<PAGE>


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

                       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, 2000

  / /             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.
             (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. / /

         The approximate aggregate market value of voting stock held by
non-affiliates of the Registrant was $476,132,000 based on the last sale price
of Common Stock reported on The Nasdaq National Market on January 31, 2001.
6,502,530 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 January 31, 2001, the number of outstanding shares of the
Registrant's Common Stock was 23,475,865.


                       DOCUMENTS INCORPORATED BY REFERENCE

         Certain information required by Part III of Form 10-K is incorporated
by reference to the Registrant's Proxy Statement for the Annual Stockholders
Meeting to be held May 2, 2001.

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


<PAGE>


                       PHARMACOPEIA, INC. AND SUBSIDIARIES

                                 2000 FORM 10-K

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

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

           ITEM 1.      BUSINESS..................................................................................1
           ITEM 2.      PROPERTIES...............................................................................24
           ITEM 3.      LEGAL PROCEEDINGS........................................................................24
           ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................25
           ITEM 4A.     EXECUTIVE OFFICERS OF THE REGISTRANT.....................................................25

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

           ITEM 5.      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................27
           ITEM 6.      SELECTED FINANCIAL DATA..................................................................27
           ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                        CONDITION AND RESULTS OF OPERATIONS......................................................28
           ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                        RISK.....................................................................................33
           ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............................................35
           ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                        ACCOUNTING AND FINANCIAL DISCLOSURE......................................................54

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

           ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................................54
           ITEM 11.     EXECUTIVE COMPENSATION...................................................................54
           ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                        MANAGEMENT...............................................................................54
           ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................................54

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

           ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
                        FORM 8-K.................................................................................54

SIGNATURES.......................................................................................................58

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

     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 the qualifications described on page 28 under "Management's
Discussion and Analysis of Financial Condition and Results of Operations".

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

                         PHARMACOPEIA'S SOFTWARE SEGMENT

     Pharmacopeia's Software Segment consists of companies acquired by
Pharmacopeia over the last few years - Molecular Simulations Incorporated
("MSI") acquired in June 1998, Synopsys Scientific Systems, Ltd. ("Synopsys")
acquired in March 2000, and the software subsidiaries of Oxford Molecular Group
plc acquired in September 2000.

SOFTWARE SEGMENT OVERVIEW

     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. Companies in these industries invest considerable resources
in technologies that suggest productive new pathways for research projects,
increase the efficiency of discovery and development processes, or enable them
to maximize the use of corporate data, information, and knowledge. One such
technology area is software-based computation, analysis, informatics and
knowledge management tools. These allow users to simulate processes, predict the
outcome of product designs, manage data and turn it into useful information,
support decisions, and manage workflows.

     Pharmacopeia's Software Segment 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. Using these software products, researchers may 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 the Company's Software
Segment include leading commercial, governmental and academic organizations.
Many of the largest pharmaceutical, biotechnology, chemical, petroleum and
semiconductor companies worldwide use Pharmacopeia software. The Company markets
its products and services worldwide, principally through its direct sales force
based in the United States, Europe and Asia, excluding Japan, and through
distributors in Japan.

     Following are brief descriptions of the Company's various software product
lines.

     MOLECULAR MODELING AND SIMULATION SOFTWARE. Many factors that affect a
molecule, including activity, bioavailability, toxicity, shelf life and
environmental impact, are governed by fundamental, atomic level properties such
as shape, structure and reactivity. Molecular simulation was developed to
predict these molecular properties


<PAGE>


and help researchers discover new products, sharpen the focus of experimental
activities and improve ultimate product performance. Pharmacopeia is a leading
provider of molecular modeling, simulation, and information management software.

     The Company has a broad molecular modeling and simulation 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. These application
products allow scientists to perform molecular level computations of chemical,
biological and materials properties, to simulate, visualize and analyze chemical
and biological systems, and to communicate the results to other scientists. The
Company's products are based upon advanced software architectures that
facilitate the development, integration and deployment of new software products.
The Company 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.

     Pharmacopeia plans to continue enhancing its software product and service
offerings for simulation specialists, who are the principal users of molecular
modeling and simulation products. In addition, Pharmacopeia plans to broaden its
user base of this software to include the much larger population of
experimentalists--laboratory scientists and engineers who engage in experimental
activities.

     BIOINFORMATICS SOFTWARE. Pharmacopeia is a leading provider of tools for
gene sequence analysis and bioinformatics. The Company provides a suite of 130
programs enabling molecular biologists to search, edit, compare, map, and align
sequence data. Researchers use these to enable the analysis of DNA and protein
sequences and structure, predict RNA secondary structure, and annotate protein
sequences. Such capabilities help them to use the genomic data that is being
made available by projects such as the Human Genome Project. In addition, the
Company provides enterprise-wide data management and analysis tools that assist
in the management of this data. These are based on the Oracle architecture. Data
visualization and analysis capabilities allow this data to be viewed and
understood on standard desktop computers.

     CHEMINFORMATICS SOFTWARE. Pharmacopeia is a leading provider of tools to
manage and analyze chemical information. The Company's tools are based on
standard database architectures such as Oracle and Access. The Company provides
data visualization and analysis software to search, retrieve, and use chemical
structures, biological and chemical data, experimental data, and registration
information. Many of these tools use industry standard software components and
are compliant with applications such as Microsoft Excel, allowing chemists to
interact with chemical data within familiar productivity tools. The Company also
uses this component technology and its database architectures to build
customized enterprise-wide systems for client companies.

SOFTWARE SEGMENT BUSINESS STRATEGY

     Pharmacopeia's Software Segment's objective is to strengthen its position
as a leading provider of software-based computation, analysis, informatics and
knowledge management products and services worldwide by providing a
comprehensive set of integrated productivity tools that are integral to the
enterprise-wide research and development activities of its customers. The key
elements of Pharmacopeia's strategy to achieve this objective include:

o     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
      molecular modeling and simulation and gene sequence analyses specialists,
      but also at the much larger group of experimentalists (scientists and
      engineers). Pharmacopeia believes it can leverage its strong relationships
      with modeling, simulation and analysis specialists to help promote use of
      modeling, simulation and analyses methods by other scientists working in
      the same organization as the specialists.


                                      -2-
<PAGE>


o     LEVERAGE CORE COMPUTATIONAL TECHNOLOGY AND MAINTAIN TECHNOLOGY LEADERSHIP.
      Pharmacopeia believes that its core molecular modeling and simulation and
      gene sequence analysis technologies have helped position the Company at
      the forefront of computational methods technology providers. Pharmacopeia
      intends to continue to make significant investments in research and
      development in order to improve the efficiency and predictive accuracy of
      this core technology and to maintain its technology leadership.

o     ENHANCE TECHNOLOGY POSITION. The Company strengthens its scientific and
      technical expertise through acquisitions and consortia, and through joint
      development projects with leading academic, governmental and industrial
      researchers. Pharmacopeia's Software Segment may 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.

o     EXPAND INFORMATICS MARKET SHARE. As the use of molecular modeling and
      simulation, gene sequence analysis and other computational methods expand,
      especially to the experimentalists, and as the amount of data about drug
      discovery and chemical development activities also continues to expand,
      the Company's customers will need more comprehensive and sophisticated
      data and knowledge management tools. The Company plans to continue to
      improve its bioinformatics and cheminformatics offerings, and to leverage
      its relationships with customers, to expand its sales of data and
      knowledge management products.

o    CREATE COLLABORATIVE SYSTEMS AND ENVIRONMENTS - The Company believes that
     continued expansion in the use of software-based drug discovery and
     chemical development tools and databases will also lead to the need for
     workflow and project management tools that help researchers to better
     collaborate and manage projects. The Company plans to continue to improve
     its bioinformatics and cheminformatics offerings to include workflow and
     project management capabilities. As these product offerings expand, the
     Company also expects increased opportunities to tailor and customize work
     group and enterprise-wide solutions for customers.

SOFTWARE SEGMENT SCIENCE AND TECHNOLOGY

      Following are more detailed descriptions of the science and technologies
supporting each of the Company's various software product lines.

MOLECULAR MODELING AND SIMULATION - The Company's molecular modeling and
simulation technology delivers predictive models of chemical, biological and
materials phenomena within an open environment. This technology simulates
subatomic, 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
five primary classes of molecular and materials simulation methods, all of which
are found in the Company's products:

o    QUANTUM METHODS. Quantum methods, the most fundamental of the Company's
     simulation methods, compute interactions at the level of electrons and
     nuclei. These methods are capable of simulating which chemical entities are
     stable, how chemical reactions occur, and properties such as reactivity,
     color and magnetism. These methods are computationally demanding.
     Historically, they have been applied to small, carefully selected models.
     Technological advances, many driven by the Company and its partners, are
     now allowing quantum methods to be applied more generally and to larger
     materials and systems.

o    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. Such methods contain more approximations than quantum
     methods but can be applied to much larger and more complex systems,
     supporting insight into many chemical processes.


                                      -3-
<PAGE>


o    MESOSCALE METHODS. Mesoscale methods study processes above the molecular
     scale that are critical to materials and chemical engineering properties.
     These methods are particularly suited to predicting the properties and
     mixing behaviours of polymer mixtures, complex fluids, detergents, and soft
     materials.

o    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.

o    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.

o    OPEN ARCHITECTURE. The Company 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 described above, allowing their use in discrete, combined and
     packaged ways. The Cerius2 application programming interfaces ("APIs") are
     used by the Company's internal developers to create products. The same APIs
     are made available through the Cerius2 SDK to customers and third-party
     licensees.

o    DESKTOP AND ENTERPRISE-WIDE ACCESS. WebLab is an extension of the Cerius2
     open architecture, and is the medium by which the Company can deliver
     molecular modeling and simulation desktop products for life sciences
     experimentalists. These products make use of both the Cerius2 architecture
     and 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, Windows 2000
     and Windows NT.

     Materials Studio is a client-server architecture that enables the Company's
     materials modeling and simulation codes to be used on desktop personal
     computers. The client software provides a PC-based modeling and
     visualization environment from which users can set up, run, and analyze
     computations on more powerful computer servers on their Intranet. The
     servers can be UNIX workstations, Linux servers, or Windows NT/2000. The
     client software runs on Windows 95, Windows 98, Windows 2000, Windows NT,
     and Windows Me.

     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. Existing
     and planned Materials Studio server codes run on Silicon Graphics and
     Compaq UNIX workstations and Windows platforms.

BIOINFORMATICS SOFTWARE -The Company's bioinformatics solutions enable the
management and analysis of biological data and provide a wide range of gene
sequence analysis capabilities.

o    GENE SEQUENCE ANALYSIS. The core technology serving the bioinformatics and
     gene sequence analysis market is contained within a suite of programs
     called the GCG Wisconsin Package. This contains over 130 programs covering
     the research needs of molecular biologists. Based on published algorithms
     from the fields of


                                      -4-
<PAGE>


     mathematical and computational biology, the Package includes sequence
     comparison, database searching and retrieval, DNA/RNA secondary structure
     prediction, editing and publication, evolutionary analysis, fragment
     assembly, gene finding and pattern recognition, importing and exporting,
     mapping, primer selection, protein analysis, and translation.

     The computational and analysis capabilities of the GCG Wisconsin Package
     run on UNIX workstations. They can be accessed through a variety of client
     user interfaces, enabling broad access to this technology. These include
     SeqWeb, a web browser-based interface that allows researchers to access the
     technology across corporate intranets; SeqLab enabling X-Windows-based
     access; and OMIGA, which provides access to users of Windows operating
     systems. MacVector provides gene sequence analysis capabilities to users of
     Macintosh computers.

o    RELATIONAL DATABASES. SeqStore, the Company's Oracle database technology,
     allows researchers to collect, organize, and maintain genomic data and the
     results of analyses in in-house corporate databases. The SeqStore data
     warehouse makes data from separate groups available across the corporate
     structure. Dynamic update technology allows new data to be continually and
     automatically added to the database.

     In-house developers can access the Oracle data from popular development
     tools across multiple platforms and multiple networks, including
     Microsoft's VisualTools, Open Database Connectivity (ODBC), Java, Java
     Database Connectivity (JDBC), and Oracle Objects for OLE.

     GCG Wisconsin Package analyses can be applied to SeqStore databases - a
     process that can be automated as the data is updated, creating an automated
     sequence analysis pipeline that alerts the researcher to potentially
     valuable information as it is created.

o    DATA CONTENT. The Company provides its users with a wide range of public
     databases in convenient formats that can be updated at regular intervals
     through its Data Update Services. These include GenBank and EMBL for
     nucleic acid sequences, SP-TREMBL protein translations of coding sequences,
     PIR protein sequences, NRL_3D sequence and three-dimensional structure,
     GenPept unannotated translations of GenBank sequences, REBASE restriction
     enzyme data, including restriction enzyme, SWISS-PROT well-annotated
     protein sequences, and PROSITE protein sequence motifs.

CHEMINFORMATICS SOFTWARE - The Company provides software to manage chemical
information, such as 2D chemical structure diagrams and associated property
data. This software ranges from chemical data management and analysis technology
integrated with standard desktop productivity tools to enterprise-wide
informatics systems. The company also provides a number of software packages
focused on particular applications of interest to the chemist, and a range of
useful data content.

o    CORE DATABASES. Much of the Company's cheminformatics technology is founded
     on its two Oracle databases, RS(3) and ACCORD for Oracle. These allow
     chemical objects to be stored, manipulated, and searched using industry
     standard query languages and tools. The Company is engaged in the creation
     of a single, integrated "chemistry engine" based on these technologies.

o    PRODUCTIVITY TOOLS. The ACCORD for Excel, ACCORD for Access, and RS(3) for
     Excel software packages allow chemical objects to be stored and manipulated
     within these standard Microsoft desktop productivity tools. This means that
     the researcher can view and analyze chemical data without the need to learn
     new software systems, and that the wide range of calculation and data
     management features available in these applications can be easily applied
     to chemical data without the need for the Company to develop and maintain
     specialist tools. The DIVA technology provides desktop decision support
     capabilities, allowing users to work with chemical structures, assay
     results and other chemical and biological data in one spreadsheet.

o    APPLICATION-FOCUSED TOOLS. The Company offers tailored products that apply
     its database and data management technology to specific problems in high
     throughput screening. RS(3) HTS is a data management system based on


                                      -5-
<PAGE>


     the RS(3) database that is designed to assist biologists and chemists to
     track the workflow of high-throughput screening. OMM is a flexible
     screening management and data processing solution for plate-based
     biological assays.

o    PREDICTION ENGINES. Diamond Discovery is an enterprise-wide decision
     support system, based on an open Oracle architecture, that works with
     current corporate chemical and biological database systems providing a
     range of tools to predict key properties based on the available data. These
     properties include molecular descriptors to aid profiling of compound sets,
     physicochemical properties to improve screening selection, and the toxicity
     of compounds.

o    DATA CONTENT. The Company delivers a range of chemical databases. These
     include the Failed Reactions Database offering data on reactions that
     afford unexpected results, Solid-Phase Synthesis designed for chemists
     engaged in the design of combinatorial libraries, Metabolism and
     Biotransformations providing data on the metabolic fate of organic
     molecules, Methods in Organic Synthesis (MOS) containing over 3,000 new
     reactions each year, BioCatalysis covering biomolecule-mediated organic
     synthesis, Protecting Groups providing chemists with ready access to
     selected information on the full range of protecting group chemistry, and
     BIOSTER that provides a critical compilation of thousands of bio-analogous
     molecule pairs.

o    DEVELOPER TOOLS. The Company enables application developers to build on its
     database technologies through the RS(3) IAB (Intranet Application Builder)
     and Accord SDK (Software Developer's Kit) products.

SOFTWARE SEGMENT PRODUCTS AND SERVICES

     Pharmacopeia's Software Segment 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,
manage and analyze chemical and biological data and information, and communicate
more effectively both inside and outside an organization. These products and
services incorporate the following attributes:

o    VALIDATED CORE MODELING TECHNOLOGY. The core technology underlying the
     Company's modeling and simulation products consists of a number of
     fundamental, scientifically proven methods for conducting predictive
     computer modeling and analyses 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.

o    BROAD APPLICABILITY. The validated core technology underlying the Company's
     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. The
     Company's 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.

o    DATA MANAGEMENT COMPLIANT WITH INDUSTRY STANDARDS. The Company's data
     management and analysis solutions are based on industry-standard
     technologies such as Oracle. This means that they are compliant with other
     corporate systems and retain the maximum openness and flexibility. The
     Company's technology ensures that these standards are enabled for chemical
     and biological data.

o    OPEN ARCHITECTURE. Many of the Company's products are based upon open
     architectures that allow customers, collaborators and third parties to
     develop software applications in the same development environment used
     internally by the Company. Core molecular modeling functions are included
     in this open environment, which


                                      -6-
<PAGE>


     permits developers to focus on their particular scientific interests and
     increase the power and utility of their programs by integrating them with
     the Company's products.

o    EASE OF USE. The Company's UNIX software products are integrated, modular,
     focused on specific research areas or techniques, and accessible by
     intuitive graphical user interfaces ("GUI"). These enable experimentalists
     to use molecular simulation in a manner consistent with established
     analytical and laboratory techniques, in a user-friendly computational
     environment.

o    INCREASED ACCESS. The Company has developed desktop product lines that
     target 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. The Company's desktop products use
     familiar technology and are built upon the Company's open architecture and
     validated core technology.

     Based upon the science, technology and attributes described above,
Pharmacopeia provides a broad suite of software products used throughout the
research and development cycle. Pharmacopeia believes that offering a
"single-shop," integrated drug discovery and chemical development solution will
be a significant benefit to its customers. Individual software modules are
priced from $500 to $75,000 for commercial customers. Discounts ranging from 50%
to 85% are offered to academic customers. In addition to these software modules,
the Company also offers the following:

o    INTEGRATION PRODUCTS AND SERVICES. With most software modules the Company
     offers customers and third-party licensees a standard environment in which
     to develop and integrate their own applications. These integration products
     provide an external developer with access to APIs used by the Company's own
     internal development staff. As a result, a developer can employ most of the
     functions, subsystems or methods embodied in or accessible through the
     Company's products to integrate an external program or to create additional
     application functionality, with a corresponding GUI.

o    DATABASES. Databases are a close adjunct to the Company's software
     products. The Company creates, maintains and sells a database of chemical
     reactions in connection with its cheminformatics product line. The Company
     also resells a number of scientific databases created by third parties.

o    CONSULTING SERVICES. The Company offers consulting, contract research,
     custom development and systems integration services, with a particular
     emphasis on the development of enterprise-wide informatics and decision
     support systems. These services allow customers to benefit from the
     Company's facilities and the expertise of the Company's staff in
     outsourcing these types of specialist functions.

o    COMPUTER HARDWARE. As a convenience to its customers, the Company acts as a
     value-added reseller of computer hardware. The Company purchases
     substantially all of its hardware for resale from a Silicon Graphics, Inc.
     ("SGI") authorized distributor.

SOFTWARE SEGMENT - PRODUCT USES

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

o    SEQUENCE TO STRUCTURE. The Company's bioinformatics and structural biology
     software provides tools that enable researchers to tackle the range of
     problems inherent in moving from gene sequence data to fully characterized
     targets for drug discovery projects. This range of activities represents
     the early stages of the drug discovery process and is an essential
     pre-requisite for the structure-based route to drug discovery. Relevant


                                      -7-
<PAGE>


     problems include finding interesting sequences within the huge quantities
     of available genetic data, characterizing those sequences and relating them
     to particular functions, determining the secondary structure of DNA and
     RNA, determining the three dimensional molecular structure of proteins
     (often using data from analytical techniques such as NMR and X-ray
     diffraction), and understanding the relationship between this structure and
     function. The key product for gene sequence analysis is the GCG Wisconsin
     Package. Products used in macromolecular structure determination and
     subsequent protein modeling include X-PLOR, Insight II application modules,
     QUANTA, Discover, CHARMm and Felix.

o    LEAD IDENTIFICATION AND OPTIMIZATION. The next step in drug discovery is
     the development and optimization of potential small molecule drugs based on
     these targets. The Company's rational drug design products allow the design
     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 that are screened for desired
     activity using high throughput experimentation. The Company thus brings
     together the worlds of computation and experiment. The large quantities of
     data generated by such activities can be managed and analyzed using the
     Company's informatics tools - the results inform more focused testing and
     design. Rational drug design and combinatorial chemistry products include
     Catalyst, Cerius2 and Insight II application modules, QSAR and Discover.
     Cheminformatics tools applied to manage relevant data are based on the RS3
     and Accord databases, with application-specific informatics tools and
     decision support capabilities provided by products such as RS3 HTS and
     Diva.

o    DEVELOPMENT AND FORMULATION. Following the discovery process, a drug must
     be delivered successfully - administered as a crystalline solid in a pill,
     or through some other mechanism such as a patch or spray. The Company's
     crystallization software solves a range of problems that are important to
     the development and formulation of pharmaceuticals - for example,
     establishing possible crystalline structures for the solid material of a
     pill. Such problems are critical across the chemicals industries, affecting
     products such as paints, pigments, and petrochemicals. The Company's
     crystallization products are delivered as Cerius2 and Materials Studio
     application modules including the Polymorph Predictor and Powder Solve
     methods. Development of new and improved products is also achieved through
     formulation - varying the process and proportions in which known components
     are combined. The Company's software can optimize this process for products
     including drugs, foods, cosmetics, personal care products, detergents,
     plastics, and specialty chemicals. The Company serves formulators through
     the FAST informatics software and the systems integration services of the
     Formulations Consortium.

o    IMPROVING MATERIALS AND PROCESSES IN THE CHEMICALS INDUSTRY. Many of the
     Company's other solutions support the design of improved products and
     processes across the chemicals industry. Two key technology areas in this
     respect are polymer science and catalysis. Polymer modeling products are
     used by researchers in the chemical, plastics, rubber, adhesives,
     petrochemical, aerospace and automotive industrial sectors to analyze and
     predict polymer properties and establish the link between these properties
     and the molecular-level structure of the material. The Company's 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. The Company's
     polymer products include Cerius2, Materials Studio, and Insight II
     application modules, QSAR and Discover. The Company's catalysis products
     are used by companies in the chemical, petrochemical, natural gas and
     plastics industries and by catalyst manufacturers to characterize catalysts
     and sorbent materials, to simulate thermodynamic and reactivity data, and
     to understand and control chemical reactions. The Company's products are
     used to characterize and design metallocene catalysts, zeolites and other
     molecular sieves, and metal oxides. These products include Cerius2 and
     Insight II application modules, Discover, DMol and CASTEP.

o    OTHER MATERIALS-BASED INDUSTRIES. The Company's products find a broad range
     of applications across industries including electronics, aerospace,
     structural materials, the automotive industry, and energy. In electronics,
     for example, the trend toward microminiaturization of electronic devices
     has created a need for improved processes and materials. The Company's
     software products are used by semiconductor and electronics companies to
     understand surface chemistry, defects, thin oxide layers, magnetic
     properties and the


                                      -8-
<PAGE>


     performance of new packaging materials. These products include Cerius2 and
     Insight II application modules, Discover, DMol and CASTEP.

SOFTWARE SEGMENT CUSTOMERS

     The Company's customer base consists of leading commercial, governmental
and academic organizations. No Software Segment customer accounted for more than
10% of the Company's revenues during the fiscal year ended December 31, 2000.

     INDUSTRIAL CUSTOMERS. The Company's 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 the Company'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 the Company's products.

     ACADEMIC CUSTOMERS. Many universities in the United States, Europe and the
Asia/Pacific region use the Company's products. This use historically has been
for purposes of academic research, but the Company believes its products
increasingly may be used as a part of formal university teaching curricula.

SOFTWARE SEGMENT STRATEGIC AND ACADEMIC ALLIANCES

     The Company has entered into a number of strategic alliances relating to
product development, product distribution and joint marketing. The Company 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, the Company plans to
maintain and expand its alliances focused on compatibility of the Company's
products with databases and database management systems, other computational
chemistry and molecular simulation products, and products in related markets
such as laboratory instrumentation. The Company also intends to continue to
enter into porting and joint marketing arrangements with hardware vendors on
whose systems the Company's products operate.

SOFTWARE SEGMENT CONSORTIA

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

     These consortia bring together groups of industrial researchers, academic
experts and the Company's scientists that focus on developing, validating and
applying simulation to the target industrial research area. Typically, consortia
participants provide funds and a liaison to the Company. 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.

     The Company has seven active consortia in the following research areas:
Polymers, Catalysis, Combinatorial Chemistry, Formulations, Molecular
Crystallization, Functional Genomics and High Throughput Crystallography.
Consortium members have 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.


                                      -9-
<PAGE>


SOFTWARE SEGMENT SALES AND MARKETING

     The Company markets its products and services worldwide. In the United
States, Europe, and Asia, excluding Japan, the Company 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, the Company distributes its products and services through
distributors.

     NORTH AND SOUTH AMERICA; EUROPE; ASIA, EXCLUDING JAPAN. The Company employs
direct sales representatives and telesales representatives to market and sell
the Company'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 the Company's pre-sales support scientists in order to
demonstrate the Company's products and their applicability to various research
and development efforts.

     JAPAN. Ryoka Systems Inc. ("Ryoka"), a wholly owned subsidiary of
Mitsubishi Chemical Co., Ltd., is the exclusive distributor of the Company's
molecular modeling and simulation software products in Japan. Under the terms of
this agreement, Ryoka has committed to certain sales order levels through
December 2001. The Company also contracts with other distributors who sell the
Company's gene sequence analyses, bioinformatics, and cheminformatics products
in Japan on a non-exclusive basis.

     In support of its sales activities, the Company 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 the Company
and its product and service offerings.

     The Company's sales efforts have historically resulted in a higher
concentration of sales in the last quarter of the calendar year.

SOFTWARE SEGMENT PRODUCT DEVELOPMENT

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

     The Company licenses software products or otherwise has acquired software
products from corporate, governmental and academic institutions. These
arrangements sometimes involve joint development efforts and frequently require
the payment of royalties by the Company. 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 the Company contracts and other factors. The
Company has also developed products with funding and direction from customers
through the Company's consortia activities. See "Software Segment Consortia."
The Company 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

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


                                      -10-
<PAGE>


     Purchases of multi-year licenses to use the Company's software products
include one year of maintenance services, consisting of technical support and
software upgrades. Thereafter, the Company offers renewals of maintenance
services on an annual basis for an annual fee. Annual licenses to use the
Company's software products generally include all maintenance services. Most of
the Company'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 the Company's products more effectively,
including access to the Company's technical and scientific support personnel
during extended business hours. Through its distribution channels, the Company
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, the Company sponsors
scientific symposia and user group meetings throughout the year.

SOFTWARE SEGMENT COMPETITORS

     The market for the Company's products is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
market activities of industry participants. The Company's competitors offer a
variety of products and services to address this market. The Company 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
software packages 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 the Company's licenses grant the
right to sublicense the Company's software. As a result, the Company's customers
and third-party licensees could develop specific simulation applications using
the Company's technology and compete with the Company by distributing such
programs to potential customers of the Company. Customers or licensees could
also develop their own modeling, simulation, analyses, bioinformatics or
cheminformatics technology and cease using the Company's products and services.
Further, they may choose to sublicense such technology.

     Certain of the Company's competitors and potential competitors have longer
operating histories than the Company and have greater financial, technical,
marketing and other resources. Further, many of the Company's competitors offer
products and services directed at more specific markets than those targeted by
the Company, enabling these competitors to focus a greater proportion of their
efforts on such markets. Certain offerings that are competitive with the
Company'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 the
Company'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 the Company. There can be no
assurance that the Company's competitors will not adapt more quickly than the
Company to technological advances and customer demands, thereby increasing such
competitors' market share relative to that of the Company. Any material decrease
in demand for the Company's technologies or services may have a material adverse
effect on the business, financial condition and results of operations of the
Company.

SOFTWARE SEGMENT SOURCES OF SUPPLY

     The Company 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 the Company
and its licensees with similar hardware products at comparable terms. However,
any disruption of supply could cause a temporary adverse effect in the Company's
revenues during any period requiring porting of the


                                      -11-
<PAGE>


Company's software products to alternative hardware platforms or negotiation of
alternative supply and distribution agreements.

SOFTWARE SEGMENT INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

     The Company relies primarily on a combination of copyright, trademark and
trade secret laws, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company also has two United States patents.
The Company 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. The Company 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 the Company'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 the Company's technology. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards as
proprietary. In limited instances, the Company has licensed source codes of
certain products to customers or collaborators. For these reasons, policing
unauthorized use of the Company'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 the Company'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 the Company of
their intellectual property rights. From time to time the Company receives
letters from third parties claiming or suggesting that its products may infringe
patents or other intellectual property rights. The Company has investigated
these matters and believes that they are immaterial to the operations of the
Company. There can be no assurance, however, that the Company's products do not
infringe upon the patent or other intellectual property rights of third parties,
that the Company 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 the Company. The Company
expects in general that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in the
Company'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 the Company to
enter into royalty or licensing agreements.

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


                                      -12-
<PAGE>


     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 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, the
Company's Drug Discovery Services segment makes extensive use of the Software
segment's products, software designed in-house by the Company's Drug Discovery
Services segment and software 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 2000, 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 Progenics and Amgen. In addition, under existing agreements,
Pharmacopeia continued peforming such services for N.V. Organon ("Organon"),
Otsuka Pharmaceutical Factory ("Otsuka"), Pharmacia & Upjohn Inc. ("Pharmacia
Upjohn") a Roche Biosciences ("Roche") and Schering AG. In 2000, Pharmacopeia
performed Lead Optimization Services for Schering-Plough Ltd.
("Schering-Plough"), Bristol-Myers Squibb ("BMS"), Hoffmann-La Roche, Organon
and Schering AG.

DRUG DISCOVERY SERVICES SEGMENT 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


                                      -13-
<PAGE>


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

o    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.

o    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.

o    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.

o    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 SEGMENT 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 2000, BMS, Hoffman-La Roche, and Organon continued
to fund three of Pharmacopeia's previously self-funded programs. BMS, Hoffman-La
Roche, and Organon will fund continued development of compounds


                                      -14-
<PAGE>


already identified by Pharmacopeia and will develop, manufacture, market and
sell any drugs resulting from the collaborations.

DRUG DISCOVERY SERVICES SEGMENT CUSTOMERS

     In 2000, Pharmacopeia performed drug discovery services for
Schering-Plough, Schering AG, Novartis, Organon, BMS, Otsuka, Pharmacia Upjohn,
Roche and AstraZeneca. Drug discovery services revenue from Schering-Plough
represented approximately 11% of the Company's revenue in 2000. The loss of one
or more Drug Discovery Services Segment customers may have a material adverse
effect on Pharmacopeia.

DRUG DISCOVERY SERVICES SEGMENT 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


                                      -15-
<PAGE>


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.

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.

o    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.

o    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.

o    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,


                                      -16-
<PAGE>


     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:

o    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 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.

o    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
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 2000, 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


                                      -17-
<PAGE>


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 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's Drug Discovery Services
Segment uses the Software segment products, 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 SEGMENT 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


                                      -18-
<PAGE>


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.

     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 SEGMENT - 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


                                      -19-
<PAGE>


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
Affymax patent in its entirety. Affymax filed an appeal to the decision of the
EPO on August 17, 2000. 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. On December 15, 2000, Affymax and the Company entered
into cross-licenses which would allow each of Affymax and the Company to use
their respective tags, but not allow each party to use the tags of the other
party. The cross-licenses also provide that with respect to the cross-licensed
patents, each party will discontinue all patent challenges started against the
other party before the effective date of the cross-licenses and neither party
will institute any future patent challenges or legal proceedings against the
other party. 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


                                      -20-
<PAGE>


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
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


                                      -21-
<PAGE>


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.

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 2000, approximately 48% of the Company's consolidated revenue was
derived from customers outside the United States both through international
subsidiaries and on an export basis. Approximately 34% of the Company's revenue
was derived from customers in Europe and approximately 14% 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. 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.


                                      -22-
<PAGE>


                      CONSOLIDATED RESEARCH AND DEVELOPMENT

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

<TABLE>
<CAPTION>

                                                            Years Ended December 31 (in thousands)
                                                     -----------------------------------------------------
                                                          2000                 1999                1998
                                                     -----------------   ---------------   ---------------
<S>                                                  <C>                 <C>               <C>
Proprietary Research and Development                     $26,431                $27,282           $28,656

</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. The decrease in research and development from 1999 to 2000
resulted from the Company's decision, offset by increases due to acquisitions.

                             CONSOLIDATED EMPLOYEES

     As of December 31, 2000, the Company had 746 regular employees, 369 of whom
were in research and development, including 309 chemists, biologists and
engineers holding doctorate degrees. None of the Company's employees are 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


                                      -23-
<PAGE>


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. The ability of the Company's Software Segment to increase
revenue from the license of its products is dependent upon increased market
acceptance of its software products and services. The Company's Software Segment
products are used primarily by molecular modeling and simulation and gene
sequence analyses specialists. The Company's Software Segment 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 the Company cannot expand its Software Segment
customer base to include experimentalists, or if it otherwise cannot
successfully market and sell its desktop-based products and related services,
the Company may not be able to increase its Software Segment revenue, or its
Software Segment revenue may decline. In general, increased market acceptance
and greater market penetration of the Company's Software Segment 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 the products and services. There can
be no assurance that the Company's Software Segment products and services will
achieve increased market acceptance or penetration in the Company's Software
Segment target industries or other industries. Failure to increase market
acceptance or penetration would restrict substantially the future growth of the
Company's Software Segment 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 Segment Patents and Proprietary
Information."

                        CONSOLIDATED SEGMENT INFORMATION

     See Note 8 of the Notes to Consolidated Financial Statements included
elsewhere in this report.

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 has three additional R&D centers located in the US
and in England. In Hunt Valley, Maryland, MSI has leased 12,344 square feet
through January 2006; in Madison, Wisconsin, MSI has leased 19,058 square feet,
also through January 2006; and in Leeds, England, MSI has leased 5,500 square
feet through November 2002 and owns 5,100 square feet. 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.


                                      -24-
<PAGE>


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

     Not applicable.

ITEM 4A.  EXECUTIVE OFFICERS OF THE REGISTRANT

     The Executive Officers of the Company are as follows:

<TABLE>
<CAPTION>

                  NAME                    AGE                            POSITION
-------------------------------------    ------    -----------------------------------------------------
    <S>                                  <C>       <C>
    Joseph A. Mollica, Ph.D.              60       Chairman of the Board, President and Chief
                                                   Executive Officer of the Company
    John J. Baldwin, Ph.D.                66       Chief Science and Technology Officer
    Bruce C. Myers                        45       Chief Financial Officer, Executive Vice President
    Stephen A. Spearman, Ph.D.            51       Chief Operating Officer, Exeutive Vice President of
                                                   Drug Discovery Services
    Michael R. Stapleton, Ph.D.           36       Chief Operating Officer, Executive Vice President
                                                   of Software
    Scott Kahn, Ph.D                      41       Senior Vice President, Modeling and Simulations
    Glen A. Hopkinson, Ph.D.              42       Vice President, Cheminformatics
    Judith M. Ohrn                        37       Vice President, Human Resources
    Arthur E. Roke, CPA                   35       Vice President, Finance

</TABLE>

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

         Dr. Baldwin has served as Vice President of Chemistry since July 1993,
     was appointed Senior Vice President of Chemistry in August 1996 and was
     appointed Chief Science and Technology Officer in June 1998. For a period
     of thirty years, prior to joining the Company, Dr. Baldwin held a variety
     of scientific and management positions with Merck Sharp & Dohme Research
     Laboratories, most recently as Distinguished Senior Scientist. Dr. Baldwin
     holds more than 140 U.S. patents and is the inventor of Trusopt, a drug for
     preventing glaucoma. Dr. Baldwin received a Ph.D. in Organic Chemistry from
     the University of Minnesota.

         Mr. Myers was named Chief Financial Officer and Executive Vice
     President in 2000. Prior to that he had served the Company as Senior
     Vice President of Finance, Administration and Strategic Planning,
     MSI since December 1998. Mr. Myers served as Chief Financial Officer and
     Secretary to the Board for GTI Corporation from January 1997 to December
     1998. From June 1989 to December 1996, Mr. Myers was with Photomatrix, Inc.
     and served as Chief Financial Officer, Chief Operating Officer and
     Secretary to the Board. Prior to joining Photomatrix, Mr. Myers spent
     eleven years with Arthur Andersen & Company. Mr. Myers holds a B.S. in
     Commerce from the University of Virginia and is a Certified Public
     Accountant.

         Dr. Spearman was named Chief Operating Officer and Executive Vice
     President of Drug Discovery Services in February 2001. Previously, he had
     served the Company as Executive Vice President, Operations


                                      -25-
<PAGE>


     since August 1996 and was appointed Executive Vice President, Discovery
     Technology in June 1998. From 1975 to August 1996, Dr. Spearman held
     several positions at CIBA-GEIGY Corporation, most recently as Project
     Leader. Dr. Spearman received his Ph.D. and M.S. from Emory University. Dr.
     Spearman also holds a M.B.A. in Finance from Bryant College.

         Dr. Stapleton was named Chief Operating Officer and Executive Vice
     President of Software Operations in February 2001. Since 1990, he has
     served the Company in various management roles, most recently as Executive
     Vice President, Software Operations, and prior to that as Vice President,
     Worldwide Marketing, and General Manager of the Materials Science Business
     unit. Dr. Stapleton earned his Ph.D. in Chemical Physics from Southampton
     University in the United Kingdom and performed post-doctoral research in
     computational chemistry at the School of Chemical Engineering at Cornell
     University.

         Dr. Kahn has served as Senior Vice President, Modeling and Simulations
     since March 2000. During the previous year he was Vice President of
     Research and Development, and prior to that had been Director of Marketing
     since 1995. From 1991 until joining the Company, Dr. Kahn was employed by
     BioCAD, a molecular modeling start-up company in Silicon Valley. Dr. Kahn
     earned his Ph.D. in Theoretical Organic Chemistry at the University of
     California, Irvine and performed post-doctoral research at Cambridge
     University in England. Dr. Kahn also spent four years as an Assistant
     Professor of Chemistry at the University of Illinois at Urbana-Champaign.

         Dr. Hopkinson has served as Vice President, Cheminformatics since
     February 2000. From 1992 until February 2000, he was Managing Director of
     Synopsys Scientific Systems, Ltd. in the United Kingdom. Prior to joining
     Synopsys in 1992, he was Software Development Manager at Orac Ltd. for four
     years. From 1985 to 1988 Dr. Hopkinson was on the research staff at FMC
     Corporation in San Jose, California. Dr. Hopkinson earned his Ph.D in
     Organic Chemistry from Leeds University in the United Kingdom.

         Ms. Ohrn has served as Vice President, Human Resources since March
     2000. From 1993 through March 2000, Ms. Ohrn had served as Director of
     Human Resources for MSI. Prior to joining the Company, she held management
     positions with both a prominent human resource consulting firm and a
     publicly-traded software company. Ms. Ohrn holds a B.S. in Finance and
     Marketing from Babson College in Wellesley, MA.

         Mr. Roke has served as Vice President, Finance since September 2000.
     From April 1991 through September 2000, Mr. Roke served in various
     management positions, most recently as Chief Financial Officer and Vice
     President-Finance, at CN Biosciences, Inc, a division of Merck KGaA. Mr.
     Roke also spent three years with Arthur Andersen & Company. Mr. Roke holds
     a B.S. in Business Administration from Georgetown University in Washington
     D.C. and is a Certified Public Accountant.


                                      -26-
<PAGE>


                                     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.

<TABLE>
<CAPTION>

                                                                 2000                             1999
                                                        HIGH            LOW               HIGH           LOW
                                                     ------------ ----------------    ------------- ---------------
                 <S>                                 <C>          <C>                 <C>           <C>
                 First Quarter                         $104.00           $21.50           $11.88           $5.88
                 Second Quarter                          60.25            17.75            11.50            5.44
                 Third Quarter                           49.00            22.44            12.94            9.50
                 Fourth Quarter                          30.50            17.25            23.25            9.75

</TABLE>

HOLDERS OF RECORD

     As of January 31, 2001 there were approximately 429 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,
                                                     2000          1999            1998            1997           1996
                                                 ------------- -------------- --------------- --------------- -------------
   STATEMENT OF OPERATIONS DATA:                                   (in thousands, except per share data)
   <S>                                           <C>           <C>            <C>             <C>             <C>
   Total revenue                                    $119,391       $103,959       $ 92,211        $81,197        $62,060
   Operating income (loss)(1)                         (6,764)           149        (13,456)        (3,024)        (8,358)
   Net income (loss) (1)                               1,175          3,771        (10,163)        (1,728)        (7,386)
   Basic net income (loss) per common share             0.05           0.19          (0.54)         (0.09)         (0.42)
   Diluted net income (loss) per common share           0.05           0.19          (0.54)         (0.09)         (0.42)
   Shares used in computing basic net
       income (loss) per common share                 22,659         19,684         18,916         18,445         17,736
   Shares used in computing diluted net
       income (loss) per common share                 24,453         20,294         18,916         18,445         17,736
   Cash dividends declared per common share               --             --             --             --             --

</TABLE>


                                      -27-
<PAGE>


<TABLE>
<CAPTION>

                                                                            AS OF DECEMBER 31,
                                                     2000          1999            1998            1997           1996
                                                 ------------- -------------- --------------- --------------- -------------
   BALANCE SHEET DATA:                                                        (in thousands)
   <S>                                           <C>           <C>            <C>             <C>             <C>
   Cash, cash equivalents and marketable
       securities                                   $ 165,178       $ 69,032     $  81,098      $  97,640      $  95,991
   Total assets                                       284,766        126,259       127,865        140,051        131,644
   Notes payable, deferred revenue, and
       other long-term liabilities                      4,553          5,121         3,332          6,194          6,433
   Accumulated deficit                                (67,874)       (69,049)      (72,820)       (62,657)       (60,929)
   Total stockholders' equity                         209,867         78,746        72,217         80,596         75,501

</TABLE>
-----------------
(1)    The 1998 amount includes $8.0 million of merger related expenses. The
       1999 amount includes $0.4 million of acquisition related goodwill
       amortization. The 2000 amount includes $8.7 million of acquisition
       related write-offs of in-process R&D, $3.8 million of acquisition related
       goodwill amortization and $3.3 million of acquisition related intangible
       asset amortization.

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 should be read in conjunction with "Selected Consolidated
Financial Data" and the Consolidated Financial Statements and related notes
included elsewhere in this Report.

     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" on page 32 below, and in "Important Risk Factors
Regarding Forward Looking Statements" on page 23 above, 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.

BUSINESS OVERVIEW

     Pharmacopeia designs, develops, markets and supports science and
technology-based products and services intended to improve and accelerate the
processes of drug discovery and chemical development. The Company's Software
Segment provides molecular modeling and simulation, bioinformatics and
cheminformatics software solutions that facilitate the discovery and development
of new drug and chemical products and processes in the pharmaceutical,
biotechnology, chemical, petrochemical and materials industries. The Company's
Drug Discovery Services Segment provides drug discovery services to
pharmaceutical and biotechnology companies based on proprietary combinatorial
chemistry and high throughput screening technologies. Segment and geographical
data are included in Note 8 of the Notes to Consolidated Financial Statements.


                                      -28-
<PAGE>


RESULTS OF OPERATIONS

2000 COMPARED TO 1999

     Total revenue grew 15% to $119.4 million in 2000 compared to $104.0 million
in 1999.

     Software Segment revenue (including software license, service, hardware and
other revenue) increased 16% to $80.4 million in 2000 compared to $69.4 million
in 1999. Software license, service and other revenue increased 24% to $75.4
million in 2000 compared to $60.9 million in 1999. This increase includes $8.4
million, or 14%, generated from sales of products and services added through the
2000 acquisitions of Synopsys and the software subsidiaries of Oxford Molecular
Group Plc (see Note 3 of the Notes to Consolidated Financial Statements).
Excluding the effect of these acquisitions, software license, service and other
revenue in 2000 increased by $6.1 million, or 10%, compared to 1999. Hardware
revenue, generated from the resale of computers, decreased by 41% to $5.0
million in 2000 compared to $8.4 million in 1999 primarily because of a
reorganization in the distribution channel of the Company's sole supplier of
hardware for resale.

     Software Segment revenue in 2000 compared with 1999 increased in the
European and US regions by 10%. This increase consisted of an 18% increase in
software license, service and other revenue, and a 39% decrease in hardware
revenue. Almost all of the increase in European and US region software license,
service and other revenue resulted from the effects of the two acquisitions
referenced above. Excluding the effects of these acquisitions, European and US
region software license, service and other revenue increased only slightly.
Management believes that this lack of internal growth was caused primarily by
inefficiencies experienced by the Company's sales organization as it absorbed
sales responsibility for the acquisitions.

     Software Segment revenue in 2000 compared with 1999 for the Asia region
increased by 49%. This increase resulted from increased modeling and simulation
software orders from the Company's distribution partner in Japan pursuant to
certain sales order level guarantees. Based upon an extended and renegotiated
contract with this distribution partner, 2001 modeling and simulation software
revenues in Japan are not expected to increase beyond the level achieved in
2000.

     Drug Discovery Services Segment revenue increased 13% to $39.0 million
in 2000 compared to $34.6 million in 1999. This net increase of $4.4 million
was primarily attributable to the receipt of a one-time $3.0 million
technology out-license fee in the first quarter of 2000, and a $2.0 million
increase in milestone fees received in 2000 compared to 1999. Drug Discovery
Services Segment revenue in 1999 did not include any technology out-license
fees nor significant milestone fees. Excluding the technology out-license fee
and the increase in milestone fees, 2000 Drug Discovery Services Segment
revenue decreased slightly compared to 1999. This slight decrease consisted
of a $2.6 million or 52% decrease in library out-licensing fees offset by an
increase in other forms of drug discovery services. In 2000, one Drug
Discovery Services Segment customer accounted for 11% of consolidated revenue.

     Software Segment gross margin increased 20% to $65.1 million (81% of
related sales) in 2000 compared to $54.4 million (78% of related sales) in
1999. The increase resulted primarily from the 24% increase in software
license, service and other revenue (including the effect of acquisitions) and
from decreased hardware revenue which carries lower margins.

     Gross margin generated from the Drug Discovery Services Segment
increased 16% to $15.9 million (41% of related sales) in 2000 compared to
$13.8 million (40% of related sales) in 1999. The increase in the amount of
gross margin resulted from the increased technology out-license and milestone
revenues. Excluding technology out-license and milestone revenues, gross
margin as a percent of revenue decreased from 38% in 1999 to 32% in 2000
primarily because more fixed overhead was allocated to funded work while
internal research declined.

     Research and development expenses declined 3% to $26.4 million in 2000
compared to $27.3 million in 1999 including the effect of acquisitions.
Research and development costs include costs associated with internal drug
discovery programs and software development. The decline in research and
development expenses is primarily

                                      -29-
<PAGE>


attributable to the reduction of internally funded drug development activities
in the Company's Drug Discovery Services Segment, offset by increases in
spending in the Company's Software Segment primarily due to acquisitions.

     Selling, general and administrative expenses increased 21% to $48.7 million
in 2000 compared to $40.4 million in 1999. The increase in sales, general and
administrative expenses is attributable to increases in sales and marketing
expenses, increases in administrative salaries and overheads, and increased
amortization of acquired intangible assets, all primarily due to acquisitions in
the Company's Software Segment.

     In 2000, the Company recorded one-time charges of $8.7 million related to
acquired in process research and development, and goodwill amortization related
to acquisitions of $3.8 million. In 1999, there were no one-time charges, and
goodwill amortization was $0.4 million.

     Net interest income increased 124% to $9.2 million in 2000 compared to $4.1
million in 1999. This increase resulted primarily from the investment of the
proceeds from a $110.0 million private placement of the Company's common stock
in March 2000.

     The provision for income taxes increased 160% to $1.3 million in 2000
compared to $0.5 million in 1999. The tax provisions are primarily due to
foreign taxable income generated from the Software Segment. These
provisions differ from the Federal tax rate primarily because of the effect of
net operating loss carryforwards and carrybacks.

     As a result of the increased revenue and gross margins, net of the one-time
charges related to acquisitions, the increases in net interest income and the
other matters described above, the Company generated net income of $1.2 million
or $0.05 per basic and diluted share in 2000. This compares to net income of
$3.8 million or $0.19 per basic and diluted share in 1999.

1999 COMPARED TO 1998

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

     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.

     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.

     Drug Discovery Services Segment 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

                                      -30-
<PAGE>


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 Segment revenue included $0.3 million and $1.0 million of milestone
payments in 1999 and 1998, respectively. In 1999, one Drug Discovery Services
Segment customer accounted for 12% of consolidated revenue.

     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.

     Gross margin generated from the Drug Discovery Services Segment
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.

     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 the future. 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.

     Selling, general and administrative expenses increased to $40.4 million in
1999 compared to $36.4 million in 1998, representing 39% of total revenue for
both years. The year to year increase of $4.0 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.

     In 1999, the Company recorded goodwill amortization of $0.4 million related
to the acquisition of Japanese distribution rights and the remaining joint
venture interest. In 1998 there was no goodwill amortization.

     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 Segment. These
provisions differ from the Federal tax rate primarily because of the effect of
net operating loss carryforwards and carrybacks.

     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, compared to a net loss of $10.2 million or $(0.54) per basic and
diluted share in 1998.


                                      -31-
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

     The Company has funded its activities to date primarily through the sale of
equity securities, software licenses, software maintenance services, hardware
and drug discovery services. As of December 31, 2000, the Company had working
capital of $140.7 million compared to $58.7 million as of December 31, 1999. The
increase was generated from a $110.0 million private placement of the Company's
common stock in March 2000 and from operations, offset by various investing
activities, including two acquisitions for the Software Segment. In 2000, the
Company also invested $4.2 million in capital expenditures, which consisted
primarily of computer hardware and laboratory equipment. Financing activities in
2000 provided $124.9 million, primarily from the private placement, sales of
common stock from option exercises and employee stock purchase plan
participation.

     As of December 31, 2000, the Company's cash, cash equivalents and
marketable securities totaled $165.2 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 an increase of
$96.2 million from the 1999 year end level of $69.0 million. This increase was
primarily the result of the receipt of proceeds from a $110.0 million private
placement of the Company's common stock in March 2000 offset by cash used for
acquisitions.

     The Company anticipates that its capital requirements may increase in
future periods as the Company expands its research and development activities,
expands its facilities, and acquires additional equipment. The Company's capital
requirements may also increase in future periods as the Company seeks to expand
its technology platform through 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 2002. However, there
can be no assurance that changes will not occur that would consume available
capital resources before such time. The Company's capital requirements depend on
numerous factors, including the ability of the Company to continue to generate
software sales, the ability of the Company to extend existing Drug Discovery
Services agreements and to enter into additional arrangements, competing
technological and market developments, changes in the Company's existing
collaborative relationships, the cost of filing, prosecuting, defending and
enforcing patent claims and other intellectual property rights and the outcome
of related litigation, the purchase of additional capital equipment,
acquisitions of other businesses or technologies, and the progress of the
Company's customers' milestone and royalty producing activities. There can be no
assurance that additional funding, if necessary, will be available on favorable
terms, if at all. The Company's forecasts of the period of time through which
its financial resources will be adequate to support its operations is forward
looking information, and actual results could vary. The factors described
earlier in this paragraph will impact the Company's future capital requirements
and the adequacy of its available funds.

RECENTLY ISSUED ACCOUNTING STANDARD

     The Company is currently addressing the impact of the Financial Accounting
Standards Board's Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") and Financial Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation - an
interpretation of APB Opinion No. 25" ("FIN 44"). See Note 2 of the Notes to
Consolidated Financial Statements.

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.

     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 the wrong technologies, integration costs may be higher than
anticipated, management's time and attention may be


                                      -32-
<PAGE>


unduly diverted, key employees may not be retained, and earnings per share may
be temporarily or permanently diluted.

     UNCERTAIN REVENUE AND PROFIT 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 software and drug discovery services, 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.

     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.

     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.

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 2000, 48% of the Company's
consolidated revenue was derived from customers outside the United States
(including 34% from customers in Europe and 14% 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, 2000, the Company
had no hedging transactions in effect.

     The Euro's initial implementation was effective as of January 1, 1999, and
the transition period will continue through January 1, 2002. On January 1, 1999,
the Company began to convert product prices from local currencies to Euros as
required. The Company implemented system changes to give multi-currency
capability to internal applications and to ensure that external partners'
systems processing Euro conversions are compliant with the European Council
regulations.

     The introduction and use of the Euro has not had a material effect on the
Company's foreign exchange or hedging activities, and the Company does not
presently expect that it will. All costs associated with the conversion to the
Euro are expensed to operations as incurred. While the Company will continue to
evaluate the impact of the Euro over time, based on currently available
information, the Company does not believe that the introduction of the Euro
currency will have a material adverse impact on the consolidated financial
condition, cash flows or results of operations.

     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


                                      -33-
<PAGE>


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, 2000. Declines in interest rates over time
will, however, reduce the Company's interest income.


                                      -34-
<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. as of December 31, 2000 and 1999, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 2000. 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 auditing standards generally accepted
in the United States. 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 consolidated financial position of Pharmacopeia, Inc.
at December 31, 2000 and 1999 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 2000
in conformity with accounting principles generally accepted in the United
States.


                                                  ERNST & YOUNG LLP



San Diego, California
January 26, 2001


                                      -35-
<PAGE>


                               PHARMACOPEIA, INC.
                           CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>

                                                                                            December 31,
                                                                                --------------------------------------
                                                                                      2000                1999
                                                                                -----------------    -----------------
<S>                                                                                  <C>                  <C>
ASSETS
Current assets:
     Cash and cash equivalents                                                       $  69,350            $  17,157
     Marketable securities
                                                                                        95,828               51,875
     Trade receivables, net of allowance for doubtful
          accounts of $2,305 and $624 respectively                                      39,017               26,836
     Other current assets                                                                6,823                5,251
                                                                                -----------------    -----------------
       Total current assets                                                            211,018              101,119
Property and equipment, net                                                             12,381               11,362
Goodwill, net of accumulated amortization of $4,207 and $368,
     respectively                                                                       39,090                9,071
Software development costs, net of accumulated
     amortization of $8,450 and $4,594, respectively                                    16,193                3,353
Other intangible assets, net of accumulated amortization of
     $1,167 in 2000                                                                      4,293                    -
Other assets                                                                             1,791                1,354
                                                                                -----------------    -----------------
        Total assets                                                                 $ 284,766            $ 126,259
                                                                                =================    =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                                  $   2,921            $   3,479
   Accrued liabilities                                                                  33,580               18,409
   Deferred revenue, current portion                                                    33,802               20,212
   Notes payable, current portion                                                           43                  292
                                                                                -----------------    -----------------
        Total current liabilities                                                       70,346               42,392

Notes payable, long-term portion                                                           181                   --
Other long-term liabilities                                                                 46                   69
Deferred revenue, long-term                                                              4,326                5,052
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, 23,411 and 20,183 shares
         issued and outstanding, respectively                                                2                    1
    Additional paid-in capital                                                         276,144              148,862
    Accumulated deficit                                                                (67,874)             (69,049)
    Accumulated comprehensive income (loss)                                              1,595               (1,068)
                                                                                -----------------    -----------------
    Total stockholders' equity                                                         209,867               78,746
                                                                                -----------------    -----------------
    Total liabilities and stockholders' equity                                       $ 284,766            $ 126,259
                                                                                =================    =================

</TABLE>

       See accompanying notes to these consolidated financial statements.


                                      -36-
<PAGE>


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

<TABLE>
<CAPTION>

                                                                      Years Ended December 31,
                                                               ----------------------------------
                                                                  2000         1999        1998
                                                               ---------    ---------   ---------
<S>                                                            <C>          <C>         <C>
Revenues:
    Drug discovery services                                    $  39,035    $  34,581   $  29,677
    Software license, service and other                           75,401       60,943      54,420
    Hardware                                                       4,955        8,435       8,114
                                                               ---------    ---------   ---------
         Total revenues                                          119,391      103,959      92,211

 Cost of revenues:
     Drug discovery services                                      23,100       20,814      20,307
     Software license, service and other                          10,901        7,430       5,285
     Hardware                                                      4,396        7,512       7,061
                                                               ---------    ---------   ---------
         Total cost of revenues                                   38,397       35,756      32,653
                                                               ---------    ---------   ---------
 Gross margin                                                     80,994       68,203      59,558

 Operating costs and expenses:
     Research and development                                     26,431       27,282      28,656
     Selling, general and administrative                          48,749       40,403      36,360
     Amortization of goodwill                                      3,838          369          --
     Write-off of in-process research and development              8,740           --          --
     Merger related costs                                             --           --       7,998
                                                               ---------    ---------   ---------
         Total operating costs and expenses                       87,758       68,054      73,014
                                                               ---------    ---------   ---------
 Operating income (loss)                                          (6,764)         149     (13,456)
 Interest and other income, net                                    9,194        4,122       4,202
                                                               ---------    ---------   ---------
 Income (loss) before provision for income taxes                   2,430        4,271      (9,254)
 Provision for income taxes                                        1,255          500         909
                                                               ---------    ---------   ---------
 Net income (loss)                                             $   1,175    $   3,771   $ (10,163)
                                                               =========    =========   =========

 Net income (loss) per share
       - Basic                                                 $    0.05    $    0.19   $   (0.54)
                                                               =========    =========   =========
       - Diluted                                               $    0.05    $    0.19   $   (0.54)
                                                               =========    =========   =========

 Weighted average shares of common stock outstanding
       - Basic                                                    22,659       19,684      18,916
       - Diluted                                                  24,453       20,294      18,916

</TABLE>

       See accompanying notes to these consolidated financial statements.


                                      -37-
<PAGE>


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

<TABLE>
<CAPTION>

                                                                         COMMON STOCK
                                                                     --------------------
                                                                                                 ADDITIONAL
                                                                     NUMBER OF                     PAID-IN        ACCUMULATED
                                                                      SHARES       AMOUNT          CAPITAL          DEFICIT
                                                                     --------------------        ----------      -------------
<S>                                                                  <C>          <C>            <C>             <C>
  Balance at December 31, 1997                                         18,801     $     1        $ 144,439       $   (62,657)
  Comprehensive income (loss):
       Net loss                                                                                                      (10,163)
       Translation adjustment

       Comprehensive loss
  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 options and warrants     886           -            1,762
  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)
  Comprehensive income (loss):
       Net income                                                                                                      1,175
       Translation adjustment
       Unrealized gain on marketable securities
       Comprehensive income
  Issuance of common stock in private placement, net                    1,860           1          110,149
  Issuance of common stock in connection with business acquisition         19           -            1,199
  Issuance of common stock for exercise of stock options and warrants   1,259           -           14,017
  Issuance of common stock in employee stock purchase plan                 62           -            1,044
  Issuance of common stock for 401(k) matching                             28           -              873
                                                                     --------------------        ----------      -------------
  Balance at December 31, 2000                                         23,411     $     2        $ 276,144       $   (67,874)
                                                                     ====================        ==========      =============

</TABLE>

<TABLE>
<CAPTION>

                                                                            ACCUMULATED                TOTAL
                                                                        OTHER COMPREHENSIVE        STOCKHOLDERS'
                                                                            INCOME (LOSS)              EQUITY
                                                                        -------------------        --------------
<S>                                                                      <C>                        <C>
  Balance at December 31, 1997                                                   $  (1,188)          $    80,595
  Comprehensive income (loss):
       Net loss                                                                                          (10,163)
       Translation adjustment                                                          725                   725
                                                                                                     -----------
       Comprehensive loss                                                                                 (9,438)
  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 options and warrants                                      1,762
  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
  Comprehensive income (loss):
       Net income                                                                                          1,175
       Translation adjustment                                                          541                   541
       Unrealized gain on marketable securities                                      2,122                 2,122
                                                                                                     -----------
       Comprehensive income                                                                                3,838
  Issuance of common stock in private placement, net                                                     110,150
  Issuance of common stock in connection with business acquisition                                         1,199
  Issuance of common stock for exercise of stock options and warrants                                     14,017
  Issuance of common stock in employee stock purchase plan                                                 1,044
  Issuance of common stock for 401(k) matching                                                               873
                                                                        -------------------        --------------
  Balance at December 31, 2000                                                   $   1,595            $  209,867
                                                                        ===================        ==============

</TABLE>

       See accompanying notes to these consolidated financial statements.


                                      -38-
<PAGE>


                               PHARMACOPEIA, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                                          Years Ended December 31,
                                                                                      2000         1999         1998
                                                                                   ---------    ---------    ---------
<S>                                                                                <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income (loss)                                                             $   1,175    $   3,771    $ (10,163)
     Adjustments to reconcile net income (loss) to net cash used in operations:
        Depreciation                                                                   5,314        5,431        4,110
        Amortization                                                                   8,860        2,237        1,881
        Contribution of stock to 401(k) members                                          873          834          260
        Write-off of in-process research and development                               8,740           --           --
        Changes in assets and liabilities:
             Accounts receivable
                                                                                      (8,923)      (3,529)      (3,015)
             Prepaid and other current assets                                           (748)         (13)      (1,435)
             Other assets                                                                173         (324)         708
             Accounts payable
                                                                                      (1,218)      (1,679)         926
             Accrued liabilities                                                        (311)      (3,018)       3,309
             Deferred revenue
                                                                                       6,403         (915)      (7,508)
             Other                                                                     1,203         (236)         227
                                                                                   ---------    ---------    ---------
                  Net cash provided by (used in) operating activities
                                                                                      21,541        2,559      (10,700)
CASH FLOWS FROM INVESTING ACTIVITES
    Capital expenditures                                                              (4,176)      (3,093)      (5,283)
    Purchases of marketable securities                                              (133,241)     (66,513)     (62,987)
    Proceeds from sales of marketable securities                                      89,536       58,746       91,783
    Acquisition of businesses, net of cash acquired                                  (45,084)          --        1,013
    Acquisition of distribution rights and joint venture interest                         --      (10,566)          --
    Increase in capitalized software development costs                                (1,956)      (1,730)      (1,322)
                                                                                   ---------    ---------    ---------
                 Net cash provided by (used in) investing activities                 (94,921)     (23,156)      23,204
CASH FLOWS FROM FINANCING ACTIVITES
     Proceeds from issuance of common stock
                                                                                     125,210        2,529          799
     Principal payments on notes payable                                                (320)      (1,311)      (1,774)
                                                                                   ---------    ---------    ---------
                Net cash provided by (used in) financing activities                  124,890        1,218         (975)
Exchange rate effect on cash and equivalents
                                                                                         683         (327)         725
                                                                                   ---------    ---------    ---------
Net increase (decrease) in cash and equivalents                                       52,193      (19,706)      12,254

Cash and equivalents, beginning of period                                             17,157       36,863       24,609
                                                                                   ---------    ---------    ---------
Cash and equivalents, end of period                                                $  69,350    $  17,157    $  36,863
                                                                                   =========    =========    =========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for:
     Interest                                                                      $      21    $      81    $     333
                                                                                   =========    =========    =========
     Income taxes                                                                  $     503    $     395    $   1,277
                                                                                   =========    =========    =========

</TABLE>

See accompanying notes to these consolidated financial statements.


                                      -39-
<PAGE>


                               PHARMACOPEIA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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.

USE OF ESTIMATES

     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 AND 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. The Company's marketable securities are classified as
available-for-sale and are recorded at estimated fair value with unrealized
gains or losses reported in accumulated comprehensive income in stockholders'
equity.

     Included in accumulated comprehensive income as of December 31, 2000 is
$1.9 million of unrealized gain on an investment in the common stock of an
unrelated, publicly-traded corporation. The Company has included this investment
in other current assets.


                                      -40-
<PAGE>


     At December 31, 1999 marketable securities totaled $51.9 million of which
$29.2 million was invested in U.S. government securities and $22.7 million was
invested in U.S. corporate debt securities. At December 31, 1999 the cost of
marketable securities approximated fair value.

     At December 31, 2000, marketable securities consisted of the following
(in thousands):

<TABLE>
<CAPTION>

                                                             AMORTIZED           MARKET          UNREALIZED
                                                                COST             VALUE              GAIN
                                                          ----------------- ----------------- ------------------
        <S>                                               <C>               <C>               <C>
        U.S. treasury securities and obligations of
             U.S. Government agencies                            $ 59,627          $ 59,732              $ 105
        U.S. corporate debt securities                             36,044            36,096                 52
                                                          ----------------- ----------------- ------------------
                                                                 $ 95,671          $ 95,828              $ 157
                                                          ================= ================= ==================

</TABLE>

      Available for sale marketable securities by contractual maturity at
December 31, 2000 are as follows (in thousands):

<TABLE>

        <S>                                                 <C>
        Due within one year                                         $ 70,530
        Due after one year through two years                          25,298
                                                            ------------------
                                                                    $ 95,828
                                                            ==================

</TABLE>

     Included in the short-term investment balance as of December 31, 2000 is
$1.1 million in commercial paper issued by Pacific Gas and Electric Company
(PG&E). Subsequent to December 31, 2000 PG&E has defaulted on certain of its
liabilities and the public rating agencies have downgraded the quality of PG&E's
debt instruments. Without government intervention, PG&E will more than likely be
unable to honor it's obligations and the Company's investment will become
permanently impaired, necessitating a write down to net realizable value. The
amount of the decline and ultimate realization of this investment is not
currently determinable.

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.

SOFTWARE 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 costs incurred in the 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.

RESEARCH AND DEVELOPMENT COSTS

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


                                      -41-
<PAGE>


IMPAIRMENT OF LONG-LIVED ASSETS

     The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed of" ("SFAS 121"). SFAS 121 requires recognition of impairment
of long-lived assets in the event the net book value of these assets exceeds
the future undiscounted cash flows attributable to these assets. The Company
assesses potential impairments to its long-lived assets when there is
evidence that events or changes in circumstances have made recovery of the
asset's carrying value unlikely. Should an impairment exist, the impairment
loss would be measured based on the excess of the carrying value of the asset
over the asset's fair value or discounted estimates of future cash flows. The
Company has identified no such impairment losses as of December 31, 2000.

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

     Many of 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 2000, one of the Company's Drug Discovery Services Segment customers
accounted for 11% 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 results of operations. 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

     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


                                      -42-
<PAGE>


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.

     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.

     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 payments are recognized as revenue when they
are not subject to future performance obligations. Otherwise, such payments are
deferred and amortized into revenue over the term of the agreement.

ADVERTISING EXPENSE

     The cost of advertising is expensed as incurred. The Company incurred
$417,000, $153,000 and $695,000 in advertising costs during 2000, 1999 and 1998,
respectively.

INCOME TAXES

     Income taxes have been provided using the liability method in accordance
with FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES.

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

     The Company computes net loss per share following SFAS No. 128, "Earnings
Per Share". Under the provisions of SFAS No. 128, basic net loss per share is
computed by dividing the net loss available to common stockholders for the
period by the weighted average number of common shares outstanding during the
period. Diluted net loss per share is computed by dividing the net loss for the
period by the weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares, composed of unvested
restricted common shares and incremental common shares issuable upon the
exercise of stock options, are included in diluted net loss per share to the
extent these shares are dilutive.

     The following table sets forth the computation of basic and diluted net
loss per share as follows (in thousands, except per share amounts):


                                      -43-
<PAGE>


<TABLE>
<CAPTION>

                                                                              Years Ended December 31,
                                                                    2000              1999               1998
                                                               ----------------------------------------------------
        <S>                                                    <C>              <C>               <C>
        Numerator:

        Net income (loss):                                            $ 1,175           $ 3,771          $  (10,163)
                                                               ====================================================

        Denominator:
          Weighted average shares outstanding and
          Denominator for basic earnings per share                     22,659            19,684              18,916

        Effect of dilutive securities:
          Employee stock options                                        1,794               610                   -
                                                               ----------------------------------------------------

        Denominator for diluted earnings per share                     24,453            20,294              18,916
                                                               ====================================================

        Net income (loss) per share:
          Basic                                                       $  0.05           $  0.19          $    (0.54)
                                                               ====================================================
          Diluted                                                     $  0.05           $  0.19          $    (0.54)
                                                               ====================================================

</TABLE>

     Dilutive common stock equivalents would include the dilutive effects of
common stock options, convertible preferred stock (as if converted), warrants
for common stock, and restricted stock that has not yet fully vested.
Potentially dilutive common stock totaled approximately 626,000 1,640,000 and
2,705,000 shares for the years ended December 31, 2000, 1999 and 1998
respectively, and were excluded from the diluted earnings per share because of
their anti-dilutive effect.

COMPREHENSIVE INCOME

     The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes all changes in equity (net assets) during a period
from non-owner sources. Net loss and other comprehensive loss, including foreign
currency translation adjustments, and unrealized gains and losses on investments
shall be reported, net of their related tax effect, to arrive at comprehensive
loss. The Company's net loss and its total comprehensive loss are included in a
supplementary schedule in the statement of stockholders equity.

EFFECT OF NEW ACCOUNTING STANDARDS

     In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities
- Deferral of Effective Date of FASB Statement No. 133" ("SFAS No. 137"). The
Statement defers for one year the effective date of FASB Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 137 now will apply to all fiscal quarters of all fiscal years beginning
after June 15, 2000. The FASB issued SFAS No. 133 in June 1998. SFAS No. 133
requires the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. As of December 31,
2000, the Company did not hold any derivative


                                      -44-
<PAGE>


instruments, or conduct any hedging activities. Therefore, there is no
anticipated impact to the consolidated financial statements for the adoption of
SFAS No's. 133 and 137 in January 2001.

     In March 2000, the FASB issued Financial Interpretation No.44, (FIN 44),
"Accounting for Certain Transactions Involving Stock Compensation - an
interpretation of APB Opinion No. 25". FIN 44 clarifies the definition of an
employee for purposes of applying Accounting Practice Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. FIN 44 became effective on July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a
material effect on the financial position or results of operations of the
Company.

RECLASSIFICATIONS

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

3. BUSINESS COMBINATIONS

ACQUISITION OF SYNOPSYS LTD., AND SOFTWARE SUBSIDIARIES OF OXFORD MOLECULAR
GROUP, PLC

     On February 29, 2000, the Company acquired Synopsys Scientific Systems,
Ltd. ("Synopsys"), a U.K.-based company providing chemical database software,
chemical data content and system integration services to the pharmaceutical,
biotechnology and chemical industries. The Company paid $25.6 million for
Synopsys, consisting of $23.7 million in cash, $0.7 million in transaction
costs, and 19,142 shares of the Company's common stock valued at $1.2 million.

     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. Based on an independent valuation, the Company
recorded a first quarter 2000 charge of $6.4 million related to the write-off of
the portion of the purchase price that was allocated to in-process research and
development. The remainder of the purchase price was allocated as follows: $0.3
million to net tangible assets (including cash acquired of $0.5 million), $3.0
million to developed software, $3.4 million to customer lists and other
identified intangible assets, and $12.5 million to goodwill. The developed
software is being amortized over three years within cost of revenues, the
customer lists and other identified intangible assets are being amortized over
three years within selling, general and administrative expenses, and the
goodwill is being amortized over five years. The operating results of Synopsys
have been included in the Company's results of operations since the acquisition
date.

     On September 6, 2000, the Company acquired the software subsidiaries of
Oxford Molecular Group Plc (the "Software Subsidiaries"). The acquired assets of
the Software Subsidiaries, constituting plant, equipment or other physical
property were used by the Software Subsidiaries in the design and marketing of
bioinformatics and cheminformatics products for the pharmaceutical,
biotechnology and chemical industries. The Company intends to use these assets
in the same manner in which they were used prior to the acquisition.

     The Company paid $32.1 million for the Software Subsidiaries, consisting of
$18.7 million in cash, $11.9 million in assumed liabilities and $1.5 million in
transaction costs. Of the $18.7 million paid in cash, $2.0 million was paid into
a one-year escrow account as security against the representations and warranties
made by the seller in the related contract. 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.


                                      -45-
<PAGE>


     Based on an independent valuation, the Company recorded a third quarter
2000 charge of $2.3 million related to the write-off of the portion of the
purchase price that was allocated to in-process research and development. The
remainder of the purchase price was allocated as follows: $5.3 million to net
liabilities (net of cash acquired of $0.2 million), $11.7 million to developed
software, $2.1 million to customer lists and other identified intangible assets,
and $21.3 million to goodwill. The developed software is being amortized over
three years within cost of revenues, the customer lists and other identified
intangible assets are being amortized over three years within selling, general
and administrative expenses, and the goodwill is being amortized over five
years. The operating results of the Software Subsidiaries have been included in
the Company's results of operations since the acquisition date.

     The Company has included $10.4 million in accrued liabilities for closure
of identified facilities, termination and relocation of employees. Such accruals
were recorded at the time of acquisition based on excess capacity identified by
management pursuant to a plan established at that time.

     Assuming that the acquisition of Synopsys and of the Software Subsidiaries
had occurred on January 1 of the respective years, the pro forma consolidated
results of operations would be as follows (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
                                               Years Ended December 31,
                                               2000               1999
                                            -----------------------------
<S>                                         <C>                <C>
Revenues                                    $ 130,746          $ 127,403
Net loss                                    $ (20,317)         $ (45,076)

Loss per share:
  Basic                                     $   (0.90)         $   (2.29)
  Diluted                                   $   (0.90)         $   (2.29)

</TABLE>

These pro forma results of operations do not give effect to the write-off of
allocated in-process research and development of $8.7 million.

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 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.

     For the period from January 1, 1998 to June 12, 1998, Pharmacopeia had
revenues and net losses of $12.3 million and $3.6 million, respectively, and MSI
incurred revenues and net losses of $20.4 million and $1.5 million,
respectively.

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


                                      -46-
<PAGE>


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 (in thousands):

<TABLE>
<CAPTION>

                                                        As of December 31,
                                                      2000             1999
                                                -----------------------------------
      <S>                                       <C>                 <C>
      Laboratory equipment                             $ 10,617        $  9,147
      Furniture, fixtures and equipment                   5,744           5,134
      Computers and software                             13,112           9,513
      Leasehold improvements                              6,756           6,176
      Other                                                 752             356
                                                -----------------------------------
                                                         36,981          30,326
      Accumulated depreciation and amortization         (24,600)        (18,964)
                                                -----------------------------------
      Property and equipment, net                      $ 12,381        $ 11,362
                                                ===================================

</TABLE>

      Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>

                                                       As of December 31,
                                                     2000              1999
                                               ------------------------------------
      <S>                                      <C>                 <C>
      Payroll and other compensation                 $ 13,167          $  8,984
      Royalties                                         1,088             1,173
      Merger related and restructuring costs           10,360             1,096
      Taxes                                             5,685             4,142
      Other                                             3,280             3,014
                                               ------------------------------------
                                                     $ 33,580          $ 18,409
                                               ====================================

</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 (in thousands):


                                      -47-
<PAGE>


<TABLE>
<CAPTION>
                                                                              As of December 31,
                                                                            2000             1999
                                                                       -------------------------------
                  <S>                                                  <C>               <C>
                  Deferred tax assets:
                     Net operating loss carryforwards                       $ 33,449       $ 18,500
                     Unused tax credits                                          914          2,637
                     Accruals and reserves                                     5,225          3,095
                                                                       -------------------------------
                     Gross deferred tax asset                                 39,588         24,232

                  Deferred tax liabilities:
                     Fixed assets and intangibles                              8,586            757
                                                                       -------------------------------

                  Net asset before valuation allowance                        31,002         23,475
                  Valuation allowance                                        (31,002)       (23,475)
                                                                       -------------------------------

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

</TABLE>

     As of December 31, 2000, approximately $8,032 of the valuation allowance
for deferred tax assets relates to pre-acquisition tax deductions which, to the
extend recognized, will result in a reduction of goodwill.

The provision for income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                                                   2000              1999             1998
                                                              ----------------------------------------------
                 <S>                                          <C>               <C>            <C>
                 Current:
                    Federal                                         $    --           $  50        $   --
                    State                                               329              70           310
                    Foreign                                             926             380           599
                                                              ----------------------------------------------
                 Total                                              $ 1,255           $ 500        $  909
                                                              ==============================================

</TABLE>

The following reconciles income taxes computed at the U.S. statutory federal tax
rate to the provision for income taxes (in thousands):

<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                                                      2000            1999         1998
                                                               ----------------------------------------------
         <S>                                                   <C>                  <C>          <C>
         Tax expense (benefit) at U.S. statutory rate                $   826        $  1,495     $ (3,146)
            State income taxes, net of Federal income
              tax benefit                                                329             70           205
            Nondeductible merger costs                                 5,031             --         1,788
            Foreign taxes                                                183            380           (12)
            Alternative minimum tax                                       --             50            --
            Change in valuation allowance and other                   (5,114)        (1,495)        2,074
                                                               ----------------------------------------------
         Provision for income taxes                                  $ 1,255        $   500      $    909
                                                               ==============================================

</TABLE>

     Pretax income (loss) from the Company's domestic operations totaled
approximately $559,000, $838,000 and $(10,900,000) in 2000, 1999 and 1998,
respectively. Pretax income from the Company's foreign operations totaled
approximately $1,870,000, $3,433,000 and $1,800,000 in 2000, 1999 and 1998,
respectively.

     As of December 31, 2000, the Company has Federal net operating loss
carryforwards of approximately $73 million, and credit carryforwards of
approximately $2 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. A portion of the net operating losses relate to stock option
deductions which will result in an increase to paid-in capital and a decrease in
income taxes payable at such time that the tax benefit is realized.


                                      -48-
<PAGE>


     A portion of the Company's federal net operating loss carryforwards that
relate to the acquired companies may be subject to limitations under Section
382.

6.  STOCK PLANS

     The Company has four Stock Plans, including the 1994 Incentive Stock Plan,
the 1995 Employee Stock Purchase Plan, the 1995 Director's Option Plan and the
2000 Stock Option Plan.

     In accordance with the 1994 Incentive Stock Plan (the "Plan"), the Company
may grant up to 4,700,000 shares of both incentive or non-qualified stock
options or stock purchase rights to officers, directors, employees, sales
representatives and consultants of the Company. The term of each incentive and
non-qualified stock option and stock purchase right is generally ten years.
Vesting generally occurs over a period of not greater than five years. At
December 31, 2000, there were 697,000 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 250,000
shares of common stock are reserved for offering under the ESPP. In 2000,
100,000 shares of common stock were purchased at prices ranging from $15.25 to
$18.38 per share. At December 31, 2000, there were 30,000 shares available for
future purchase under the ESPP.

     In accordance with the 1995 Director's Option Plan, the Company may grant
up to 300,000 options to purchase shares of common stock to non-employee members
of the Board. The exercise price of the stock options shall be equal to the fair
market value per share of common stock on the option grant date. Each option has
a term of ten years from the option grant date and shall become exercisable in a
series of three equal and successive annual installments. In 2000, 50,000
options were granted at exercise prices ranging from $28.00 to $43.625. At
December 31, 2000, there were 152,000 shares available for future grants under
the Directors Option Plan.

     In accordance with the 2000 Stock Option Plan, the Company may grant up to
750,000 shares of non-qualified stock option or stock purchase rights to
employees and consultants of the Company. The term of each non-qualified stock
option and stock purchase right is ten years. In 2000, 48,000 options were
granted at exercise prices ranging from $19.75 to $28.6875. Vesting generally
occurs over a period of not greater than five years. At December 31, 2000, there
were 702,000 shares available for future grants under the 2000 Stock Option
Plan.

     The Company applies APB 25 in accounting for its stock option programs
described above. The exercise 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 2000, 1999 and 1998,
respectively: risk-free interest rates of 5.2%, 6.5% and 4.5%; expected
volatility of 108%, 111% and 81%; expected option life of 5.9, 4.9 and 5.9 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 (in
thousands, except per share amounts):

                                      -49-
<PAGE>


<TABLE>
<CAPTION>
                                                                       Years Ended December 31,
                                                              2000               1999               1998
                                                        ----------------- -------------------- ----------------
<S>                                                         <C>                 <C>              <C>
         Net income (loss):
             As reported                                    $   1,175           $  3,771         $(10,163)
             Pro forma                                        (16,823)            (6,619)         (17,209)
         Basic net income (loss) per common share:
             As reported                                    $    0.05           $   0.19         $  (0.54)
             Pro forma                                          (0.74)             (0.34)           (0.91)
         Diluted net income (loss) per common share:
             As reported                                    $    0.05           $   0.19         $  (0.54)
             Pro forma                                          (0.74)             (0.34)           (0.91)

</TABLE>

A summary of the Company's stock option activity and weighted average exercise
prices follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                          2000                              1999                               1998
                               ----------------------------    -------------------------------    --------------------------------
                                                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                          3,664         $ 10.73            3,725           $ 9.54            3,164             $ 8.19
     Granted                        1,460           42.53            1,270             9.27            1,218              12.45
     Exercised                     (1,259)          10.93             (886)            2.70             (296)              2.42
     Expired                         (482)          19.04             (445)           13.44             (361)             13.01
                               ------------                    ------------                       -------------
   Outstanding at end of year       3,383           23.33            3,664            10.73            3,725               9.54
                               ============                    ============                       =============

   Exercisable at end of year       1,223                            1,739                             1,853
                               ============                    ============                       =============
   Weighted average fair
   value  of options granted
   during the year                                 $35.83                            $ 8.65                              $ 6.52

</TABLE>


A summary of stock options outstanding and exercisable as of December 31, 2000,
follows (in thousands, except per share amounts):

<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>
    $  0.38 - $ 19.00                    1,965                    6.4        $ 10.05                  1,157      $ 9.87
    $ 19.01 - $ 49.00                    1,308                    9.2          39.56                     66       21.71
    $ 49.01 - $ 85.00                      110                    9.2          67.51                      0        0.00
    -----------------------    ------------------    ----------------- ----------------    ----------------- -------------
    $  0.38 - $ 85.00                    3,383                    7.5          23.33                  1,223       10.51

</TABLE>

7.       DEFERRED COMPENSATION AND RETIREMENT SAVINGS PLANS

     The Company has an employee savings and retirement plan (the "401(k) Plan")
and a deferred compensation plan for certain highly compensated employees.


                                      -50-
<PAGE>


     The 401(k) Plan is intended to be a tax-qualified plan covering
substantially all employees. Under the terms of the 401(k) Plan, employees may
elect to contribute up to 20% of their compensation, or the statutory prescribed
limit, if less. As part of this plan employees may elect to invest in the stock
of the Company. The Company may, at its discretion, match employee contributions
up to a maximum of 3% of the employees compensation. Employer contributions
totaled $873,000, $834,000, and $370,000 for the years ended December 31, 2000,
1999, and 1998.

     The Deferred Compensation plan was established in fiscal 2000 and permits
selected employees to defer a portion of their compensation (not to exceed 90%).
Contributions to this plan are held in a trust account and are invested at the
participant's discretion in marketable debt and equity securities. These
investments are reflected in other assets on the balance sheet and total
$226,000 as of December 31, 2000. The Company recognized $45,000 deferred
compensation expense for the year ended December 31, 2000.

8.  SEGMENT INFORMATION

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

     Summarized financial information concerning the industry segments and
geographic revenues follows (in thousands):

<TABLE>
<CAPTION>
                                                               Years Ended December 31,
                                   2000                                  1999                                 1998
                     ---------------------------------- --------------------------------------- ------------------------------------
                                  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>
  REVENUES:
  Drug discovery
     services         $    --     $39,035     $ 39,035    $     --      $  34,581    $  34,581     $     -     $ 29,677    $ 29,677
  Software license
     service and
     other             75,401           -       75,401      60,943              -       60,943      54,420            -      54,420
  Hardware              4,955           -        4,955       8,435              -        8,435       8,114            -       8,114
                     ---------------------------------- --------------------------------------- ------------------------------------
  Total revenues     $ 80,356    $ 39,035     $119,391    $ 69,378      $  34,581    $ 103,959     $62,534     $ 29,677    $ 92,211
                     ================================== ======================================= ====================================
  DEPRECIATION AND
     AMORTIZATION    $ 19,504    $  3,410     $ 22,914    $  3,798      $   3,870    $   7,668     $ 2,733     $  3,258    $  5,991
  OPERATING INCOME
  (LOSS)(1)          $ (6,497)   $   (267)    $ (6,764)   $  8,520      $  (8,371)   $     149     $ 1,090     $(14,546)   $(13,456)
  CAPITAL
     EXPENDITURES    $  2,365    $  1,811     $  4,176    $  1,173      $   1,920    $   3,093     $ 1,878     $  3,405    $  5,283

  TOTAL ASSETS       $119,386    $165,380     $284,766    $ 59,985      $  66,274    $ 126,259     $52,889     $ 74,976    $127,865

  REVENUES (2)
    U.S.                                      $ 79,863                               $  70,249                             $  58,601
    Europe                                      24,124                                  23,348                                22,739
    Asia-Pacific                                15,404                                  10,362                                10,871
                                            -----------                             -----------                           ----------
  Total                                       $119,391                               $ 103,959                             $  92,211
                                            ===========                             ===========                           ==========

</TABLE>

(1) Includes $8.0 million of merger related costs in 1998, $8.7 million of write
offs of in process Research & Development in 2000.
(2) Revenue in the U.S. category includes export sales of laboratory services
and software. Export sales from the U.S. to Europe totaled $15,953, $5,485
and $18,308 in 2000, 1999 and 1998, respectively and export sales to Asia
Pacific totaled $1,170, $1,969 and $2,303 in 2000, 1999 and 1998,
respectively.

                                      -51-
<PAGE>


9.   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 2000, 1999 and 1998 was approximately
$3,069,000 $4,803,000 and $4,435,000 respectively.

Future minimum lease commitments at December 31, 2000 are as follows:

<TABLE>

                  <S>                                  <C>
                  2001                                 6,201,000
                  2002                                 5,933,000
                  2003                                 6,045,000
                  2004                                 5,862,000
                  2005                                 5,649,000
                  Thereafter                           3,924,000
                                               --------------------
                                                     $33,614,000
                                               ====================

</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 $450,000 on an annual basis. In 2000, 1999 and 1998 the Company
incurred related royalty expense of $2.2 million, $2.3 million and $1.6 million,
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
pay annual license fees and certain royalties. In 2000, 1999, and 1998 the
Company paid related royalties and license fees of $236,000, $100,000 and
$514,000 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.

10.       SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

     The following is a summary of the quarterly results of operations for the
years ended December 31, 2000 and 1999 (amounts in thousands, except per share
amounts):

                                      -52-
<PAGE>


<TABLE>
<CAPTION>

                                                 March 31    June 30     Sept. 30     Dec.31
<S>                                              <C>         <C>         <C>         <C>
2000

Revenues                                         $ 23,850    $ 27,891    $ 27,140    $ 40,509

Cost of revenues                                 $  8,664    $  9,851    $  9,476    $ 10,406

Net income (loss)                                $ (5,797)   $  3,069    $ (1,945)   $  5,849

Per common share:
Net income (loss):
  -Basic                                         $  (0.27)   $   0.13    $  (0.08)   $   0.25
  -Diluted                                       $  (0.27)   $   0.12    $  (0.08)   $   0.24


1999

Revenues                                         $ 23,293    $ 23,267    $ 24,250    $ 33,149

Cost of revenues                                 $  9,151    $  9,180    $  8,022    $  9,404

Net income (loss)                                $   (566)   $ (1,592)   $    336    $  5,593

Per common share:
Net income (loss):
  -Basic                                         $  (0.03)   $  (0.08)   $   0.02    $   0.28
  -Diluted                                       $  (0.03)   $  (0.08)   $   0.02    $   0.26

</TABLE>

11.       RELATED PARTY TRANSACTIONS

      The Company's general counsel is also a shareholder and member of the
Board of Directors. For the years ended December 31, 2000, 1999, and 1998 the
Company expended a total of $1,015,000, $482,000, and $603,000 in fees related
to services provided by the general counsel.


                                      -53-
<PAGE>



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, other than as set forth in Item 4A, is incorporated by
reference from the Company's Proxy Statement (the "Proxy Statement") related to
the 2001 Annual Meeting of Stockholders to be held on May 2, 2001.

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 entitled "Stock Ownership of Principal Stockholders and Management" in
the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is incorporated by reference from the
section entitled "Certain Relationships and Related Transactions" in the Proxy
Statement.

                                     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, 2000 and 1999
        Consolidated Statements of Operations for the years ended December 31,
          2000, 1999 and 1998
        Consolidated Statements of Stockholders' Equity for the years ended
          December 31, 2000, 1999 and 1998
        Consolidated Statements of Cash Flows for the years ended December 31,
          2000, 1999 and 1998
        Notes to Consolidated Financial Statements


                                      -54-
<PAGE>


(a)(2)  Financial Statement Schedules

Schedule II-Valuation and Qualifying Accounts
----------------------------------------------
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the financial
statements or notes thereto.

(a)(3)    Exhibits:

<TABLE>

<S>                           <C>
----------------------------- -------------------------------------------------------------------------------
3.1                           Restated Certificate of Incorporation of the Registrant (incorporated by
                              Reference to Exhibit 3.1 to the Company's Report on Form 10-K for the year
                              ended December 31, 1996).
----------------------------- -------------------------------------------------------------------------------
3.3                           Bylaws of the Registrant, as amended (incorporated by Reference to Exhibit
                              3.3 to the Company's Report on Form 10-K for the year ended December 31,
                              1996).
----------------------------- -------------------------------------------------------------------------------
3.3(a)                        Amendment to Bylaws of Pharmacopeia dated July 31,
                              1997 (incorporated by Reference to Exhibit 3.3(a)
                              to the Company's Report on Form 10-Q for the
                              quarter ended September 30, 1997).
----------------------------- -------------------------------------------------------------------------------
10.1#                         Amended 1994 Incentive Stock Plan (incorporated by
                              Reference to Exhibit 10.5 to the Company's Report
                              on Form 10-K for the year ended December 31, 1995
                              (File Number 000-27188)).
----------------------------- -------------------------------------------------------------------------------
10.1(a)#*                     Amendment No. 1 to the 1994 Incentive Stock Plan.
----------------------------- -------------------------------------------------------------------------------
10.1(b)#*                     Amendment No. 2 to the 1994 Incentive Stock Plan.
----------------------------- -------------------------------------------------------------------------------
10.1(c)#                      Amendment No. 3 to the 1994 Incentive Stock Plan (incorporated by reference
                              to Exhibit 10.5(a) to the Company's Report on Form 10-Q for the quarter ended
                              June 30, 1997.)
----------------------------- -------------------------------------------------------------------------------
10.1(d)#*                     Amendment No. 4 to the 1994 Incentive Stock Plan.
----------------------------- -------------------------------------------------------------------------------
10.1(e)#*                     Amendment No. 5 to the 1994 Incentive Stock Plan.
----------------------------- -------------------------------------------------------------------------------
10.1(f)#*                     Amendment No. 6 to the 1994 Incentive Stock Plan.
----------------------------- -------------------------------------------------------------------------------
10.1(g)#*                     Amendment No. 7 to the 1994 Incentive Stock Plan.
----------------------------- -------------------------------------------------------------------------------
10.1(h)#                      Amendment No. 8 to the 1994 Incentive Stock Plan (incorporated by reference
                              to Exhibit 10.54 to the Company's Report on Form 10-Q for the quarter ended
                              June 30, 2000.)
----------------------------- -------------------------------------------------------------------------------
10.2#                         1995 Employee Stock Purchase Plan (incorporated by Reference to Exhibit 10.6
                              to the Company's Registration Statement on Form S-1 (Reg. No. 33-98246)).
----------------------------- -------------------------------------------------------------------------------
10.3#                         1995 Director Option Plan (incorporated by Reference to Exhibit 10.7 to the
                              Company's Registration Statement on Form S-1 (Reg. No. 33-98246)).
----------------------------- -------------------------------------------------------------------------------
10.3(a)#*                     Amendment No. 1 to 1995 Director Option Plan.
----------------------------- -------------------------------------------------------------------------------
10.4+                         Research, License, and Royalty Agreement, dated as of February 15, 1995,
                              between Pharmacopeia and Berlex Laboratories, Inc. (incorporated by Reference
                              to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (Reg. No.
                              33-98246)).
----------------------------- -------------------------------------------------------------------------------
10.4(a)+                      Amendment No. 1 to Research, License and Royalty Agreement between the
                              Company and Berlex Laboratories, Inc. dated November 27, 1996 (incorporated
                              by Reference to Exhibit 10.9(a) to the Company's Report on Form 10-Q for the
                              quarter ended June 30, 1997).
----------------------------- -------------------------------------------------------------------------------
10.4(b)+                      Amendment No. 2 to Research, License and Royalty Agreement between the
                              Company and Berlex Laboratories, Inc. dated June 30, 1997 (incorporated by
                              Reference to Exhibit 10.9(b) to the Company's Report on Form 10-Q for the
                              quarter ended June 30, 1997).
----------------------------- -------------------------------------------------------------------------------
10.4(c)+                      Amendment No.3 to Research, License and Royalty Agreement between the Company
                              and Berlex Laboratories, Inc. dated November 21, 1997 (incorporated by
                              Reference to Exhibit 10.9(c) to the Company's Report on Form 10-K for the
                              year ended December 31, 1997).
----------------------------- -------------------------------------------------------------------------------
10.5+                         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 (incorporated by Reference to Exhibit 10.10 to the
                              Company's Registration Statement on Form S-1 (Reg. No. 33-98246)).
----------------------------- -------------------------------------------------------------------------------
10.6+                         Collaboration Agreement, dated as of December 22, 1994, between Pharmacopeia
                              and Schering Corporation and Schering-Plough, Ltd.  (incorporated by
                              Reference to Exhibit 10.11 to the Company's Registration Statement on Form
                              S-1 (Reg. No. 33-98246)).
----------------------------- -------------------------------------------------------------------------------

</TABLE>



                                      -55-
<PAGE>


<TABLE>

<S>                           <C>
----------------------------- -------------------------------------------------------------------------------
10.6(a)+                      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 (incorporated by Reference to Exhibit 10.11(b) to the
                              Company's Report on Form 10-Q for the quarter ended June 30, 1997).
----------------------------- -------------------------------------------------------------------------------
10.6(b)+                      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 (incorporated by Reference to Exhibit 10.11(c) to the
                              Company's Report on Form 10-Q for the quarter ended June 30, 1997).
----------------------------- -------------------------------------------------------------------------------
10.7+                         Random Library Agreement, dated as of December 22, 1994, between Pharmacopeia
                              and Schering Corporation and Schering-Plough, Ltd. (incorporated by Reference
                              to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Reg.
                              No. 33-98246)).
----------------------------- -------------------------------------------------------------------------------
10.8                          Lease Agreement between Pharmacopeia and Eastpark at 8A (incorporated by
                              Reference to Exhibit 10.13 to the Company's Registration Statement on Form
                              S-1 (Reg. No. 33-98246)).
----------------------------- -------------------------------------------------------------------------------
10.8(a)                       Amendment dated as of January 22, 1996 to Lease Agreement between
                              Pharmacopeia and Eastpark at 8A (incorporated by reference to Exhibit
                              10.13(a) to the Company's Report on Form 10-K for the year ended December 31,
                              1995 (File Number 000-27188)).
----------------------------- -------------------------------------------------------------------------------
10.8(b)                       Third Amendment to Lease Agreement dated March 31,
                              1996 between Pharmacopeia and Eastpark at 8A
                              (incorporated by reference to Exhibit 10.13(b) to
                              the Company's Report on Form 10-Q for the quarter
                              ended June 30, 1996).
----------------------------- -------------------------------------------------------------------------------
10.9#*                        Employment Agreement dated as of February 26, 2001 between the Company and
                              Joseph A. Mollica, Ph.D.
----------------------------- -------------------------------------------------------------------------------
10.10#                        Employment Agreement, dated January 30, 1998,
                              between the Company and Richard Walsh
                              (incorporated by reference to Exhibit 10.19 to the
                              Company's Report on Form 10-Q for the quarter
                              ended June 30, 1998).
----------------------------- -------------------------------------------------------------------------------
10.11#                        Employment Agreement, dated June 3, 1993, between the Company and John J.
                              Baldwin, Ph.D (incorporated by Reference to Exhibit 10.20 to the Company's
                              Registration Statement on Form S-1 (Reg. No. 33-98246)).
----------------------------- -------------------------------------------------------------------------------
10.12#                        Employment Agreement effective November 30, 1995 between Molecular
                              Simulations Incorporated and Saiid Zarrabian (incorporated by reference to
                              Exhibit 10.16 to Molecular Simulations Incorporated's Registration Statement
                              on Form S-1 (Reg. No. 333-21427)).
----------------------------- -------------------------------------------------------------------------------
10.12(a)#                     Amendment No. 1 to Employment Agreement between Molecular Simulations
                              Incorporated and Saiid Zarrabian dated as of October 1, 1997 (incorporated by
                              reference to Exhibit 10.28(a) to the Company's Report on Form 10-Q for the
                              quarter ended June 30, 1998).
----------------------------- -------------------------------------------------------------------------------
10.12(b)#*                    Disengagement Agreement and Release dated as of Sepetember 11, 2000 between
                              Pharmacopeia, Inc. and Saiid Zarrabian.
----------------------------- -------------------------------------------------------------------------------
10.13#                        Employment Agreement, dated June 20, 1996, between
                              the Company and Stephen A. Spearman, Ph.D
                              (incorporated by reference to Exhibit 10.32 to the
                              Company's Report on Form 10-Q for the quarter
                              ended September 30, 1996).
----------------------------- -------------------------------------------------------------------------------
10.14+                        Collaboration and License Agreement between Pharmacopeia, Inc. and
                              Bristol-Myers Squibb Company dated November 26, 1997 (incorporated by
                              reference to Exhibit 10.34 to the Company's Report on Form 10-K/A-2 for the
                              year ended December 31, 1997).
----------------------------- -------------------------------------------------------------------------------
10.15+                        Collaboration and License Agreement, dated as of October 29, 1998, between
                              Pharmacopeia, Inc. and Schering-Plough Ltd. (incorporated by reference to
                              Exhibit 10.43 to the Company's Report on Form 10-K for the year ended
                              December 31, 1998).
----------------------------- -------------------------------------------------------------------------------

</TABLE>



                                      -56-
<PAGE>


<TABLE>

<S>                           <C>
----------------------------- -------------------------------------------------------------------------------
10.16+                        Collaboration and License Agreement, dated as of
                              October 29, 1998, between Pharmacopeia, Inc. and
                              Schering Corporation (incorporated by reference to
                              Exhibit 10.44 to the Company's Report on Form 10-K
                              for the year ended December 31, 1998).
----------------------------- -------------------------------------------------------------------------------
10.17                         Guarantee, dated as of October 29, 1998, between
                              Pharmacopeia, Inc. and Schering-Plough Corporation
                              (incorporated by reference to Exhibit 10.45 to the
                              Company's Report on Form 10-K for the year ended
                              December 31, 1998).
----------------------------- -------------------------------------------------------------------------------
10.18                         Lease dated November 12, 1998 between Molecular
                              Simulations Inc. and San Diego Tech Center, LLC
                              (incorporated by reference to Exhibit 10.47 to the
                              Company's Report on Form 10-K for the year ended
                              December 31, 1998).
----------------------------- -------------------------------------------------------------------------------
10.19#                        Form of Indemnity Agreement for Directors and
                              Executive Officers (incorporated by reference to
                              Exhibit 10.48 to the Company's Report on Form 10-K
                              for the year ended December 31, 1998).
----------------------------- -------------------------------------------------------------------------------
10.20                         Lease Agreement, dated May 1, 1999, between Pharmacopeia and South Brunswick
                              Rental I, LTD (incorporated by reference to Exhibit 10.49 to the Company's
                              Report on Form 10-Q for the quarter ended June 30, 1999).
----------------------------- -------------------------------------------------------------------------------
10.21                         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 (incorporated by reference to
                              Exhibit 10.50 to the Company's Report on Form 10-K for the year ended
                              December 31, 1999).
----------------------------- -------------------------------------------------------------------------------
10.22+                        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 (incorporated by reference to
                              Exhibit 10.51 to the Company's Report on Form 10-K for the year ended
                              December 31, 1999).
----------------------------- -------------------------------------------------------------------------------
10.23*                        Pharmacopeia, Inc. 2000 Stock Option Plan.
----------------------------- -------------------------------------------------------------------------------
10.24#                        Pharmacopeia, Inc. Executive Non-Qualified Deferred Compensation Plan
                              (incorporated by reference to Exhibit 10.52 to the Company's Report on form
                              10-Q for the quarter ended March 31, 2000.)
----------------------------- -------------------------------------------------------------------------------
10.25                         Form of Stock Purchase Agreement, dated as of March 8, 2000, among the company
                              and the investors set forth therein (incorporated by reference to Exhibit 10.53
                              to the Company's Report on Form 10-Q for the quarter ended March 31, 2000.)
----------------------------- -------------------------------------------------------------------------------
10.26#*                       Consulting Agreement, dated December 12, 2000 between the Company and
                              Richard Walsh
----------------------------- -------------------------------------------------------------------------------
10.27#*                       Consulting Agreement for Founding Members of the Pharmacopeia, Inc. Scientific
                              Advisory Board, between Pharmacopeia, Inc. and Paul A. Bartlett
----------------------------- -------------------------------------------------------------------------------
21.1*                         Subsidiaries of Pharmacopeia, Inc.
----------------------------- -------------------------------------------------------------------------------
23.1*                         Consent of Ernst & Young LLP, Independent Auditors
----------------------------- -------------------------------------------------------------------------------
24.1*                         Powers of Attorney (See signature page)
----------------------------- -------------------------------------------------------------------------------

</TABLE>

+      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, 2000.

(c) Exhibits

     See Item 14 (a)(3) above.


                                      -57-
<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
                                    Executive Vice President and
                                    Chief Financial Officer
                                    (Principal Financial and Accounting Officer)

                               Date:  March 23, 2001


                                      -58-
<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 23, 2001
------------------------------------  and Chief Executive Officer
Joseph A. Mollica, Ph.D.              (Principal Executive Officer)

/s/ Bruce C. Myers                    Executive Vice President and        March 23, 2001
------------------------------------  Chief Financial Officer
Bruce C. Myers                        (Principal Financial and
                                      Accounting Officer)

/s/ Frank Baldino, Jr.                Director                            March 23, 2001
------------------------------------
Frank Baldino, Jr.

/s/ Paul A. Bartlett, Ph.D.           Director                            March 23, 2001
------------------------------------
Paul A. Bartlett, Ph.D.

/s/ Gary E. Costley, Ph.D.            Director                            March 23, 2001
------------------------------------
Gary E. Costley, Ph.D.

/s/ Ricardo B. Levy, Ph.D.            Director                            March 23, 2001
------------------------------------
Ricardo B. Levy, Ph.D.

/s/ James J. Marino                   Director                            March 23, 2001
------------------------------------
James J. Marino

/s/ Charles A. Sanders, M.D.          Director                            March 23, 2001
------------------------------------
Charles A. Sanders, M.D.

</TABLE>


                     [Rest of Page intentionally left blank]


                                      -59-
<PAGE>


                               PHARMACOPEIA, INC.
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                   FOR THE THREE YEARS ENDED DECEMBER 31, 2000
                             (amounts in thousands)

<TABLE>
<CAPTION>

                     (A)                                (B)                  (C)                (D)         (E)

                                                                          Additions
                                                                  -------------------------
                                                     Balance at   Charged to    Charged to                Balance at
                                                     Beginning    Costs and     Other                     End of
            DESCRIPTION                              of Period    Expenses      Accounts     Deductions   Period
            -----------                              ------------ -----------   -----------  -----------  ---------
<S>                                                  <C>          <C>           <C>          <C>          <C>
Deducted from receivables:
  Allowance for doubtful accounts
     Year ended December 31, 1998 .........          $    466     $    641      $     -      $    498(3)   $    609
     Year ended December 31, 1999 .........               609          311             3(1)       299(3)        624
     Year ended December 31, 2000 .........               624          564         1,673(2)       556(3)      2,305

</TABLE>

------------

(1)      Represents amounts charged to foreign currency translation adjustment.
(2)      $1,664 represents amount from acquisitions, $9 represents amount
         charged to foreign currency translation adjustment.
(3)      Represents write-offs, net of recoveries.


                                      -60-