED FORWARD LOOKING STATEMENTS

      Certain discussions set forth above regarding the Company's strategy for
the development and commercialization of its products and services as well as
its ability to sustain profitability in the near term are forward-looking
statements. In the Drug Discovery Services segment, this strategy depends upon
the acceptance by potential customers of combinatorial chemistry and analysis of
compounds provided by the Company as an effective tool in drug discovery and the
Company's ability to maintain the arrangements it currently has in place.
Historically, pharmaceutical companies have conducted lead compound
identification and optimization within their own research departments, due to
the highly proprietary nature of the activities being conducted, the central
importance of these activities to their drug discovery and development efforts,
and the desire to obtain maximum patent and other proprietary protection on the
results of their internal programs. In order to achieve its business objectives,
the Company must convince these companies that the Company's technology and
expertise justify the outsourcing of these programs to the Company. There can be
no assurance that the Company will be able to attract customers on acceptable
terms for its products and services or develop a sustainable profitable
business. Moreover, the pricing and nature of the Company's combinatorial
libraries is such that there may only be a limited number of pharmaceutical
companies that are potential customers for such libraries. There can be no
assurance that the Company will be able to establish additional collaborative or
licensing arrangements, that any such arrangements or licenses will be on terms
favorable to the Company, or that current or future collaborative or licensing
arrangements will ultimately be successful.

      Further, the Company's receipt of revenues from collaborative arrangements
is affected by the timing of efforts expended by the Company and the timing of
lead compound identification. The Company's products and services will only
result in commercialized pharmaceutical products generating milestone payments
and royalties upon significant preclinical and clinical development, requisite
regulatory approvals, the establishment of manufacturing capabilities and
successful marketing. The Company does not currently intend to perform any of
these activities, other than in some instances preclinical work. Therefore, the
Company will be dependent upon the expertise and dedication of sufficient
resources by third parties to develop and commercialize products based on
library compounds produced and lead compounds discovered by the Company. Should
a collaborative partner fail to develop or commercialize a compound or product
to which it has rights from the Company, the Company may not receive any future
milestone payments or royalties associated with such compound or product. The
Company's contractual arrangements with its customers do not obligate the
customers to develop or commercialize lead compounds discovered by the Company.

      In addition, there can be no assurance that any such development or
commercialization would be successful. The compound basis for drugs developed by
a customer may be a derivative or optimized version of the lead compound
provided to the customer by the Company. While the Company's existing
collaborative agreements provide that the Company will receive milestone
payments and royalties with respect to certain products developed from certain
derivative compounds, there can be no assurance that disputes will not arise
over the application of payment provisions to such products. There can be no
assurance that current or future collaborative partners will not pursue
alternative technologies, or develop alternative products either on their own or
in collaboration with others, including the Company's competitors, as a means
for developing treatments based on the targets which are the subject of the
collaborative arrangements with the Company.

      The Company's success is also dependent on the results of operations of
its Software segment through its wholly owned subsidiary, MSI. The ability of
MSI to increase revenue from the license of its products is dependent upon
increased market acceptance of MSI's software products and services. MSI's
products are used primarily by


                                     - 21 -
<PAGE>


simulation specialists. MSI's strategy is to expand usage of its products and
services by marketing and distributing its software, in part through its
desktop-based products, to experimentalists, such as scientists and engineers.
If MSI cannot expand its customer base to include experimentalists, or if MSI
otherwise cannot successfully market and sell its desktop-based products and
related services, MSI may not be able to increase its revenue, or its revenue
may decline. In general, increased market acceptance and greater market
penetration of MSI's products depend upon several factors, including the overall
product performance, ease of implementation and use, accuracy of simulation,
breadth and integration of product offerings and the extent to which users
achieve the intended research and development benefits from their use of MSI's
products and services. There can be no assurance that MSI's products and
services will achieve increased market acceptance or penetration in MSI's target
industries or other industries. Failure to increase market acceptance or
penetration would restrict substantially the future growth of MSI and may have a
material adverse effect on the Company.

      The Company's success will also depend upon certain issues arising in
connection with the Company's patents and proprietary technology. See "Business
-- Software Segment Intellectual Property and Other Proprietary Rights" and
"Business -- Drug Discovery Services Patents and Proprietary Information."

                       CONSOLIDATED SEGMENT INFORMATION

      The information in Note 7 of the Notes to Consolidated Financial
Statements is incorporated herein by reference.

ITEM 2.  PROPERTIES

      Pharmacopeia currently leases and occupies approximately 144,000 square
feet in two facilities in or near Princeton, New Jersey. These leases expire at
various dates through 2006. MSI's principal administrative, sales, support,
marketing and product development facilities and the MSI corporate headquarters
are located in San Diego, California, where MSI has leased 76,635 square feet
through December 2006. MSI's European headquarters, along with administrative,
sales, support, marketing and product development functions, are located in
Cambridge, England, where MSI has leased 6,545 square feet through December 31,
2008 and has subleased an additional 4,952 square feet in the same building
through February 1, 2007. MSI leases additional offices in the United States,
Europe and Asia.

ITEM 3.  LEGAL PROCEEDINGS

      The Company is not a party to any material legal proceedings.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      Not applicable.


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET FOR COMMON STOCK

      The Company's Common Stock has traded on the Nasdaq National Market tier
of The Nasdaq Stock Market under the symbol PCOP since the Company's initial
public offering on December 5, 1995. The following table sets forth for the
periods indicated the range of high and low sale prices of the Common Stock.


                                     - 22 -
<PAGE>


<TABLE>
<CAPTION>

                                                               1999                               1998
                                                        HIGH            LOW               HIGH           LOW
                                                     ------------   -------------     ------------   -----------
                 <S>                                 <C>               <C>            <C>             <C>
                 First Quarter                          $11.88            $5.88          $22.13          $15.00
                 Second Quarter                          11.50             5.44           20.38           11.63
                 Third Quarter                           12.94             9.50           14.00            9.73
                 Fourth Quarter                          23.25             9.75           10.63            8.00

</TABLE>

HOLDERS OF RECORD

      As of February 29, 2000 there were approximately 504 holders of record of
Pharmacopeia's Common Stock.

DIVIDENDS

      No cash dividends have been paid on the Common Stock to date.

ITEM 6.  SELECTED FINANCIAL DATA

      The following selected consolidated financial data have been derived from
the Company's audited Consolidated Financial Statements. This data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and related notes thereto included elsewhere in this Report.

<TABLE>
<CAPTION>

                                                                         YEARS ENDED DECEMBER 31,
                                                     1999          1998            1997            1996           1995
                                                 ------------- -------------- --------------- --------------- -------------
   STATEMENT OF OPERATIONS DATA:                                   (in thousands, except per share data)
<S>                                                 <C>            <C>            <C>              <C>           <C>
   Total revenue                                    $103,959     $  92,211        $81,197          $62,060      $ 35,271
   Operating income (loss)(1,2)                          149       (13,456)        (3,024)          (8,358)      (21,300)
   Net income (loss) (1,2)                             3,771       (10,163)        (1,728)          (7,386)      (20,836)
   Basic net income (loss) per common share             0.19         (0.54)         (0.09)           (0.42)        (2.79)
   Diluted net income (loss) per common share           0.19         (0.54)         (0.09)           (0.42)        (2.79)
   Shares used in computing basic net
       income (loss) per common share                 19,684        18,916         18,445           17,736         7,458
   Shares used in computing diluted net
       income (loss) per common share                 20,294        18,916         18,445           17,736         7,458
   Cash dividends declared per common share               --            --             --               --            --

</TABLE>

<TABLE>
<CAPTION>

                                                                            AS OF DECEMBER 31,
                                                     1999          1998            1997            1996           1995
                                                 ------------- -------------- --------------- --------------- -------------
   BALANCE SHEET DATA:                                                        (in thousands)
<S>                                                   <C>          <C>            <C>              <C>           <C>
   Cash, cash equivalents and marketable
       securities                                   $  69,032    $  81,098      $  97,640        $  95,991     $  71,271
   Total assets                                       126,259      127,865        140,051          131,644        99,693
   Notes payable, deferred revenue, and
       other long-term liabilities                     5,121         3,332          6,194            6,433         4,085
   Accumulated deficit                               (69,049)      (72,820)       (62,657)         (60,929)      (53,543)
   Total stockholders' equity                         78,746        72,217         80,596           75,501        59,450

</TABLE>

(1)    The 1995 amount includes a $6.5 million write-off of acquired in-process
       research and development, $4.5 million in restructuring costs and a $1.1
       million write-off of capitalized software, all in connection with the
       acquisition of Biosym.

(2)    The 1998 amount includes $8.0 million of merger related expenses.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

      The following discussion and analysis of the financial condition and
results of operations of Pharmacopeia Inc. ("Pharmacopeia" or the "Company")
should be read in conjunction with "Selected Consolidated Financial Data" and
the Consolidated Financial Statements and related notes included elsewhere in
this Report.


                                     - 23 -
<PAGE>


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

      Although forward-looking statements in this Report reflect the good faith
judgment of the Company's management, such statements can only be based on facts
and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include, without
limitation, those discussed in "Significant Risks, Trends and Uncertainties"
such as uncertain revenue levels, rapidly changing technologies, acquisition
related uncertainties, stock price volatility and other factors as discussed
elsewhere in this Report. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Report. The
Company undertakes no obligation to revise or update any forward-looking
statements in order to reflect any event or circumstance that may arise after
the date of this Report. Readers are urged to carefully review and consider the
various disclosures made in this Report, which attempt to advise interested
parties of the risks and factors that may affect the Company's business,
financial condition, results of operations and prospects.

OVERVIEW

      Pharmacopeia designs, develops, markets and supports science and
technology-based products and services that improve and accelerate the processes
of drug discovery and chemical development. The Company's Drug Discovery
Services Segment provides drug discovery services to pharmaceutical and
biotechnology companies based on proprietary combinatorial chemistry and high
throughput screening technologies. The Company's Software Segment provides
molecular modeling and simulation software that facilitates the discovery and
development of new drug and chemical products and processes in the
pharmaceutical, biotechnology, chemical, petrochemical and materials industries.

RESULTS OF OPERATIONS

1999 COMPARED TO 1998

      Total revenue grew 13% to $104.0 million in 1999 compared to $92.2 million
in 1998.

      Drug Discovery Services revenue increased 17% to $34.6 million in 1999
compared to $29.7 million in 1998. This increase was attributable to the growth
in the number and size of collaborations in progress, including several
contracts signed in the latter half of 1998 and in early 1999. Revenue growth in
1999 resulted generally from the Company's new Lead Discovery Service (LDS)
offering, whereby the Company uses its proprietary high-throughput screening
system to screen the Company's multi-million quantity compound collection
against customer drug targets. Revenue growth from LDS was partially offset by
declines in library out-licensing revenue, in other forms of drug discovery
services, and in one-time milestone or up front license fee payments. Drug
Discovery Services revenue included $0.3 million and $1.0 million of milestone
payments in 1999 and 1998, respectively. In 1999, one Drug Discovery Services
customer accounted for 12% of consolidated revenue.

      Total revenue (including software license, service, hardware and other
revenue) generated from the Software Segment increased 11% to $69.4 million in
1999 compared to $62.5 million in 1998. Software license, service and other
revenue increased 12% to $60.9 million in 1999 compared to $54.4 million in
1998. Hardware revenue, generated from the resale of computers, increased 4% to
$8.4 million in 1999 compared to $8.1 million in 1998.


                                     - 24 -
<PAGE>


      Software Segment revenue grew in the combined Europe and US regions by 13%
in 1999 compared with 1998. Management believes that this increase resulted
primarily from a continuing increase in the size of the molecular simulation
expert software market, from price increases and from an increase in the
Company's market share within this market.

      Software Segment revenue for the Asia region showed an increase of 1% in
1999 compared with 1998. The small increase resulted entirely from the positive
currency impact of the strengthening Yen, which offset a 14% decline in Yen
denominated sales. Management believes that this decline resulted primarily from
the disruption in sales caused by the first quarter 1999 re-negotiation of the
Company's distribution arrangements in Japan. Asia sales levels began to recover
in the latter portions of 1999. In addition, the Company's distribution
agreement in Japan includes certain sales order level guarantees in 2000. As a
result, management expects further recovery in Asian sales levels in 2000.

      Gross margin generated from Drug Discovery Services increased 47% to $13.8
million (40% of related sales) in 1999 compared to $9.4 million (32% of related
sales) in 1998. This increase resulted from the 17% increase in Drug Discovery
Services revenue, from a shift in mix of business from headcount-based research
services to fixed price high-throughput screening services, and from cost
efficiencies achieved by the transition of screening work to higher density
formats.

      Gross margin generated from the Software Segment increased 8% to $54.4
million (78% of related sales) in 1999 compared to $50.2 million (80% of related
sales) in 1998. This increase resulted primarily from the 11% increase in
Software Segment revenue, offset partially by higher costs for post sale
software support activities.

      Research and development expenses declined 5% to $27.3 million in 1999
compared to $28.7 million in 1998. Research and development costs include costs
associated with internal drug discovery programs, software development, ultra
high-throughput screening, and informatics. The decline in research and
development expenses is primarily attributable to the reduction of internally
funded drug development activities.

      Within its Drug Discovery Services segment, the Company began to decrease
its internally funded drug discovery efforts in 1999, and the Company intends to
focus primarily on funded Drug Discovery Services in 2000. However, future
research and development expenses may increase in total, even as unfunded
internal drug discovery activities decrease, as the Company may further expand
its software, ultra high-throughput screening, informatics and other development
endeavors.

      Sales, general and administrative expenses increased to $40.8 million in
1999 compared to $36.4 million in 1998, representing 39% of total revenue for
both years. The year to year increase of $4.4 million is primarily attributable
to increases in sales and marketing expenses within the Software Segment,
reflecting the continuing expansion of the Company's global distribution
capacity in anticipation of additional products and product demand.

      As a result of the 1998 merger with Molecular Simulations, Inc. (MSI), the
Company incurred $8.0 million of merger related costs. No such costs were
incurred in 1999.

      The Company recorded interest and other income of $4.1 million and $4.2
million for 1999 and 1998, respectively. Interest income declined slightly in
1999 compared to 1998 primarily as a result of lower average balances of cash,
cash equivalents and marketable securities. However, foreign exchange gains in
1999 and the sale of an equity investment partially offset this decline. Foreign
exchange gains were primarily the result of the positive currency impact of the
strengthening Yen.

      The Company recorded an income tax provision of $0.5 million for 1999 and
$0.9 million for 1998. The 1999 and 1998 tax provisions are primarily due to
foreign taxable income generated from the software business segment. These
provisions differ from the Federal tax rate primarily because of the effect of
net operating loss carryforwards and carrybacks.


                                     - 25 -
<PAGE>


      As a result of the increased revenue, the increased gross margins, the
decreased research and development costs, and the other matters described above,
the Company generated net income of $3.8 million or $0.19 per basic and diluted
share for 1999. This compares to a net loss of $10.2 million or $(0.54) per
basic and diluted share in 1998.

1998 COMPARED TO 1997

      Total revenue grew 14% to $92.2 million in 1998 compared to $81.2 million
in 1997.

      Drug Discovery Services revenue increased 21% to $29.7 million in 1998
compared to $24.5 million in 1997. This increase of $5.2 million primarily
reflected expanded efforts in the Schering-Plough, Bristol-Myers Squibb and
Zeneca collaborations.

      Total revenue generated from the Software Segment increased 10% to $62.5
million in 1998 compared to $56.7 million in 1997. Software license, service and
other revenue increased 11% to $54.4 million in 1998 compared to $49.1 million
in 1997. Hardware revenue increased 7% to $8.1 million in 1998 compared to $7.6
million in 1997.

      Software Segment revenue grew in the combined Europe and US regions,
increasing 7% for 1998 compared with 1997. Management believes that this
increase resulted primarily from a continuing increase in the size of the
molecular simulation expert software market and from an increase in the
Company's market share within this market.

      Software Segment revenue for the Asia region showed an increase of 28% in
1998 compared with 1997. This increase resulted entirely from the 1998
accounting consolidation of the operating results of TMSI, the Asia distribution
joint venture between MSI and a third party. The Company acquired the third
party's entire interest in this joint venture in 1999.

      Gross margin generated from Drug Discovery Services increased 23% to $9.4
million (32% of related sales) in 1998 compared to $7.6 million (31% of related
sales) in 1997. This increase resulted primarily from the 21% increase in Drug
Discovery Services revenue.

      Gross margin generated from the Software Segment increased 12% to $50.2
million (80% of related sales) in 1998 compared to $44.8 million (79% of related
sales) in 1997. This increase resulted primarily from the 11% increase in
software revenue and a slight increase in margin on hardware sales.

      Research and development expenses increased 13% to $28.7 million in 1998
compared to $25.3 million in 1997. This increase resulted from expanded
activities in both business segments, and includes increased salaries, personnel
and facilities lease expenses. Within the Software Segment the increase relates
primarily to the development of the WebLab line of software products for
experimentalists. Within the Drug Discovery Services Segment the increase
resulted primarily from unfunded internal drug discovery. These unfunded drug
research programs were substantially discontinued in 1999 as described above.

      Sales, general and administrative expenses increased to $36.4 million in
1998, representing 39% of total revenue. Sales, general and administrative
expenses were $30.1 million in 1997, representing 37% of total revenue. The year
to year increase of $6.3 million is primarily attributable to consolidating, in
1998, the operating results of TMSI along with increased payroll and personnel
expenses as the Company continued to hire additional sales, marketing and
administrative personnel.

      As a result of the 1998 merger with MSI, the Company incurred $8.0 million
of merger related costs in 1998. No such costs were incurred in 1997.

      The Company recorded net interest and other income of $4.2 million and
$4.3 million in 1998 and 1997, respectively. The decrease of $0.1 million
resulted primarily from a decrease in the average balance of cash, cash
equivalents and marketable securities.


                                     - 26 -
<PAGE>


      The Company recorded a provision for income taxes of $0.9 million in 1998
compared to a provision for income taxes of $3.0 million in 1997. The year to
year favorable tax variances are primarily the result of the combined Company's
ability to offset MSI's taxable income with Pharmacopeia's losses during the
period following the completion of the 1998 merger.

      As a result of the foregoing, the Company generated a net loss of $10.2
million or $(0.54) per basic share for 1998. This compares to a net loss of $1.7
million or $(0.09) per basic share for 1997.

LIQUIDITY AND CAPITAL RESOURCES

      The Company has funded its activities to date primarily through the sale
of equity securities, drug discovery services, software licenses, software
maintenance services and hardware. As of December 31, 1999, the Company had
working capital of $58.7 million compared to $57.3 million as of December 31,
1998. The majority of this $1.4 million increase in working capital was
generated from operations, and was offset by various investing activities,
primarily the re-purchase of distribution rights to MSI software in Japan and
the acquisition of the remaining 50% interest of a Japanese joint venture. In
1999, the Company also invested $7.8 million in marketable securities and $3.1
million in capital expenditures, which consisted primarily of computer hardware
and laboratory equipment. Financing activities in 1999 provided $1.2 million,
primarily from sales of common stock from option exercises and employee stock
purchase plan participation and was offset by principal payments on notes
payable.

      As of December 31, 1999, the Company's cash, cash equivalents and
marketable securities totaled $69.0 million, which are invested in U.S. Treasury
and government agency obligations, investment grade commercial paper and other
short-term money market instruments. This represents a decline of $12.1 million
from the 1998 year end level of $81.1 million. This decline was primarily the
result of the re-purchase of distribution rights to MSI software in Japan and
the acquisition of the remaining 50% interest of a Japanese joint venture.

      As of December 31, 1999, the Company had outstanding commitments for
equipment purchases totaling $0.2 million. The Company anticipates that its
capital requirements may increase in future periods as the Company expands its
research and development activities, expands its facilities, and acquires
additional equipment. However, as the Company curtails its internally funded
drug discovery activities, these increases may be temporarily offset or delayed
by the Company's redeployment of laboratory equipment and facilities from
internal drug discovery work to collaborative work, if and when needed for such
collaborative work. The Company's capital requirements may also increase in
future periods as the Company seeks to expand its technology platform through
investments, licensing arrangements, technology alliances or acquisitions.

      The Company anticipates that its existing capital resources will be
adequate to fund the Company's operations at least through 2001. However, there
can be no assurance that changes will not occur that would consume available
capital resources before such time. The Company's capital requirements depend on
numerous factors, including the ability of the Company to extend existing Drug
Discovery Services agreements and to enter into additional arrangements, the
ability of the Company to continue to generate software sales, competing
technological and market developments, changes in the Company's existing
collaborative relationships, the cost of filing, prosecuting, defending and
enforcing patent claims and other intellectual property rights and the outcome
of related litigation, the purchase of additional capital equipment,
acquisitions of other businesses or technologies, and the progress of the
Company's customers' milestone and royalty producing activities. There can be no
assurance that additional funding, if necessary, will be available on favorable
terms, if at all. The Company's forecasts of the period of time through which
its financial resources will be adequate to support its operations is forward
looking information, and actual results could vary. The factors described
earlier in this paragraph will impact the Company's future capital requirements
and the adequacy of its available funds.

NEW ACCOUNTING STANDARD

      In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. SAB 101 provides guidance in applying generally accepted accounting
principles to revenue recognition in financial statements, including the
recognition of nonrefundable up-


                                     - 27 -
<PAGE>


front fees received in conjunction with a research and development arrangement.
The evaluation of the impact of SAB 101 has not been completed. However, to the
extent SAB 101 would be applicable and have a material impact, the Company would
implement this new pronouncement beginning with the first quarter of 2000.

YEAR 2000

      To date, the Company has not experienced any material year 2000 issues
with respect to its software products, its internal systems or its third-party
distribution and supply chains. In 1999, the Company performed extensive testing
of its software products and tested the readiness of its internal information
technology (IT) and non-IT systems. The Company also evaluated its third-party
distribution and supply chain to understand their ability to continue providing
services and products through the change to the year 2000.

      The Company tested current versions of its software products in 1999 and
developed corrections or updates that were believed to make these products year
2000 compliant. These corrections and updates were made available to customers
beginning in the third quarter of 1999. The Company also developed plans and
procedures to verify that versions of its software products released subsequent
to the third quarter of 1999 are year 2000 compliant. None of the corrections or
updates required a substantial resource commitment or disrupted the Company's
ongoing business activities. To date, the Company's software products have
experienced no significant year 2000 difficulties.

      While year 2000 issues presented a potential risk to the Company's
internal systems, distribution and supply chain, and facilities, the Company
attempted to minimize such risk with a worldwide effort. This effort was
completed in the fourth quarter of 1999. In 1999, Pharmacopeia performed
extensive assessment and testing and remediated mission critical components.
Contingency plans were developed, where appropriate, in parallel with the
testing and remediation efforts. All critical systems were ready for the year
2000 and the total cost to address all such issues did not exceed $0.5 million.
To date, the Company's internal systems, distribution and supply chain and
facilities have experienced no significant year 2000 difficulties. The Company
will continue to monitor and work directly with key vendors, service providers,
hardware manufacturers and distributors to avoid any business interruption in
the year 2000.

SIGNIFICANT RISKS, TRENDS AND UNCERTAINTIES

      The following significant risks, trends and uncertainties, among others,
could materially and adversely affect the Company's future financial condition,
results of operations and stock price.

      UNCERTAIN REVENUE LEVELS - The Company's future revenue levels depend upon
many factors, many of which are beyond the control of management. These factors
include changes in the demand for products and services, the introduction of
competitive drug discovery services and software, changes in the research and
development budgets of customers and potential customers, and the ability to
successfully and timely develop, introduce and market new products, services and
product enhancements and to gain cooperation of third parties as needed. In
addition, future revenue levels, especially Drug Discovery Services revenue
levels, are heavily dependent upon the life sciences industry's successful
identification of new drug targets from genes and willingness to out-source drug
discovery work, and upon the Company's ability to cost effectively develop and
identify new drug candidates that interact with those targets. There can be no
assurance about the Company's future revenue levels.

      RAPIDLY CHANGING TECHNOLOGIES - Rapid technological change and uncertainty
due to new and emerging technologies characterize the drug discovery and
chemical development industries. The Company may not be able to develop,
integrate and market, on a timely basis, the new and enhanced products and
services necessary to keep pace with competitors. Failure to anticipate or to
respond to changing technologies, or significant delays in product development
or introduction, could cause customers to delay or decide against purchases of
the Company's products or services.

      ACQUISITION STRATEGY - The success of the Company's business strategy
depends, in part, upon the successful acquisition of technologies and businesses
that supplement and add to the Company's current technologies. However, critical
technology may not be available to the Company at affordable prices, the Company
may choose


                                     - 28 -
<PAGE>


the wrong technologies, integration costs may be higher than anticipated,
management's time and attention may be unduly diverted, key employees may not be
retained, and earnings per share may be temporarily or permanently diluted.

      STOCK PRICE VOLATILITY - The Company's stock price has experienced
significant price volatility that is expected to continue in the future. Factors
such as those described above, industry business combinations,
quarter-to-quarter variations in operating results, the gain or loss of
significant orders, and the ability to meet the operating expectations of
analysts, among other things, will likely have a significant impact on the
market price of the Company's stock. Further, future fluctuations in the
Company's stock price could be unrelated or disproportionate to the operating
performance of the Company. There can be no assurance regarding the future
market price of the Company's stock.

SUBSEQUENT EVENTS

       ACQUISITION OF SYNOPSYS

       On February 29, 2000, the Company acquired Synopsys Scientific Systems
Ltd. (Synopsys), a U.K.-based company providing chemical data base software,
chemical data content and systems integration services to the pharmaceutical,
biotechnology and chemical industries. The Company paid $25 million for
Synopsys, consisting primarily of cash, and will account for the acquisition
as a purchase.

      EQUITY FINANCING

      On March 8, 2000, the Company completed the sale of 1,860,000 shares of
its common stock to selected institutional investors for net proceeds of
approximately $110 million. The shares were sold at their fair value on the
date of the transaction for $63 per share.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company is exposed to various market risks consisting primarily of
changes in foreign currency exchange rates. The Company's international sales
generally are denominated in local currencies. In 1999, 40% of the Company's
consolidated revenue was derived from customers outside the United States
(including 28% from customers in Europe and 12% from customers in the
Asia/Pacific region). The Company's exchange rate risk is greatest for
Dollar/Euro and Dollar/Yen fluctuations. When deemed appropriate, the Company
engages in exchange rate-hedging transactions in an attempt to mitigate the
impact of adverse exchange rate fluctuations. At December 31, 1999, the Company
had no material hedging transactions in effect.

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

      The Company's exposure to market risks associated with changes in interest
rates relates primarily to the increase or decrease in the amount of interest
income earned on its investment portfolio since the Company has minimal debt.
The Company ensures the safety and preservation of invested funds by limiting
default risks, market risk and reinvestment risk. The Company mitigates default
risk by investing in investment grade securities. A hypothetical 100 basis point
adverse move in interest rates along the entire interest rate yield curve would
not materially affect the fair value of the Company's interest sensitive
financial instruments at December 31, 1999. Declines in interest rates over time
will, however, reduce the Company's interest income.


                                     - 29 -
<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders
Pharmacopeia, Inc.

We have audited the accompanying consolidated balance sheets of Pharmacopeia,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with 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. and
subsidiaries at December 31, 1999 and 1998 and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1999 in conformity with generally accepted accounting principles.

We previously audited and reported on the statements of operations,
stockholders' equity and cash flows of Pharmacopeia, Inc for the year ended
December 31, 1997, prior to the restatement for the 1998 pooling of interests as
described in Note 3. The contribution of Pharmacopeia, Inc. to total revenues
represented 30.2% of the restated total for 1997. Financial statements of the
other pooled company included in the 1997 restated consolidated financial
statements were audited and reported on separately by other auditors. We have
also audited, as to combination only, the accompanying consolidated statements
of operations, stockholders' equity and cash flows for the year ended December
31, 1997, after restatement for the 1998 pooling of interests; in our opinion,
such consolidated financial statements have been properly combined on the basis
described in Note 3 to the consolidated financial statements.


                                                         ERNST  & YOUNG LLP



San Diego, California
January 28, 2000, except for Note 9,
as to which the date
is March 8, 2000


                                     - 30 -
<PAGE>


                               PHARMACOPEIA, INC.
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                            DECEMBER 31,
                                                                                --------------------------------------
                                                                                      1999                1998
                                                                                -----------------    -----------------
<S>                                                                                  <C>                   <C>
ASSETS
Current assets:
     Cash and cash equivalents                                                       $  17,157             $ 36,863
     Marketable securities                                                              51,875               44,235
     Trade receivables, net of allowance for doubtful
          accounts of $624 and $609, respectively                                       26,836               23,307
     Prepaid expenses and other current assets                                           5,251                5,238
                                                                                -----------------    -----------------
       Total current assets                                                            101,119              109,643
Property and equipment - net                                                            11,362               13,700
Software development costs, net of accumulated
       Amortization of $4,594 and $2,725, respectively                                    3,353                3,492
Goodwill - net of accumulated amortization of $368                                       9,071                   --
Other assets                                                                             1,354                1,030
                                                                                -----------------    -----------------
         Total assets                                                                $ 126,259            $ 127,865
                                                                                =================    =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                                  $   3,479             $  5,158
   Accrued liabilities                                                                  18,409               21,427
   Deferred revenue, current portion                                                    20,212               24,415
   Notes payable, current portion                                                          292                1,316
                                                                                -----------------    -----------------
         Total current liabilities                                                      42,392               52,316

Notes payable, long-term portion                                                            --                  328
Other long-term liabilities                                                                 69                1,240
Deferred revenue, long-term                                                              5,052                1,764
Commitments and Contingencies
Stockholders' equity:
    Preferred stock, $.0001 par value, 2,000 shares
         authorized, none issued and outstanding                                            --                   --
    Common stock, $.0001 par value, 40,000 shares
         authorized, 20,183 and 19,121 shares
         issued and outstanding, respectively                                                1                    1
    Additional paid-in capital                                                         148,862              145,499
    Accumulated deficit                                                                (69,049)             (72,820)
    Accumulated comprehensive loss                                                      (1,068)                (463)
                                                                                -----------------    -----------------
    Total stockholders' equity                                                          78,746               72,217
                                                                                -----------------    -----------------
    Total liabilities and stockholders' equity                                       $ 126,259            $ 127,865
                                                                                =================    =================

</TABLE>

       See accompanying notes to these consolidated financial statements.


                                     - 31 -
<PAGE>


                               PHARMACOPEIA, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                              YEAR ENDED DECEMBER 31,
                                                             ------------------------------------------------------------
                                                                   1999                  1998                 1997
                                                             -------------------     ---------------      ---------------
<S>                                                                   <C>                <C>                 <C>
Revenue:
    Drug discovery services                                           $34,581            $ 29,677            $ 24,523
    Software license, service and other                                60,943              54,420              49,108
    Hardware                                                            8,435               8,114               7,566
                                                             -------------------     ---------------      ---------------
         Total revenue                                                103,959              92,211              81,197

 Cost of revenue:
     Drug discovery services                                           20,814              20,307              16,931
     Software license, service and other                                7,430               5,285               5,195
     Hardware                                                           7,512               7,061               6,720
                                                             -------------------     ---------------      ---------------
         Total cost of revenue                                         35,756              32,653              28,846
                                                             -------------------     ---------------      ---------------
 Gross margin                                                          68,203              59,558              52,351

 Operating costs and expenses:
     Research and development                                          27,282              28,656              25,251
     Sales, general and administrative                                 40,772              36,360              30,124
     Merger related costs                                                   -               7,998                   -
                                                             -------------------     ---------------      ---------------
         Total operating costs and expenses                            68,054              73,014              55,375
                                                             -------------------     ---------------      ---------------
 Operating income (loss)                                                  149             (13,456)             (3,024)
 Interest and other income, net                                         4,122               4,202               4,292
                                                             -------------------     ---------------      ---------------
 Income (loss) before provision for income taxes                        4,271              (9,254)              1,268
 Provision for income taxes                                               500                 909               2,996
                                                             -------------------     ---------------      ---------------
 Net income (loss)                                                    $ 3,771            $(10,163)            $ (1,728)
                                                             ===================     ===============      ===============

 Net income (loss) per share
       - Basic                                                         $ 0.19            $  (0.54)             $ (0.09)
                                                             ===================     ===============      ===============
       - Diluted                                                       $ 0.19            $  (0.54)             $ (0.09)
                                                             ===================     ===============      ===============

 Weighted average shares of common stock outstanding
       - Basic                                                         19,684              18,916              18,445
       - Diluted                                                       20,294              18,916              18,445

</TABLE>

       See accompanying notes to these consolidated financial statements.


                                     - 32 -
<PAGE>


                               PHARMACOPEIA, INC.
          CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                           COMMON STOCK                           TREASURY STOCK
                                                        --------------------                  -------------------------
                                                                                ADDITIONAL
                                                        NUMBER OF                PAID-IN        NUMBER OF                ACCUMULATED
                                                          SHARES     AMOUNT      CAPITAL         SHARES       AMOUNT       DEFICIT
                                                        --------------------  --------------  ------------------------- ------------
<S>                                                     <C>         <C>       <C>             <C>            <C>        <C>
  Balance at December 31, 1996                            18,244       $  1     $ 136,928               -      $   -      $ (60,929)
  Comprehensive income (loss):
       Net loss                                                                                                              (1,728)
       Translation adjustment

       Comprehensive loss
  Acquisition of  treasury stock                                                                    1,646         (1)
  Retirement of treasury stock                                (2)         -            (1)         (1,646)         1
  Issuance of common stock in  private placements, net       438          -         6,861
  Issuance of common stock for exercise of stock
     options                                                  93          -           201
  Issuance of common stock in employee stock purchase
     plan                                                     19          -           235
  Issuance of common stock for 401(k) matching                13          -           216
                                                        --------------------  --------------  ------------------------- ------------
  Balance at December 31, 1997                            18,805          1       144,440               -           -       (62,657)
  Comprehensive income (loss):
       Net loss                                                                                                             (10,163)
       Translation adjustment

       Comprehensive loss
  Acquisition of  treasury stock                                                                     3,584         (1)
  Retirement of treasury stock                                (4)          -            (1)         (3,584)         1
  Issuance of common stock for exercise of stock
     options                                                 264          -           502
  Issuance of common stock in employee stock purchase
     plan                                                     32          -           298
  Issuance of common stock for 401(k) matching                24          -           260
                                                        --------------------  --------------  ------------------------- ------------
  Balance at December 31, 1998                            19,121          1       145,499               -           -       (72,820)
  Comprehensive income (loss):
       Net income                                                                                                             3,771
       Translation adjustment
       Unrealized loss on marketable securities

       Comprehensive income
  Issuance of common stock for exercise of stock             886          -         1,762
     options and warrants
  Issuance of common stock in employee stock purchase
     plan                                                    100          -           767
  Issuance of common stock for 401(k) matching                76          -           834
                                                        ====================  ==============  ========================= ============
  Balance at December 31, 1999                            20,183       $  1     $ 148,862               -       $   -    $  (69,049)
                                                        ====================  ==============  ========================= ============

</TABLE>

<TABLE>
<CAPTION>

                                                                 ACCUMULATED
                                                                    OTHER                TOTAL
                                                                COMPREHENSIVE        STOCKHOLDERS'
                                                                 INCOME (LOSS)            EQUITY
                                                               ------------------   -----------------
<S>                                                            <C>                   <C>
  Balance at December 31, 1996                                     $     (499)           $   75,501
  Comprehensive income (loss):
       Net loss                                                                              (1,728)
       Translation adjustment                                            (689)                 (689)
                                                                                     -----------------
       Comprehensive loss                                                                    (2,417)
  Acquisition of  treasury stock                                                                 (1)
  Retirement of treasury stock                                                                    -
  Issuance of common stock in  private placements, net                                        6,861
  Issuance of common stock for exercise of stock
  options                                                                                       201
  Issuance of common stock in employee stock purchase
     plan                                                                                       235
  Issuance of common stock for 401(k) matching                                                  216
                                                                ------------------   -----------------
  Balance at December 31, 1997                                         (1,188)               80,596
  Comprehensive income (loss):
       Net loss                                                                             (10,163)
       Translation adjustment                                             725                   725
                                                                                     -----------------
       Comprehensive loss                                                                    (9,438)
  Acquisition of  treasury stock                                                                 (1)
  Retirement of treasury stock                                                                    -
  Issuance of common stock for exercise of stock
  options                                                                                       502
  Issuance of common stock in employee stock purchase
     plan                                                                                       298
  Issuance of common stock for 401(k) matching                                                  260
                                                                ------------------   -----------------
  Balance at December 31, 1998                                           (463)               72,217
  Comprehensive income (loss):
       Net income                                                                             3,771
       Translation adjustment                                            (478)                (478)
       Unrealized loss on marketable securities                          (127)                (127)
                                                                                     -----------------
       Comprehensive income                                                                   3,166
  Issuance of common stock for exercise of stock                                              1,762
  options                and warrants
  Issuance of common stock in employee stock purchase
     plan                                                                                       767
  Issuance of common stock for 401(k) matching                                                  834
                                                                ==================   =================
  Balance at December 31, 1999                                     $   (1,068)           $   78,746
                                                                ==================   =================
</TABLE>


       See accompanying notes to these consolidated financial statements.


<PAGE>


                               PHARMACOPEIA, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                          YEAR ENDED DECEMBER 31,
                                                                                  1999             1998              1997
                                                                             ----------------- ---------------  ----------------
<S>                                                                                <C>            <C>                <C>
      CASH FLOWS FROM OPERATING ACTIVITIES
           Net income (loss)                                                       $  3,771       $ (10,163)         $ (1,728)
           Adjustments to reconcile net loss to net cash used in operations
              Depreciation                                                            5,431           4,110             3,599
              Amortization                                                            2,237           1,881             2,162
              Contribution of stock to 401(k) members                                   834             260               216
              Changes in assets and liabilities:
                   Accounts receivable                                               (3,529)         (3,015)           (3,246)
                   Prepaid and other current assets                                     (13)         (1,435)             (258)
                   Other assets                                                        (324)            708               353
                   Accounts payable                                                  (1,679)            926             1,856
                   Accrued liabilities                                               (3,018)          3,309             3,316
                   Deferred revenue                                                    (915)         (7,508)             (314)
                   Other                                                               (236)            227                37
                                                                             ----------------- ---------------  ----------------
                        Net cash provided by (used in) operating activities           2,559         (10,700)            5,993
      CASH FLOWS FROM INVESTING ACTIVITES
          Capital expenditures                                                       (3,093)         (5,283)            7,549)
          Purchases of marketable securities                                        (66,513)        (62,987)          (90,373)
          Proceeds from sales of marketable securities                               58,746          91,783            81,765
          Effect of MSI KK consolidation                                                  -          (1,113)                -
          Acquisition of distribution rights and joint venture interest             (10,566)              -                 -
          Increase in capitalized software development costs                         (1,730)         (1,322)           (1,923)
                                                                             ----------------- ---------------  ----------------
                       Net cash provided by (used in) investing activities          (23,156)         21,078           (18,080)

      CASH FLOWS FROM FINANCING ACTIVITES
           Proceeds from issuance of common stock                                     2,529             799             7,261
           Principal payments on notes payable                                       (1,311)         (1,774)           (1,506)
                                                                             ----------------- ---------------  ----------------
                      Net cash provided by (used in) financing activities             1,218            (975)            5,755
      Exchange rate effect on cash and equivalents                                     (327)            725              (627)
                                                                             ----------------- ---------------  ----------------
      Net increase (decrease) in cash and equivalents                               (19,706)         10,128            (6,959)
      Effect of cash from MSI KK purchase transaction                                     -           2,126                 -
      Cash and equivalents, beginning of period                                      36,863          24,609            31,568
                                                                             ================= ===============  ================
      Cash and equivalents, end of period                                          $ 17,157       $  36,863          $ 24,609
                                                                             ================= ===============  ================
      SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
      Cash paid during the period for:
           Interest                                                                $     81       $     333          $    379
                                                                             ================= ===============  ================
           Income taxes                                                            $    395       $   1,277          $  1,555
                                                                             ================= ===============  ================

</TABLE>

       See accompanying notes to these consolidated financial statements.

<PAGE>


                               PHARMACOPEIA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


1.  ORGANIZATION AND DESCRIPTION OF BUSINESS

      Pharmacopeia, Inc. (the "Company") designs, develops, markets and supports
science and technology-based products and services that improve and accelerate
the processes of drug discovery and chemical development.

2.  SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

      These consolidated financial statements include the accounts of
Pharmacopeia and its majority-owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.

BASIS OF PRESENTATION

      In 1999 the Company revised the format of its statement of operations to
segregate costs of revenues from operating costs and expenses, and to report
gross margin from revenue. This change in presentation resulted from a 1999
change in the Company's primary business focus, from drug research to the sale
of science and technology-based products and services. The Company believes that
the new format better presents results of operations considering this change in
focus. Certain prior year amounts have been reclassified to conform to the new
presentation.

      On June 12, 1998 the Company acquired Molecular Simulations Inc. (MSI) in
a business combination accounted for as a pooling of interests. The Company's
consolidated financial statements for all periods prior to the acquisition have
been restated to include MSI's financial position, results of operations and
cash flows.

FINANCIAL STATEMENT PREPARATION

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and the disclosure of contingent assets and liabilities. 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 with major financial institutions in money market funds, U.S. Treasury
securities and other investment grade securities such as prime rated commercial
paper.

MARKETABLE SECURITIES

      Marketable securities consist of fixed income investments with an original
maturity of greater than three months such as United States treasury securities,
obligations of United States government agencies and other investment grade
securities such as prime rated commercial paper and corporate bonds. The Company
applies Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115) to its investments
in marketable securities. As a result of the Company's strategic acquisition
intentions, the Company transferred the classification of its marketable
securities of $64,029 from held-to-maturity to available-for-sale, effective
June 30, 1998. At the date of the transfer unrealized gains or losses were not
material. Marketable


                                     - 35 -
<PAGE>


securities classified as available-for-sale are recorded at estimated fair
value with unrealized gains or losses reported in stockholders' equity. At
December 31, 1998 marketable securities totaled $44.2 million of which $36.2
million was invested in U.S. government securities and $8.0 million was
invested in U.S. corporate debt securities. At December 31, 1998 the cost of
marketable securities approximated fair value.

At December 31, 1999, marketable securities consisted of the following:

<TABLE>
<CAPTION>

                                                             AMORTIZED           MARKET          UNREALIZED
                                                                COST             VALUE           GAIN (LOSS)
                                                          ----------------- ----------------- ------------------
        <S>                                               <C>               <C>               <C>
        U.S. treasury securities and obligations of
             U.S. Government agencies                            $ 29,262          $ 29,190             $ (72)
        U.S. corporate debt securities                             22,740            22,685               (55)
                                                          ----------------- ----------------- ------------------
                                                                 $ 52,002           $51,875            $ (127)
                                                          ================= ================= ==================

</TABLE>

Available for sale marketable securities by contractual maturity are as follows:

<TABLE>
<CAPTION>

                                                                DECEMBER 31,
                                                                   1999
                                                            ------------------
        <S>                                                 <C>
        Due within one year                                         $ 42,745
        Due after one year through two years                           9,130
                                                            ------------------
                                                                    $ 51,875
                                                            ==================

</TABLE>

PROPERTY AND EQUIPMENT

      Property and equipment is stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the related assets,
which range from three to ten years. Assets under capital leases are amortized
over their estimated useful life or the applicable lease period, whichever
period is shorter. The Company amortizes leasehold improvements over the shorter
of their estimated useful lives or the remaining term of the related lease.
Repair and maintenance costs are charged to expense as incurred.

RESEARCH AND DEVELOPMENT COSTS

      The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased or Otherwise Marketed" (SFAS 86). Such
costs are stated at the lower of cost or net realizable value. Capitalized
software costs are comprised of development costs incurred in the research and
development of new software products and enhancements to existing software
products after technological feasibility has been established. The Company
amortizes capitalized costs over the estimated product life, not to exceed three
years from the date on which the product is available for general release.

      All research and development costs not subject to capitalization under
SFAS 86 are charged to operations as incurred.

REALIZATION OF ASSETS

      The Company periodically re-evaluates the original assumptions and
rationale utilized in the establishment of the carrying value and estimated life
of its long-lived assets. The criteria used for these evaluations include
management's estimates of the assets continuing ability to generate income from
operations and positive cash flow in future periods, as well as the strategic
significance of its assets to the Company's business objectives.


                                     - 36 -
<PAGE>


FOREIGN CURRENCY TRANSLATION

      The Company translates certain of its accounts and the financial
statements of its foreign operations in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation" (SFAS 52). The
financial statements of the Company's international operations are translated
into U.S. dollars using period-end exchange rates for assets and liabilities and
average exchange rates during the period for revenues and expenses. Cumulative
translation gains and losses are excluded from results of operations and
recorded as a separate component of comprehensive income (loss) within
stockholders' equity. Gains and losses resulting from foreign currency
transactions are included in the consolidated statement of operations.

CONCENTRATIONS OF RISK

      The Company's software products operate primarily on the Silicon Graphics
version of the Unix operating system. Any disruption of supply could cause a
temporary adverse effect in the Company's revenues while its software is ported
to alternative systems.

      In 1999, one Drug Discovery Services customer accounted for 12% of
consolidated revenue.

      The Company's international sales are generally denominated in foreign
currencies. Conversion of foreign-denominated receivables into U.S. dollars
could have a material adverse effect on the Company's financial statements. The
Company conducts business in Europe and in the Asia/Pacific region, primarily in
Japan. Any significant decline in the economies or the value of the currencies
in these regions could have a material adverse impact on the Company.

REVENUE RECOGNITION

      Revenue from Drug Discovery Services is recognized primarily using the
percentage of completion method. Accordingly, revenue is recognized as research
and development labor is expended against a total research and development plan.
Payments received prior to the completion of the related work are recorded as
deferred revenue. Non-refundable milestone payments and up-front fees are
recognized as revenue when received when they are not subject to future
performance obligations. Otherwise, such milestone payments and up-front fees
are deferred and amortized into revenue over the term of the agreement in
accordance with SEC Staff Accounting Bulletin 101.

      The Company recognizes revenue from licenses of computer software provided
that the customer has signed a non-cancelable license agreement, the software
and related documentation has been shipped, no material uncertainties regarding
customer acceptance exist, collection of the resulting receivable is deemed
probable and no other significant obligations by the Company exist. Prepaid post
contract support and maintenance ("PCS") revenue bundled with software license
agreements is unbundled using objective, vendor specific evidence. PCS revenue
is recognized pro-rata over the related license period, which is generally one
year. Revenue generated from consulting, training and software customization
sold separately from license agreements is recognized as the services are
performed.

      The Company earns revenue under consortia agreements wherein several
unrelated parties enter into a joint software development agreement with the
Company. These agreements are generally one to three years in length, require an
annual membership fee and contain best efforts development milestones. Customers
receive a consortia membership, a software library and related software and
maintenance support. The portion of consortia fees associated with the initial
software library is recognized upon delivery, while consortia fees associated
with consortia membership and software maintenance are recognized on a
straight-line basis over the term of the agreement. The Company is not required
to deliver specified products under the agreements and the consortia fees are
generally non-refundable. If the Company is successful in developing software
under the consortia agreement described above, a non-transferable license is
typically awarded to the consortia members.


                                     - 37 -
<PAGE>


      Under certain circumstances, the Company sells computer hardware to a
licensee of the Company's software products. In these instances, the Company
typically orders the hardware from an unrelated vendor and recognizes revenue
upon shipment of the hardware to the licensee by the vendor.

STOCK BASED COMPENSATION

      As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company 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.

NET INCOME (LOSS) PER SHARE

      Basic net income (loss) per share is based on net income (loss) for the
year divided by the weighted average number of common shares outstanding during
the year. Diluted net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding, including
the effect of dilutive securities. Dilutive securities such as convertible
preferred stock, stock options and warrants are not included in loss years
because their effect is anti-dilutive.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

      In January 1999, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions." SOP (98-9). This SOP
amends SOP 98-4 to extend the deferral of the application of certain passages of
SOP 97-2 that appear in SOP 98-4. The adoption of SOP 98-9 did not have a
significant impact on the Company's consolidated financial position or results
of operations.

      In March 1998, the AICPA issued SOP 98-1, "Accounting For the Costs of
Computer Software Developed For or Obtained for Internal Use" (SOP 98-1). The
Company adopted SOP 98-1 effective January 1, 1999. The SOP requires the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use. Previous to
the adoption of SOP 98-1 the Company expensed all such costs as incurred. The
adoption of SOP 98-1 did not have a significant impact on the Company's
consolidated financial position or results of operations.

      In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Financial
Instruments and for Hedging Activities" (SFAS 133), which will be adopted by the
Company in 2001. The statement establishes accounting and reporting standards
requiring that every derivative instrument, including derivative instruments
embedded in other contracts, be recorded in the balance sheet either as an asset
or liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings unless specific
hedge accounting criteria are met. SFAS 133 is not anticipated to have a
significant impact on operating results or financial condition when adopted
because the Company's derivative instruments are not material.

3. BUSINESS COMBINATIONS

MERGER WITH MOLECULAR SIMULATIONS INC.

      In June 1998, the Company completed a merger with MSI through the issuance
of approximately 7.1 million shares of common stock for all of the capital stock
of MSI. The merger was accounted for as a pooling-of-interests


                                     - 38 -
<PAGE>


and, accordingly, the Company's financial statements for the periods prior to
the merger have been restated to include MSI. In connection with the merger, the
Company recorded merger-related charges of approximately $8.0 million in 1998.
Such charges consisted of transaction costs, principally investment banking and
professional fees.

      The following table summarizes 1998 information on a separate company
basis for Pharmacopeia and MSI prior to the completion of the merger:

<TABLE>
<CAPTION>

                                                         PERIOD FROM            YEAR ENDED
                                                      JANUARY 1, 1998 TO       DECEMBER 31,
                                                        JUNE 12, 1998              1997
                                                    ----------------------- -------------------
                  <S>                               <C>                     <C>
                  Total revenue:
                       Pharmacopeia                         $  12,322           $  24,523
                       MSI                                     20,437              56,674
                  Net income (loss):
                       Pharmacopeia                         $  (3,588)          $  (6,678)
                       MSI                                     (1,483)              5,450

</TABLE>

ACQUISITION OF JAPANESE DISTRIBUTION RIGHTS AND REMAINING JOINT VENTURE INTEREST

      In March 1999, the Company completed the re-purchase of certain
distribution rights to MSI software in Japan and acquired the remaining 50%
interest of its Japanese joint venture from a third party for a total cash
purchase price of approximately $10.6 million. The joint venture, renamed as MSI
KK, markets, distributes, and supports the Company's software products in the
Asia/Pacific region. As a result of the transaction, Company ownership of MSI KK
became 100%. The acquisition has been accounted for by the purchase method of
accounting and, accordingly, the assets acquired and liabilities assumed have
been recorded at their estimated fair values. The excess of cost over the
estimated fair value of the net assets acquired was allocated to goodwill in the
amount of $9.4 million, which is being amortized on a straight-line basis over
20 years.

      Pro forma results of operations presented as if the acquisition of the
remaining joint venture interest had taken place as of the beginning of the
periods presented would not materially affect reported revenues and would not
materially change net loss or net loss per share from the figures presented in
the accompanying statements of operations.

4.  COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Property and equipment consist of the following:

<TABLE>
<CAPTION>

                                                           DECEMBER 31,
                                                      1999             1998
                                                -----------------------------------
<S>                                                      <C>           <C>
      Laboratory equipment                             $  9,147        $  8,477
      Furniture, fixtures and equipment                   5,134           4,553
      Computers and software                              9,513           8,287
      Leasehold improvements                              6,176           5,780
      Other                                                 356             453
                                                -----------------------------------
                                                         30,326          27,550
      Accumulated depreciation and amortization         (18,964)        (13,850)
                                                -----------------------------------
      Property and equipment, net                      $ 11,362        $ 13,700
                                                ===================================

</TABLE>


                                     - 39 -
<PAGE>


Accrued liabilities consist of the following:

<TABLE>
<CAPTION>

                                                          DECEMBER 31,
                                                     1999              1998
                                               ------------------------------------
      <S>                                             <C>               <C>
      Payroll and other compensation                  $ 8,529           $ 8,984
      Royalties                                         1,173               946
      Merger related and restructuring costs            1,096             3,867
      Taxes                                             4,142             5,108
      Other                                             3,014             2,977
                                               ------------------------------------
                                                      $18,409           $21,427
                                               ====================================

</TABLE>

5.  INCOME TAXES

      The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial carrying amounts and the tax basis of existing assets and
liabilities.

      Significant components of the Company's deferred tax assets and
liabilities as of December 31, are as follows:

<TABLE>
<CAPTION>

                                                                            1999             1998
                                                                       ---------------- ----------------
                  <S>                                                  <C>               <C>
                  Deferred tax assets:
                     Net operating loss carryforwards                       $ 18,500         $ 17,873
                     Unused tax credits                                        2,637            2,261
                     Accruals and reserves                                     3,095            2,628
                     Other                                                         -              258
                                                                       ---------------- ----------------
                     Gross deferred tax asset                                 24,232           23,020

                  Deferred tax liabilities:
                     Fixed assets and intangibles                                757              948
                                                                       ---------------- ----------------

                  Net asset before valuation allowance                        23,475           22,072
                  Valuation allowance                                        (23,475)         (22,072)
                                                                       ---------------- ----------------

                  Net deferred tax asset                                    $     --         $     --
                                                                       ================ ================

</TABLE>

      As of December 31, 1999, approximately $1,576 of the valuation allowance
for deferred tax assets relates to pre-acquisition tax deductions which, when
recognized, will be allocated directly to goodwill.


                                     - 40 -
<PAGE>


The provision for income taxes consists of the following:

<TABLE>
<CAPTION>

                                                           1999             1998             1997
                                                     ---------------------------------------------------
<S>                                                            <C>            <C>             <C>
                 Current:
                    Federal                                   $  50           $   --          $ 1,603
                    State                                        70              310              480
                    Foreign                                     380              599              913

                 Deferred:
                    Federal                                      --               --               --
                    State                                        --               --               --
                    Foreign                                      --               --               --
                                                     ---------------------------------------------------
                 Total                                        $ 500           $  909          $ 2,996
                                                     ===================================================

</TABLE>

The following reconciles income taxes computed at the U.S. statutory federal tax
rate to income tax expense:

<TABLE>
<CAPTION>

                                                                     1999             1998            1997
                                                               --------------------------------------------------
         <S>                                                   <C>               <C>              <C>
         Tax expense (benefit) at U.S. statutory rate               $  1,495          $(3,146)         $ 431
         State income taxes, net of Federal income tax
         benefit                                                          70              205            317
         Nondeductible merger costs                                       --            1,788             --
         Foreign taxes                                                   380              (12)           975
         Alternative minimum tax                                          50               --             --
         Change in valuation allowance and other                       (1,495)          2,074          1,273
                                                               --------------------------------------------------
         Income tax expense                                            $ 500           $  909        $ 2,996
                                                               ==================================================

</TABLE>

      Pretax income (loss) before extraordinary item from the Company's domestic
operations totaled approximately $838, $(10,900) and $1,400 in 1999, 1998 and
1997, respectively. Pretax income (loss) from the Company's foreign operations
totaled approximately $3,433, $1,800 and $(200) in 1999, 1998 and 1997,
respectively.

      As of December 31, 1999, the Company has Federal net operating loss
carryforwards of approximately $48.3 million, and credit carryforwards of
approximately $1.3 million. The federal net operating losses and credits begin
to expire in 2008 through 2018, if not fully utilized. Realization is dependent
on generating sufficient taxable income prior to expiration of the loss
carryforwards. As of December 31, 1999 the Company also has foreign net
operating losses of approximately $4.2 million, which will begin to expire in
2004, unless previously utilized.

      As a result of certain transactions involving the Company's stock, the
Company believes an ownership change, as defined in Section 382 of the Internal
Revenue Code, has occurred. Consequently, future utilization of the Company's
federal net operating loss carryforwards may be subject to limitations.

6.  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 3,700 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


                                     - 41 -
<PAGE>


purchase right is generally ten years. Vesting generally occurs over a period of
not greater than five years. At December 31, 1999, there were 627 shares
available for future grants under the 1994 Incentive Stock Plan.

      In 1995, the Company adopted the 1995 Employee Stock Purchase Plan
("ESPP") under Section 423 of the Internal Revenue Code. A total of 250 shares
of common stock are reserved for offering under the ESPP. In 1999, 100 shares of
common stock were purchased at prices ranging from $7.54 to $7.81 per share. At
December 31, 1999, there were 92 shares available for future purchase under the
ESPP.

      In accordance with the 1995 Directors Option Plan, the Company may grant
up to 150 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. In 1999, 30 options
were granted at an exercise price of $10.06. At December 31, 1999, there were 30
shares available for future grants under the Directors Option Plan.

      The Company applies APB 25 in accounting for its stock option programs
described above. The option price under the option plans equals or exceeds the
fair market value on of the common shares on the date of grant, and,
accordingly, no compensation cost has been recognized under the provisions of
APB 25. SFAS 123, requires pro forma information regarding net income and
earnings per share as if the Company had 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 SFAS 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 1999, 1998 and 1997,
respectively: risk-free interest rates of 6.5%, 4.5% and 5.4%; expected
volatility of 111%, 81% and 47%; expected option life of 4.9, 5.9 and 5.8 years
from vesting and an expected dividend yield of 0.0%.

      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 income (loss) and per share information is as follows:

<TABLE>
<CAPTION>

                                                              1999               1998               1997
                                                        ----------------- -------------------- ----------------
<S>                                                         <C>                 <C>              <C>
         Net income (loss):
             As reported                                    $  3,771            $(10,163)        $ (1,728)
             Pro forma                                        (6,619)            (17,209)          (5,224)
         Basic net income (loss) per common share:
             As reported                                    $   0.19            $  (0.54)        $  (0.09)
             Pro forma                                         (0.34)              (0.91)           (0.28)
         Diluted net income (loss) per common share:
             As reported                                    $   0.19            $  (0.54)        $  (0.09)
             Pro forma                                         (0.33)              (0.91)           (0.28)

</TABLE>


                                     - 42 -
<PAGE>


A summary of the Company's stock option activity and weighted average exercise
prices follows:

<TABLE>
<CAPTION>

                                          1999                              1998                               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                          3,725          $ 9.54            3,164           $ 8.19       2,650                  $ 6.41
   Granted                          1,270            9.27            1,218            12.45              779              13.94
   Exercised                        (886)            2.70            (296)             2.42            (109)               3.32
   Expired                          (445)           13.44            (361)            13.01            (156)               9.01
                               ------------                    ------------                       -------------
   Outstanding at end of year       3,664           10.73            3,725             9.54            3,164               8.19
                               ============                    ============                       =============

   Exercisable at end of year       1,739                            1,853                             1,450
                               ============                    ============                       =============
   Weighted average fair
   value  of options granted
   during the year                                  $8.65                             $6.52                              $10.58

</TABLE>

A summary of stock options outstanding and exercisable as of December 31, 1999,
follows:

<TABLE>
<CAPTION>

                                                            OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE
                                                     ----------------------------------    -------------------------------
                                                     Weighted Average     Weighted                             Weighted
                                                        Remaining          Average                             Average
          Range of                  Options            Life (years)    Exercise Price           Number         Exercise
       Exercise Prices            Outstanding                                                Exercisable        Price
   ------------------------    ------------------    ----------------- ----------------    ----------------- -------------
   <S>                         <C>                   <C>               <C>                 <C>               <C>
       $0.00 -  $ 0.48                      64             0.5                 $0.47                  64          $0.47
       $ 1.24 - $19.00                   3,318             7.7                  9.99               1,458           8.95
       $19.01 - $26.75                     282             6.9                 21.77                 217          22.04
   ------------------------    ------------------    ----------------- ----------------    ----------------- -------------
       $ 0.00 - $26.75                   3,664             7.5                 10.73               1,739          10.27

</TABLE>

7.  SEGMENT INFORMATION

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

      Summarized financial information concerning the industry segments and
geographic revenues follows:

<TABLE>
<CAPTION>

                                   1999                                  1998                                    1997
                     ---------------------------------- -------------------------------------  -------------------------------------
                                   Drug                                   Drug                                 Drug
                                 Discovery                              Discovery                            Discovery
                     Software    Services     Total      Software       Services       Total     Software    Services      Total
                     ---------- ----------- ----------- -----------   ------------  ---------  -------------------------------------
<S>                  <C>        <C>         <C>         <C>           <C>           <C>        <C>          <C>            <C>
  REVENUE:
  Drug discovery
     services         $    --     $34,581    $  34,581     $     -       $ 29,677     $ 29,677    $     -     $ 24,523     $ 24,523
  Software license
     service and       60,943           -       60,943      54,420              -       54,420     49,108            -       49,108
     other
  Hardware              8,435           -        8,435       8,114              -        8,114      7,566            -        7,566
                     ---------------------------------  --------------------------------------- ------------------------------------
  Total revenue       $69,378     $34,581    $ 103,959     $62,534       $ 29,677     $ 92,211    $56,674     $ 24,523     $ 81,197
                     ================================== ======================================= ====================================
  DEPRECIATION AND
     AMORTIZATION     $ 3,798     $ 3,870    $   7,668     $ 2,733       $  3,258     $  5,991    $ 2,985     $  2,776     $  5,761

</TABLE>



                                     - 43 -
<PAGE>


<TABLE>

<S>                  <C>        <C>         <C>         <C>           <C>           <C>        <C>          <C>            <C>
  OPERATING INCOME    $ 8,520   $ (8,371)    $    149     $ 1,090    $ (14,546)   $ (13,456)     $ 7,820     $(10,844)   $  (3,024)
  (LOSS)(1)
  CAPITAL
     EXPENDITURES     $ 1,173   $  1,920     $  3,093     $ 1,878    $   3,405    $   5,283      $ 2,216     $  5,333    $   7,549

                      $59,985   $ 66,274     $126,259     $52,889    $  74,976    $ 127,865      $44,364     $ 95,687    $ 140,051

  TOTAL ASSETS
  REVENUES (2)
    U.S.                                     $ 70,249                             $  58,601                              $  62,444
    Europe                                     23,348                                22,739                                 18,753
    Asia-Pacific                               10,362                                10,871                                      -
                                           -----------                           ----------                             -----------
  Total                                      $103,959                             $  92,211                              $  81,197
                                           ===========                           ===========                            ===========

</TABLE>

(1) Includes $8.0 million of merger related costs in 1998.
(2) Revenue in the U.S. category includes export sales of laboratory services
and software. Export sales from the U.S. to Europe totaled $5,485, $18,308 and
$26,327 in 1999, 1998 and 1997, respectively and export sales to Asia Pacific
totaled $1,969, $2,303 and $5,257 in 1999, 1998 and 1997, respectively.

8.   COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

      The Company has several operating leases or sub-leases for office and
laboratory space, which expire at various dates through 2006. The leases for the
Company's primary facilities in San Diego and New Jersey provide for scheduled
rent increases, an option to extend the lease for five years with certain
changes to the terms of the lease agreement, and a refurbishment allowance. Rent
expense under operating leases for 1999, 1998 and 1997 was approximately $4,803,
$4,435 and $3,793, respectively.

Future minimum lease commitments at December 31, 1999 are as follows:

<TABLE>

                  <S>                          <C>
                  2000                                   $ 4,757
                  2001                                     4,982
                  2002                                     4,959
                  2003                                     4,937
                  2004                                     4,805
                  Thereafter                               7,313
                                               --------------------
                                                         $31,753
                                               ====================

</TABLE>

ROYALTIES

      The Company pays royalties to approximately forty-five partners for
worldwide licenses to enhance and market certain software developed at
universities, corporations and other institutions. A majority of the royalty
agreements are long term or perpetual in nature and the royalty obligations
thereunder are generally based on a percentage of revenues derived from certain
software licenses plus associated revenues from post contract support and
maintenance. The royalty agreements require quarterly payments and generally do
not limit the maximum royalty amount under the agreement. Certain agreements
contain provisions for quarterly and annual minimum royalty payments that total
approximately $450 on an annual basis. In 1999, 1998 and 1997 the Company
incurred related royalty expense of $2,273, $1,623 and $1,304, respectively.
Based on existing royalty agreements, the Company expects to incur significant
future royalty obligations. Additionally, the Company has a license agreement
that grants to the Company an exclusive, worldwide license to certain technology
for making and using combinatorial chemical libraries. The agreement requires
the Company to


                                     - 44 -
<PAGE>


pay annual license fees and certain royalties. In 1999, 1998, and 1997 the
Company paid related royalties and license fees of $100, $514 and $550,
respectively.

LITIGATION

      In the ordinary course of business, the Company is subject to claims and,
from time to time, is named in various legal proceedings. In the opinion of
management, the amount of ultimate liability, if any, with respect to any
pending actions will not materially affect the financial position or results of
operations of the Company.

9.       SUBSEQUENT EVENTS

ACQUISITION OF SYNOPSYS

      On February 29, 2000, the Company acquired Synopsys Scientific Systems
Ltd. (Synopsys), a U.K.-based company providing chemical data base software,
chemical data content and systems integration services to the pharmaceutical,
biotechnology and chemical industries. The Company paid $25 million for
Synopsys, consisting primarily of cash, and will account for the acquisition as
a purchase.

EQUITY FINANCING

      On March 8, 2000, the Company completed the sale of 1,860,000 shares of
its common stock to selected institutional investors for net proceeds of
approximately $110 million. The shares were sold at their fair value on the date
of the transaction for $63 per share.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required by this Item concerning the Company's
directors and executive officers is incorporated by reference from the
Company's Proxy Statement related to the 2000 Annual Meeting of Stockholders
to be held on May 3, 2000 which was filed with the Securities and Exchange
Commission on March 27, 2000 (the "Proxy Statement").

ITEM 11.  EXECUTIVE COMPENSATION

         The information required by this Item is incorporated by reference from
the section entitled "Executive Compensation" in the Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this Item is incorporated by reference from
the section captioned "Executive Compensation" in the Proxy Statement.


                                     - 45 -
<PAGE>


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         None.


                                     PART IV

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

(a)(1)  Financial Statements

The following Consolidated Financial Statements are included:

        Report of Independent Auditors
        Consolidated Balance Sheets as of December 31, 1998 and 1999
        Consolidated Statements of Operations for the years ended December 31,
          1997, 1998 and 1999
        Consolidated Statements of Stockholders' Equity for the years ended
          December 31, 1997, 1998 and 1999
        Consolidated Statements of Cash Flows for the years ended December 31,
          1997, 1998 and 1999
        Notes to Consolidated 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:

3.1  (6)                   Restated Certificate of Incorporation of the
                           Registrant.

3.3  (6)                   Bylaws of the Registrant, as amended.

3.3(a)  (8)                Amendment to Bylaws of Pharmacopeia dated July 31,
                           1997.

4.3  (1)                   Stockholders Rights Agreement, dated February 15,
                           1995.

10.1  (1)                  Series A and Series B Preferred Stock Purchase
                           Agreement, dated July 21, 1993.

10.2  (1)                  Series B Preferred Stock Purchase Agreement, dated
                           March 11, 1994.

10.3  (1)                  Series C Preferred Stock Purchase Agreement, dated
                           December 22, 1994.

10.4  (1)                  Series D Preferred Stock Purchase Agreement, dated
                           February 15, 1995.

10.5  (2)#                 Amended 1994 Incentive Stock Plan.

10.5(a)  (7)#              Amendment No. 3 to the 1994 Incentive Stock Plan
                           dated May 9, 1997.

10.6  (1)#                 1995 Employee Stock Purchase Plan.

10.7  (1)#                 1995 Director Option Plan.



                                     - 46 -
<PAGE>


10.8  (1)+                 Library Collection Agreement, dated as of October 1,
                           1995, between Pharmacopeia and Novartis Corporation.

10.9  (1)+                 Research, License, and Royalty Agreement, dated as of
                           February 15, 1995, between Pharmacopeia and Berlex
                           Laboratories, Inc.

10.9(a)  (7)+              Amendment No. 1 to Research, License and Royalty
                           Agreement between the Company and Berlex
                           Laboratories, Inc. dated November 27, 1996.

10.9(b)  (7)+              Amendment No. 2 to Research, License and Royalty
                           Agreement between the Company and Berlex
                           Laboratories, Inc. dated June 30, 1997.

10.9(c)  (9)+              Amendment No.3 to Research, License and Royalty
                           Agreement between the Company and Berlex
                           Laboratories, Inc. dated November 21, 1997.

10.10  (1)+                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  (1)+                Collaboration Agreement, dated as of December 22,
                           1994, between Pharmacopeia and Schering Corporation
                           and Schering-Plough, Ltd.

10.11(b)  (7)+             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)  (7)+             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  (1)+                Random Library Agreement, dated as of December 22,
                           1994, between Pharmacopeia and Schering Corporation
                           and Schering-Plough, Ltd.

10.13  (1)                 Lease Agreement between Pharmacopeia and Eastpark at
                           8A.

10.13(a)  (2)              Amendment dated as of January 22, 1996 to Lease
                           Agreement between Pharmacopeia and Eastpark at 8A.

10.13(b)  (4)              Third Amendment to Lease Agreement dated March 31,
                           1996 between Pharmacopeia and Eastpark at 8A.

10.14  (1)                 Sublease, dated as of December 7, 1994, between
                           Pharmacopeia and Enichem Americas, Inc.

10.15  (1)                 Lease, dated as of May 2, 1994, between Pharmacopeia
                           and College Road Associates Limited, as amended.

10.15(a)  (2)              Lease dated as of December 1, 1995 between
                           Pharmacopeia and College Road Associates, as amended.

10.15(b)  (4)              Third Execution and Modification of lease dated June
                           7, 1996, between Pharmacopeia and College Road
                           Associates Limited.

10.17  (1)#                Employment Agreement, dated October 4, 1994, between
                           the Company and Lewis J. Shuster.

10.18  (9)#                Employment Agreement effective November 1, 1997
                           between the Company and Joseph A. Mollica, Ph.D.


                                     - 47 -
<PAGE>


10.19  (12)#               Employment Agreement, dated January 30, 1998, between
                           the Company and Richard Walsh

10.20  (1)#                Employment Agreement, dated June 3, 1993, between the
                           Company and John J. Baldwin, Ph.D.

10.21  (1)#                Employment Agreement, dated December 2, 1993, between
                           the Company and Nolan H. Sigal, M.D., Ph.D.

10.22  (1)#                Consulting Agreement, dated April 30, 1993, between
                           the Company and W. Clark Still, Ph.D.

10.23  (1)                 Warrant to purchase Common Stock issued to Columbia
                           University.

10.24  (1)                 Warrant to purchase Common Stock issued to Cold
                           Spring Harbor Laboratory.

10.25  (2)+                Collaboration Agreement effective as of December 31,
                           1995 between Pharmacopeia and Bayer.

10.26  (2)+                Random Library Agreement effective as of December 31,
                           1995 between Pharmacopeia and Bayer.

10.27  (11)#               Employment Agreement effective November 30, 1995
                           between Molecular Simulations Incorporated and
                           Michael J. Savage.

10.27(a) (12)#             Amendment No. 1 to Employment Agreement between
                           Molecular Simulations Incorporated and Michael J.
                           Savage dated as of October 1, 1997.

10.28  (11)#               Employment Agreement effective November 30, 1995
                           between Molecular Simulations Incorporated and Saiid
                           Zarrabian.

10.28(a) (12)#             Amendment No. 1 to Employment Agreement between
                           Molecular Simulations Incorporated and Saiid
                           Zarrabian dated as of October 1, 1997.

10.30  (3)+                Collaborative Agreement dated as of March 29, 1996
                           with Daiichi Pharmaceutical Co., Ltd.

10.30(a)  (7)+             Amendment No. 1 to Collaboration Agreement between
                           the Company and Daiichi Pharmaceutical Co., Ltd.
                           dated April 14, 1997.

10.31  (4)+                Research Agreement, between Pharmacopeia, Inc. and
                           N.V. Organon dated May 31, 1996.

10.32  (5)#                Employment Agreement, dated June 20, 1996, between
                           the Company and Stephen A. Spearman, Ph.D.

10.33  (5)                 Lease Agreement, dated June 21, 1996, between
                           Pharmacopeia and South Brunswick Rental I, Ltd.

10.34  (10)+               Collaboration and License Agreement between
                           Pharmacopeia, Inc. and Bristol-Myers Squibb Company
                           dated November 26, 1997.

10.35  (12)+               Joint Venture Agreement dated February 14, 1992
                           between Polygen Corporation and Teijin Limited.

10.36  (12)                Amendment No. 1 to Joint Venture Agreement dated
                           March 30, 1998 between Teijin Limited and Molecular
                           Simulations Incorporated.


                                     - 48 -
<PAGE>


10.37  (12)+               Distributorship Agreement dated April 1, 1992 between
                           Polygen Corporation and Teijin Molecular Simulations
                           Incorporated

10.38  (12)                Amendment to Distributorship Agreement dated October
                           17, 1994 between Molecular Simulations Incorporated
                           and Teijin Molecular Simulations Incorporated.

10.39  (12)+               Amendment No. 2 to Distributorship Agreement dated
                           September 30, 1996 between Molecular Simulations
                           Incorporated and Teijin Molecular Simulations
                           Incorporated.

10.40  (13)+               Amended and Restated Distributorship Agreement, dated
                           March 1, 1998, between Molecular Simulations
                           Incorporated and Teijin Molecular Simulations
                           Incorporated.

10.41  (13)                Indemnity Agreement, dated March 1, 1998, between
                           Molecular Simulations Incorporated and Teijin
                           Molecular Simulations Incorporated.

10.42  (13)                Lease Agreement, dated February 26, 1987, as amended,
                           between Sorrento Tech Limited and Biosym
                           Technologies, Inc.

10.43  (14)+               Collaboration and License Agreement, dated as of
                           October 29, 1998, between Pharmacopeia, Inc. and
                           Schering-Plough Ltd.

10.44  (14)+               Collaboration and License Agreement, dated as of
                           October 29, 1998, between Pharmacopeia, Inc. and
                           Schering Corporation.

10.45  (14)                Guarantee, dated as of October 29, 1998, between
                           Pharmacopeia, Inc. and Schering-Plough Corporation.

10.46  (14)#               Employment Agreement, dated December 17, 1998,
                           between the Company and Lewis Shuster

10.47  (14)                Lease dated November 12, 1998 between Molecular
                           Simulations Inc. and San Diego Tech Center, LLC

10.48  (14)#               Indemnity Agreement dated July 21, 1997 between
                           Molecular Simulations Inc. and C. Peter W. Booth

10.49  (15)                Lease Agreement, dated May 1, 1999, between
                           Pharmacopeia and South Brunswick Rental I, LTD.

10.50*                     Amendment No. 1, effective April 15, 1999, to
                           Collaboration and License Agreements, dated as of
                           October 29, 1998, between Pharmacopeia, Inc.,
                           Schering-Plough Ltd. and Schering Corporation.

10.51++*                   Amendment No. 2, effective October 1, 1999, to
                           Collaboration and License Agreements, dated as of
                           October 29, 1998, between Pharmacopeia, Inc.,
                           Schering-Plough Ltd. and Schering Corporation.

11.1  (1)                  Statement re Computation of Per Share Earnings.

21.1*                      Subsidiaries of Pharmacopeia, Inc.

23.1*                      Consent of Ernst & Young LLP.

24.1*                      Powers of Attorney (See signature page)

27.1*                      Financial Data Schedule

27.2  (13)                 Restated Financial Data Schedule as of June 30, 1997


                                     - 49 -
<PAGE>


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

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

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

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

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

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

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

(8)   Incorporated by reference to the same numbered exhibit filed with the
      Company's form 10-Q for the quarter ended September 30, 1997.

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

(10)  Incorporated by reference to the same numbered exhibit filed with the
      Company's Form 10-K/A-2 for the year ended December 31, 1997.

(11)  Incorporated by reference to Exhibit 10.15 and 10.16 to Molecular
      Simulations Incorporated's Registration Statement on Form S-1
      (Registration No. 333-21427) listed on February 10, 1997.

(12)  Incorporated by reference to the same numbered exhibit filed with the
      Company's Form 10-Q for the quarter ended June 30, 1998.

(13)  Incorporated by reference to the same numbered exhibit filed with the
      Company's Form 10-Q for the quarter ended September 30, 1998.

(14)  Incorporated by reference to the same numbered exhibit filed with the
      Company's Form 10-K for the year ended December 31, 1998.

(15)  Incorporated by reference to the same numbered exhibit filed with the
      Company's Form 10-Q for the quarter ended June 30, 1999.

+   Confidential treatment granted.
++  Confidential treatment requested.
#   Represents a management contract or compensatory plan or arrangement.
*   Filed herewith.

(b)  Reports on Form 8-K

     There were no reports on Form 8-K required to be filed for the quarter
ended December 31, 1999.

(c)  Exhibits

     See Item 14 (a)(3) above.

(d)  Financial Statement Schedule

     See Item 14(a)(2) above.


                                     - 50 -
<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/ Bruce C. Myers
                                  -----------------
                                   Bruce C. Myers
                                   Senior Vice President and
                                   Chief Financial Officer
                                   (Principal Financial and Accounting Officer)

                               Date:  March 30, 2000


                     [Rest of Page intentionally left blank]



                                     - 51 -
<PAGE>


                                POWER OF ATTORNEY

      KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Bruce C. Myers and Joseph A. Mollica,
Ph.D., jointly and severally, as his or her attorney-in-fact, each with full
power of substitution, for him or her, in any and all capacities, to sign each
amendment to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or his or her substitute or substitutes may lawfully do or
cause to be done by virtue hereof.

      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>

SIGNATURES                            TITLE                               DATE
<S>                                   <C>                                 <C>


/s/ Joseph A. Mollica, Ph.D.          Chairman of the Board, President    March 30, 2000
------------------------------------  and Chief Executive Officer
Joseph A. Mollica, Ph.D.              (Principal Executive Officer)

/s/ Bruce C. Myers                    Senior Vice President and Chief     March 30, 2000
------------------------------------  Financial Officer (Principal
Bruce C. Myers                        Financial and Accounting Officer)

/s/ Frank Baldino, Jr.                Director                            March 30, 2000
------------------------------------
Frank Baldino, Jr.

/s/ Paul A. Bartlett, Ph.D.           Director                            March 30, 2000
------------------------------------
Paul A. Bartlett, Ph.D.

                                      Director                            March 30, 2000
------------------------------------
C. Peter W. Booth

/s/ Gary E. Costley, Ph.D.            Director                            March 30, 2000
------------------------------------
Gary E. Costley, Ph.D.

                                      Director                            March 30, 2000
------------------------------------
Edith W. Martin, Ph.D.

/s/ James J. Marino                   Director                            March 30, 2000
------------------------------------
James J. Marino

/s/ Charles A. Sanders, M.D.          Director                            March 30, 2000
------------------------------------
Charles A. Sanders, M.D.

</TABLE>



                                     - 52 -