<PAGE>   1
                       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

                                       OR

[ ]     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: 0-28006

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

<TABLE>
<S>                                                            <C>
                       DELAWARE                                              94-3186021
    (State or other jurisdiction of incorporation or           (I.R.S. Employer Identification Number)
                     organization)


          850 MAUDE AVENUE, MOUNTAIN VIEW, CA                                   94043
        (Address of principal executive office)                              (Zip Code)
</TABLE>

       Registrant's telephone number, including area code: (650) 428-1550

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:

                    COMMON STOCK, $0.001 PAR VALUE PER SHARE
                                (Title of Class)

   Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes [X] No [ ]

   Indicate 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

   The aggregate market value of the voting stock of the issuer held by
non-affiliates of the issuer on December 31, 2000 was approximately $47.0
million, based upon the closing price of such stock on December 31, 2000.

   As of February 8, 2001, 11,469,802 shares of Common Stock of the registrant
were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

   Certain information required by Items 10, 11, 12 and 13 of Part III of the
Form 10-K is incorporated by reference from the Registrant's Proxy Statement for
the 2001 Annual Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission within 120 days after the close of the Registrant's
fiscal year ended December 31, 2000.

<PAGE>   2

                         MICROCIDE PHARMACEUTICALS, INC.
                                    FORM 10-K
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                      INDEX


PART I

Item 1.  Business

Item 2.  Properties

Item 3.  Legal Proceedings

Item 4.  Submission of Matters to a Vote of Security Holders

PART II

Item 5.  Market for Registrant's Common Stock and Related Stockholder Matters

Item 6.  Selected Financial Data

Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations

Item 7a. Quantitative and Qualitative Disclosures about Market Risk

Item 8.  Financial Statements and Supplemental Data

Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure

PART III

Item 10. Executive Officers and Directors of the Registrant

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management

Item 13. Certain Relationships and Related Transactions

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

Signatures

Power of Attorney

Consent of Ernst & Young LLP, Independent Auditors

Financial Statements



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                                     PART I

   The information set forth in this Business Section contains forward-looking
statements, including but not limited to statements concerning the use of the
Company's discovery and technology platform to identify potential product
candidates, expectations regarding the anticipated date of selection of clinical
development candidates, the expected date of commencement of clinical trials,
development time lines, the timing and likelihood of regulatory approvals, the
continuation of the Company's collaborations with its corporate partners, the
Company's future capital requirements and the expected time period during which
the Company's existing financial resources will meet such capital requirements,
and business conditions and growth in the biopharmaceutical industry and general
economy. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of the factors set
forth in this Business Section, as well as those set forth elsewhere in this
Form 10-K.

ITEM 1.  BUSINESS

INTRODUCTION

   Microcide, incorporated in 1992, is a biopharmaceutical company committed to
the discovery, development and commercialization of novel antimicrobials for the
improved treatment of serious bacterial, fungal and viral infections. The
Company's three discovery research platforms address the growing problems of
antibiotic resistance and the need for improved antifungal and antiviral
therapeutics. The Company's Cephalosporin Antibiotics and Efflux Pump Inhibition
platforms focus on developing novel antibiotics and antibiotic potentiators
(efflux inhibitors) to directly address existing bacterial and fungal resistance
problems. Microcide's Microbial Genomics platform utilizes proprietary
bacterial, fungal and viral genetics and genomics tools to discover entirely new
classes of antimicrobial agents.

   The Company believes that the antibiotics market provides an attractive
opportunity for its research and development activities, because:

   (i)   it is the third largest pharmaceutical market, with worldwide sales of
         systemic antibiotics totaling $24.7 billion in 1999, including $8.45
         billion in the United States;

   (ii)  there are significant unmet clinical needs, caused by growing bacterial
         resistance problems, that require new antibacterial therapies; and

   (iii) the pre-clinical and clinical development process for antibiotics
         generally follows an efficient and well-defined path to the market.

   The Company believes that the systemic antifungals market, totaling
approximately $2.5 billion in 1999 worldwide sales, also represents an
attractive opportunity, because there are currently relatively few agents with
adequate efficacy and low toxicity to treat the often immunocompromised patients
with systemic fungal infections. And, despite recent progress in introducing new
antiviral agents, the Company believes that there is a clear clinical need
within the $4.6 billion worldwide antiviral market for improved treatments for
viral infections.

   MICROCIDE'S CEPHALOSPORIN ANTIBIOTICS AND EFFLUX PUMP INHIBITION programs
seek to rapidly develop:

   (i)   clinically useful antibiotics from known classes, tailored to overcome
         resistance pathways, and

   (ii)  antibiotic potentiators, to restore usefulness to existing
         antibacterial and antifungal agents that have been rendered
         ineffective.

   The specific problematic bacteria being addressed by the Company
(staphylococci, enterococci, Pseudomonas aeruginosa and Streptococcus
pneumoniae) are responsible for 44% of the approximately two million
hospital-acquired infections occurring annually in the United States. These
infections are estimated to result in approximately eight million days of
extended hospital stay and account for more than $4.0 billion in additional
health care costs each year. The U.S. Centers for Disease Control and Prevention
(CDC) has estimated that in 1999 over 70% of hospital-acquired Staphylococcal
infections in U.S. Intensive Care Units (ICUs) are resistant to most
antibiotics, including the anti-staphylococcal beta-lactam antibiotic
methicillin, over 20% of hospital-acquired Pseudomonas aeruginosa infections in
the ICU are resistant to fluoroquinolone antibiotics and over 25% of
hospital-acquired Enterococcal infections in the ICU are resistant to
vancomycin, the antibiotic of choice for treating methicillin-resistant
staphylococci (MRS). The problematic fungi being addressed by the Company
include such opportunistic pathogens as Candida species and Aspergillus. The CDC
has estimated that in the first half of 1999 over 15% of all serious urinary
tract infections and 5% of all bloodstream infections in the ICU were a result
of Candida albicans.

   MICROCIDE'S MICROBIAL GENOMICS programs seek to identify novel classes of
antimicrobial agents that will act upon microbes which are resistant to
currently available therapeutic agents. These programs seek compounds that will
inhibit microbial genetic targets that are essential to:

   (i)   Bacterial viability in vitro - In the Bacterial Essential Genes
         Program, Microcide has identified over 100 essential gene targets in
         Staphylococcus aureus, which have been selectively incorporated into
         the Company's high-throughput, multi-channel, whole-cell screening
         system to discover new classes of antibiotics. In the Animal Health
         Program, over 65 essential gene targets have been identified in
         Salmonella typhimurium and prioritized for use in developing products
         for animal health use. The Company is currently developing new
         cell-free assays to use together with its existing whole-cell assays
         for



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<PAGE>   4

         improved drug discovery. This new approach has been used in both the
         fungal in vitro (ii) and bacterial in vivo (iii) programs, with early
         indications of success in terms of more efficiently identifying
         mechanism-specific screening hits.

   (ii)  Fungal viability in vitro - In the Fungal Genomics Program, a
         proprietary collection of fungal mutants has been created by the
         Company to target over 100 essential genes in six
         pharmaceutically-relevant pathways, a subset of which has selectively
         been incorporated into the Company's high-throughput, whole-cell assay
         system to search for novel, small molecule antifungal agents. In
         addition, the Company is developing cell-free assay systems for these
         and other essential gene targets that can be used together with the
         existing whole-cell assays to find additional mechanism-specific
         screening hits.

   (iii) Bacterial growth in vivo - In the Bacterial In Vivo Essential Genes
         Program, Microcide has used proprietary molecular genetic strategies to
         identify over 65 novel gene targets in S. aureus. These new gene
         targets are being used to discover and develop novel therapeutic agents
         based on interference with the function of bacterial genes required for
         the pathogen's survival in vivo. The primary screening assays currently
         being employed for this program are mechanism-specific, cell-free
         assays, followed by whole-cell assays.

   (iv)  Viral infectivity - Microcide has established a Viral Genomics Program
         based on applying Iconix Pharmaceuticals, Inc.'s (Iconix) genetic
         technologies to create drug screens for a number of viral disease
         targets, in order to search for improved antiviral agents.

   Microcide has COLLABORATIVE AGREEMENTS with major pharmaceutical companies
which enhance its discovery and development programs. As of December 31, 2000,
the Company has received $54.5 million in license fees, milestone payments and
research support payments, and $10.0 million in equity investments. Assuming
each of the collaborative agreements continues until its scheduled expiration,
the Company can receive up to $13.2 million in research support payments, as
well as an additional $58.9 million in potential further milestone payments and
may also receive royalties on worldwide sales of products which may result from
these collaborations. A new collaboration with Schering-Plough Animal Health
Corporation (SPAH) was announced in November 2000, which focuses on use of the
Company's efflux pump technology as applied to veterinary pathogens and certain
of SPAH's existing antiinfective products. In addition, the Research Phase of
the Company's collaboration with affiliates of Johnson & Johnson was extended
in December 2000 to encompass a new effort to develop orally-absorbed
cephalosporin antibiotics with activity against antibiotic-resistant
Gram-positive bacteria. A third collaboration, established in December 2000,
allows the R.W. Johnson Pharmaceutical Research Institute (RWJPRI), an affiliate
of Johnson & Johnson, to utilize Microcide's Natural Product extracts in their
proprietary screens. The Company has retained full rights to products which may
result from its own internal, self-funded programs in Bacterial In Vivo
Essential Genes, Bacterial and Fungal Efflux Pumps and Microbial Genomics.
Microcide's forward-integration development strategy is to continue to utilize
strategic collaborations selectively to complement and balance internal,
self-funded efforts.

   J&J. Microcide established a collaboration in October 1995 with Ortho-McNeil
Pharmaceuticals and the R.W. Johnson Pharmaceutical Research Institute,
affiliates of Johnson & Johnson collectively referred to as "J&J", to discover
and develop novel beta-lactam antibiotics, antibiotic potentiators and
inhibitors of bacterial signal transduction targeted at problematic
Gram-positive bacteria, including staphylococci and enterococci. The Company and
J&J selected an initial beta-lactam antibiotic candidate (a parenteral
cephalosporin) for pre-clinical development in October 1996, and in November
1999, J&J entered into Phase I clinical trials with this antibiotic candidate.
In November 2000, we announced that these Phase I trials would be extended into
2001, based upon the observation of induration, or irritation at the injection
site in some subjects. Additional Phase I studies are designed to explore
changes in the administration of this compound that could eliminate or reduce
the irritation observed in the initial studies. A second parenteral
cephalosporin antibiotic was selected for pre-clinical development as a back-up
and potential "second generation" compound, which may improve the likelihood of
ultimately bringing one or more products to the market. Microcide and J&J
extended this collaboration in December 2000 to develop a new class of
cephalosporins, having similar spectrum and potency to the first compounds, but
which would be bioavailable following oral administration. If specified research
and development milestones are achieved, the Company will be entitled to receive
up to $16.5 million for the initial parenteral product and up to $15.5 million
for each subsequent parenteral product developed within the collaboration, and
up to $18.5 million for an orally-absorbed product, plus royalties based on
worldwide sales of products arising from the collaboration. A new and unrelated
collaboration with J&J, focused on the discovery of products from the Company's
Natural Product extracts, was also established in December 2000. The agreement
covers collaborative research to discover novel drugs from natural products.
Microcide will provide J&J with access to its Natural Products Library for the
purpose of screening for activity in various biological and therapeutic
applications. J&J will undertake a program for the development, manufacture and
sale of products developed from the collaborative research. Under the terms of
the agreement, Microcide will receive an up-front license fee, a
technology-access fee for access to Microcide's Natural Products Library and
funding for Microcide research to identify the active components of natural
product extracts. For each product resulting from the collaboration, Microcide
will receive certain milestone payments and royalties on worldwide sales.

   DAIICHI. Microcide established a collaboration in November 1995 with Daiichi
to discover and develop bacterial efflux pump inhibitors to be used in
combination with Daiichi's quinolone antibiotics to target Gram-negative
bacteria, including pseudomonas. If specified research and development
milestones are achieved, Microcide will be entitled to receive up to $6.5
million for each product developed within the collaboration, plus royalties
based on worldwide sales of products arising from the collaboration. The
research



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<PAGE>   5

phase of this collaboration was extended for an additional year in May 2000.
Further extensions of funded research by Microcide will require joint agreement
of the parties.

   PFIZER. Microcide established a collaboration in March 1996 with Pfizer to
implement its bacterial in vitro essential gene and multi-channel screening
system to discover novel classes of antibiotics over a five-year term. Unless
the parties jointly agree to an extension, this Pfizer agreement concludes at
the end of February 2001. At the conclusion of this agreement, each party will
have the right to independently use the technology developed during the
collaboration for its own purposes. In January 1999, Microcide and Pfizer
established a separate collaboration to utilize bacterial genetic approaches
with in vitro essential genes to discover products for the treatment of
bacterial infections in animals. If specified research and development
milestones are achieved in the animal health agreement Microcide will be
entitled to receive certain milestone payments for each product developed within
the collaboration, plus royalties based on worldwide sales of products arising
from the collaboration; such milestone payments and royalties are lower in
amount than those applicable to human health applications. In October 2000, the
Company announced that this research agreement would continue throughout 2001.

   SCHERING-PLOUGH ANIMAL HEALTH (SPAH). In October 2000, Microcide entered into
a collaboration with SPAH to discover and develop compounds to be used in the
treatment of veterinary bacterial infections, based upon application of the
Company's efflux pump technology to existing SPAH antibacterials. If specified
research and development milestones are achieved, Microcide will be entitled to
receive certain milestones for each product developed within the collaboration,
plus royalties based on worldwide sales of products arising from the
collaboration; such milestone payments and royalties are lower in amount than
those applicable to human health applications. SPAH will have worldwide rights
to products resulting from the collaboration.

   ICONIX. In January 1998, Microcide entered into a collaboration with Iconix,
a biotechnology company in which Microcide holds approximately a 32% interest
or 29% ownership on a fully-diluted basis, and to which Microcide licensed or
assigned certain technology related to Iconix's genetic technology. Iconix has
applied the genetics technology to a number of viral disease targets in a search
for novel antiviral agents, in collaborative research funded by Microcide.
Microcide has worldwide development, manufacturing and marketing rights to any
antiviral products which may emerge from the collaboration and, if specified
research and development milestones are achieved, Iconix will be entitled to
receive milestone payments from Microcide of up to $11.0 million for the first
product and up to $10.5 million for each subsequent product developed within the
collaboration, in addition to royalties on worldwide sales. The assay discovery
phase of this collaboration ended in January 2001, and Microcide has assumed
responsibility for research efforts on certain of the screening technologies and
the viral gene targets to use in its search for novel antiviral agents.
Microcide plans to use both the existing whole-cell assay technology developed
by Iconix and new cell-free technology developed within the Company's bacterial
and fungal programs to discover new antiviral agents.

   The Company has advanced with its partner J&J one antibiotic compound into
Phase I clinical trials, and does not expect that any drugs resulting from its
and its collaborative partners' research and development efforts will be
commercially available for a number of years, if at all. Since inception, the
Company has focused its activities on the development of a gene function-based
technology platform and other proprietary information to identify and
commercialize novel antimicrobials for the treatment of serious infections. It
is difficult to predict when, if ever, the Company will be able to successfully
discover additional novel lead compounds for potential development as product
candidates. All compounds discovered by the Company will require extensive
pre-clinical and clinical testing prior to submission of any regulatory
application for commercial use. Extensive pre-clinical and clinical testing
required to establish safety and efficacy will take a number of years, and the
time required to commercialize new drugs cannot be predicted with accuracy.
There can be no assurance that the Company's approach to drug discovery, or the
efforts of any collaborative partner of the Company, will result in the
successful development of any drugs, or that any drugs, if successfully
developed, will be proven to be safe and effective in clinical trials, meet
applicable regulatory standards, be capable of being manufactured in commercial
quantities at reasonable costs or be successfully commercialized. Product
development of new pharmaceuticals is highly uncertain, and unanticipated
developments, clinical or regulatory delays, unexpected adverse effects or
inadequate therapeutic efficacy would slow or prevent product development
efforts of the Company or its collaborative partners and have a material adverse
effect on the Company's operations. The Company will not receive revenues or
royalties from sales of drugs for a significant number of years, if at all.
Failure to receive significant revenues or achieve profitable operations could
impair the Company's ability to sustain operations, and there can be no
assurance that the Company will ever receive significant revenues or achieve
profitable operations.

INFECTIOUS DISEASE ENVIRONMENT

   BACTERIAL INFECTIONS AND ANTIBIOTICS OVERVIEW

   Bacterial infections are a significant and growing medical problem. They
occur when the body's immune system cannot prevent invasion and colonization by
disease-causing bacteria. These infections may be confined to a single organ or
tissue, or disseminated throughout the body, and can cause many serious clinical
conditions, including pneumonias, endocarditis, osteomyelitis, meningitis,
deep-seated soft tissue infections, complicated urinary tract infections,
bacteremia and septicemia.



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   According to estimates by the CDC, approximately 2.0 million
hospital-acquired infections (also called nosocomial infections) occur annually
in the United States and contribute to more than 50,000 deaths. The additional
health care costs due to nosocomial infections now account for more than $3.5
billion per year. While overall per capita mortality rates declined in the
United States from 1980 to 1992, the per capita mortality rate due to infectious
diseases increased 58% over this period, continuing to make infectious diseases
a leading cause of death in the United States. The Company believes that
bacterial infections, especially infections caused by difficult-to-treat,
antibiotic-resistant bacteria, cause or contribute to a substantial majority of
these deaths.

   Antibiotics are administered both to prevent bacterial infections and to
treat established bacterial diseases. When administered to prevent an infection,
antibiotics are given prophylactically, before definitive clinical signs or
symptoms of an infection are present. When administered to treat an established
infection, antibiotics are often chosen empirically, before diagnostic testing
has established the causative bacterium and its susceptibility to specific
antibiotics.

   Antibiotics work by interfering with a vital bacterial cell function at a
specific cellular target, either killing the bacteria or inhibiting their
multiplication, thereby allowing the patient's immune system to clear the
bacteria from the body. Currently available antibiotics work on relatively few
targets, through mechanisms such as inhibiting protein or cell wall
biosynthesis. These targets tend to be present in all bacteria and are highly
similar in structure and function, such that certain antibiotics kill or inhibit
growth of a broad range of bacterial species (i.e., broad-spectrum antibiotics).

   Major structural classes of antibiotics include beta-lactams,
fluoroquinolones, macrolides, tetracyclines, aminoglycosides, glycopeptides and
trimethoprim combinations. Penicillin, a member of the beta-lactam class (which
also includes extended-spectrum penicillins, cephalosporins and carbapenems),
was first developed in the 1940s. Nalidixic acid, the earliest member of the
quinolone class, was discovered in the 1960s. The creation of broad-spectrum
antibiotics began in the 1970s and 1980s, with major advances seen in the 1970s
with the development of newer beta-lactams and aminoglycosides, and in the 1980s
with the development of fluoroquinolones and carbapenems. These antibiotics
remain the mainstay of therapy today, since the only new class of antibiotics
that has been discovered and commercialized in the last 20 years is the recently
introduced oxazolidinones, exemplified by linezolid. Daptomycin, a member of the
new antibiotic class, lipopeptides, is undergoing clinical trials.

   According to sales data compiled by IMS International, an independent
pharmaceutical industry research firm, the market for systemic (orally or
parenterally administered) antibiotics constitutes the third largest worldwide
pharmaceutical market, generating $24.7 billion in worldwide sales in 1999,
including $8.45 billion in the United States. The in-hospital antibiotic market,
where bacterial resistance poses the most serious threat, totaled $7.5 billion
worldwide during this period.

   FUNGAL INFECTIONS

   Invasive infections due to fungi are a continuing problem, particularly among
patient populations with compromised host defenses due to immunosuppressive
drugs (e.g., in organ transplant patients or in patients undergoing cancer
chemotherapy) or serious underlying disease (e.g., AIDS). Despite the
limitations of existing therapeutics, systemic antifungal agents generated
worldwide sales of approximately $2.5 billion in 1999, according to IMS
International. The two major classes of clinically important systemic antifungal
agents (polyenes and azoles) utilize essentially only two targets: ergosterol
(membrane) biosynthesis and membrane integrity. Amphotericin B, while
fungicidal, has toxicity limitations in many patients. In contrast, the azole
class of compounds is limited by suboptimal efficacy in the treatment of
deep-seated fungal infections in immunocompromised patients, due to its
fungistatic mode-of-action and emerging drug resistance. A new class of cell
wall biosynthesis inhibitors, echinocandins, is in advanced stages of clinical
testing.

   VIRAL INFECTIONS

   Viral infections continue to be a major medical problem in both
immune-competent and immunosuppressed patients. An estimated 42 million people
have been infected with the human immunodeficiency virus (HIV) since its
discovery. Newer combination therapies with HIV-protease inhibitors or newer
reverse-transcriptase inhibitors have markedly improved survival and reduced the
occurrence of opportunistic infections. However, these agents are often poorly
tolerated by patients due to drug-to-drug interactions and adverse effects,
require frequent administration of multiple pills that make adherence to
prescribed regimens difficult, and are subject to viral resistance, resulting in
a need for new agents. There is a vast, unmet clinical need for effective and
well-tolerated antiviral therapy in other viral infections with a high
prevalence and morbidity. Hepatitis B (HBV) afflicts a major proportion of the
global population; U.S. Centers for Disease Control and Prevention estimates
that approximately 3.0 million people in the U.S. have hepatitis C (HCV)
infection. Both forms of hepatitis can cause chronic infections that can lead to
serious complications, including the need for liver transplantation.
Well-tolerated treatment regimens that produce a durable antiviral response
would represent a considerable advance in the long-term management of such
chronically-infected patients. Cytomegalovirus (CMV) infection remains a
complication in transplant patients as well as in certain pediatric populations,
and existing antiviral therapies for CMV are often poorly tolerated.


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   ANIMAL HEALTH INFECTIONS

   Bacterial infections represent a major problem with respect to both livestock
animals and companion animals. In particular, livestock animals undergo periods
of stress-induced suppression of immunity during which there is increased
susceptibility to bacterial infection. Important bacterial pathogens of
livestock include species responsible for bovine and porcine respiratory
diseases, enteric diseases, and mastitis. The Company estimates that global
sales of antiinfective products for therapeutic use in animal health
applications are in excess of $1.0 billion. With the continued development of
antibiotic-resistant bacteria in human populations, there has been increasing
pressure to limit the animal use of antibiotics that are also used to treat
infections in humans. Novel approaches that do not utilize antibiotic classes
used in humans may find an increasing importance in veterinary infections.

   RESISTANCE PROBLEMS

   One of the key contributors to the increase in mortality and morbidity due to
bacterial infections is the increasing prevalence of drug-resistant bacteria.
Evidence of bacterial resistance to penicillin was first seen in the 1940s
shortly after its introduction. Methicillin and subsequent second-generation
penicillins were developed to overcome these penicillin-resistant organisms, but
resistance to methicillin in turn began to occur in the 1970s shortly after its
release, and has continued to increase. Similar resistance problems are now seen
with a number of clinically important bacteria targeted by the Company's initial
products, including staphylococci, enterococci, pneumococci and pseudomonas.
Strains of these bacteria have become resistant to all but a few antibiotics.
According to estimates based on CDC data, these four groups of bacteria are
responsible for 44% of all hospital-acquired infections and for 63% of
hospital-acquired blood stream infections in the United States.

   A number of factors are believed to contribute to the increased rate of
bacterial drug resistance:

   (i)   physician reliance on broad-spectrum antibiotics for empiric treatment
         of an infection prior to definitive diagnoses;

   (ii)  repeated exposure of bacteria to long-term antibiotic therapy,
         providing a competitive advantage to bacteria that harbor drug
         resistance;

   (iii) antibiotic use in immunosuppressed patients (e.g. from cancer
         chemotherapy, AIDS and organ transplantation);

   (iv)  the growing number of institutionalized, often elderly, patients
         receiving multiple courses of antibiotics;

   (v)   the increased frequency of invasive medical procedures; and

   (vi)  societal and technological changes, including air travel, that
         accelerate the spread of drug-resistant bacteria.

   One example of the seriousness of antibiotic resistance is
methicillin-resistant staphylococci (MRS), which has become resistant to
virtually all currently used antibiotics, except vancomycin. The heavy use of
vancomycin to treat MRS infections may in turn have contributed to the emergence
of new strains of enterococci that are resistant to vancomycin. Infections
caused by these vancomycin-resistant enterococci (VRE) frequently do not respond
to any current therapies, and in many cases prove fatal. The transfer of
vancomycin resistance from enterococci to staphylococci has been demonstrated
experimentally. If vancomycin resistance is transferred in the clinical setting
by VRE to staphylococci, the leading cause of hospital-acquired bacterial
infections, no effective antibiotic therapy will remain to treat MRS infections.
The first report of vancomycin intermediate-susceptible Staphylococcus aureus in
a clinical setting occurred in 1997 in Japan, followed by subsequent reports of
strains with decreased susceptibility to vancomycin in patients in various parts
of the United States. Although caused by a different mechanism-of-action than
occurs in VRE, the Company believes that these reports are suggestive of future
resistance problems in staphylococci.

   As a result of increasing bacterial resistance to existing antibiotics,
numerous clinical infections occur that resist first-line therapy. When bacteria
develop resistance to established first-line antibiotics, it is often necessary
to use a combination of two or more



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antibiotics to treat these resistant infections. Such therapy is generally more
costly and potentially more toxic to the patient due to additive and sometimes
synergistic side effects. The table below outlines some of the major problematic
drug-resistant bacteria, the classes of antibiotics to which they already show
clinically significant levels of resistance, and the remaining recommended
treatments.


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------

                       PROBLEMATIC DRUG-RESISTANT BACTERIA

--------------------------------------------------------------------------------
                            ANTIBIOTIC TREATMENTS
                              WITH SIGNIFICANT        REMAINING RECOMMENDED
         BACTERIA            RESISTANCE PROBLEMS           TREATMENTS
--------------------------------------------------------------------------------
<S>                        <C>                     <C>
Staphylococcus sp.         Beta-lactams            - Vancomycin
                           Fluoroquinolones        - Linezolid (Zyvox(R))
                           Macrolides              - Combination Therapy
                           Aminoglycosides

--------------------------------------------------------------------------------
Enterococcus sp.           Beta-lactams            - Multiple Antibiotic Therapy
                           Aminoglycosides         - Quinupristin/ Dalfopristin
                           Glycopeptides              (Synercid(R))

--------------------------------------------------------------------------------
Pseudomonas aeruginosa     Beta-lactams            - Combination Therapy
                           Fluoroquinolones
                           Aminoglycosides

--------------------------------------------------------------------------------
Streptococcus pneumoniae   Beta-lactams            - Cephalosporin or Carbapenem
                           Macrolides              - Vancomycin
                           Tetracyclines           - Fluoroquinolones
                           Fluoroquinolones
--------------------------------------------------------------------------------
</TABLE>

STRATEGY

   The Company believes that the antibiotics market provides an attractive
opportunity for its research and development activities because (i) there are
significant unmet clinical needs caused by growing bacterial resistance problems
that require new antibacterial therapies and (ii) the pre-clinical and clinical
development process for antibiotics typically follows an efficient and
well-defined path to the market, with early testing generally predictive of
later stage results. The Company believes these factors will lead to shorter
overall development timelines and higher approval rates for its products than
for products in most other therapeutic categories. Microcide's strategy is to
focus near-term Cephalosporin Antibiotics and Efflux Pump Inhibition
pre-clinical research activities on drug resistance mechanisms, and to conduct
longer-term drug discovery using novel microbial (bacterial, fungal and viral)
targets identified through its Microbial Genomics programs. The Company's
strategy is comprised of the following five key elements:

   Develop Novel Antibiotics by Targeting Drug Resistance Mechanisms.
Microcide's near-term research programs focus on rapidly identifying and
optimizing proprietary compounds that are effective against problematic
antibiotic-resistant microbes, including such antibiotic-resistant bacteria as
MRS, VRE, beta-lactam-resistant pneumococci and quinolone-resistant pseudomonas,
and resistant fungal pathogens, such as Candida and Aspergillus. Since
antibiotic resistance problems are often due to a single defined resistance
pathway, the Company believes that targeting those pathways will enable it to
rapidly develop novel antibiotics tailored to specific classes of resistant
microbes, as well as to develop antibiotic potentiators (efflux inhibitors) that
overcome resistance mechanisms and restore the usefulness of established
antibiotics that have been rendered ineffective. The Company's Cephalosporin
Antibiotics, Bacterial Efflux Pump Inhibition, and Fungal Efflux Pump Inhibition
programs are focused in this area.

   Accelerate the Discovery of New Antibiotic Classes through Microbial
Genomics. Microcide has developed a technology platform which utilizes microbial
genetics to discover the genes which are essential for a microbe's in vitro
survival. Microcide is utilizing essential bacterial genes discovered in its
Bacterial Essential Genes Program as the basis for identifying and
characterizing novel antibiotic targets. The Company has used an innovative
methodology for parallel high-throughput screening of these targets in
whole-cell assays against molecular diversity libraries to identify a large
number of active lead compounds. Microcide's Fungal Genomics program has
identified in vitro essential fungal gene targets which are functionally
conserved among pathogens and distinct from human genes, and has utilized these
genes in its proprietary multichannel screening system for antifungal drug
discovery. The Company is developing cell-free assays to utilize together with
these whole-cell assays in screening against its entire diversity libraries as
well as against diversity subsets



                                       8
<PAGE>   9

identified in prior whole-cell screens. The Company believes that this microbial
genetics technology platform will enable it to rapidly identify new classes of
antibiotic and antifungal drug candidates.

   Extend Microbial Genomics to Additional Gene Targets and Other Important
Infectious Pathogens. Microcide has extended its molecular genetics technologies
to identify and characterize genes that are critical to bacterial growth in
vivo. The Company believes that inhibitors of such targets have not been
previously systematically sought in antibiotic discovery programs, and that its
Bacterial In Vivo Essential Genes program utilizes proprietary methods to
discover inhibitors of these genes for development as novel antibiotics. In
addition, through a collaboration with Iconix, the Company has applied surrogate
genetics technology to screen against a number of viral disease targets in the
search for novel inhibitors.

   Enhance Research and Development and Reduce Capital Requirements through
Collaborative Agreements. The Company has entered into collaborations with major
pharmaceutical companies and animal health companies to develop its initial
products. Such collaborations are expected to provide Microcide with funding,
discovery technologies, research staffing, access to molecular diversity, and
development and commercialization capabilities. By utilizing the resources of
its collaborators, Microcide expects to lower its capital requirements and
reduce the time needed to commercialize its products worldwide. Microcide has
developed certain defined joint technologies in collaboration with Iconix, an
arrangement which it believes has enhanced the quality and reduced the costs of
development of these technologies as compared to working independently.

   Retain the Ability to Independently Develop and Market Certain Products.
Microcide's "forward integration" development strategy is to continue to utilize
strategic collaborations selectively to complement and balance internal,
self-funded efforts. Microcide plans to retain certain rights to products
resulting from its unpartnered programs, including the Company's Bacterial In
Vitro and In Vivo Essential Genes programs, Fungal Genomics and Fungal Efflux
Pump Inhibitors programs, as well as certain aspects of its Bacterial Efflux
Pump Inhibitors program that lie outside of its collaborations with Daiichi and
Schering-Plough Animal Health. In general, Microcide plans to take certain
discovery leads forward into early clinical development stages alone before
entering into collaborative relationships for final product development and
commercialization.

MICROCIDE'S RESEARCH PROGRAMS

   Microcide's research programs employ an interdisciplinary approach that
incorporates several drug discovery and research technologies, including
microbial genomics and genetics, synthetic and natural product diversity,
high-throughput and multi-channel screening, DNA microarrays, combinatorial and
medicinal chemistry, computer-assisted drug design and bioinformatics. The
Company believes that its interdisciplinary approach more effectively utilizes a
broader range of novel microbial targets for new compound discovery than
traditional biochemical approaches. Microcide believes that drug resistance
genes and in vitro and in vivo essential genes can be developed into screens for
selective inhibitors and that these methods can be widely employed in the lead
discovery process. Access to molecular diversity libraries for screening targets
is critical to drug discovery. In some instances, the Company's collaborative
partners are providing molecular diversity libraries to support the screening
process. However, the Company has also established a stand-alone molecular
diversity capability for its programs, and has built libraries of structurally
distinct synthetic compounds and natural product extracts for this purpose. The
Company's natural products program provides access to broad-based molecular
diversity not achievable by synthetic compound libraries alone. The Company
believes that each of its libraries contain significant structural diversity.
More than 250,000 molecular diversity samples have been available for
high-throughput screening since 1997. To supplement its compound libraries,
Microcide signed a joint research agreement with Coelacanth Corporation in June
2000 which will provide novel libraries of compounds for screening in a broad
range of Microcide assays directed at the identification of innovative
anti-viral, anti-fungal and anti-bacterial therapeutic agents. The Company will
continue to monitor the structural diversity of the library and the molecular
diversity needs of its programs and may further supplement these diversity
libraries in the future.

   The Company's discovery and pre-clinical research activities center on three
technology platforms: Cephalosporin Antibiotics, Efflux Pump Inhibition
(Bacterial and Fungal) and Microbial Genomics. The Company's Cephalosporin
Antibiotics and Efflux Pump Inhibition programs focus on overcoming bacterial
and fungal drug resistance, either by interfering with resistance pathways to
potentiate existing antimicrobials, or by developing novel lead compounds which
avoid such resistance pathways. The Company's Microbial Genomics programs
utilize microbial genetics and genomics approaches to discover inhibitors of
novel drug targets for further development as small molecule therapeutics.



                                       9
<PAGE>   10

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------

                          MICROCIDE'S RESEARCH PROGRAMS

----------------------------------------------------------------------------------------------------------
        PROGRAM                            PROGRAM GOAL                   CURRENT STAGE(1)      PARTNER
----------------------------------------------------------------------------------------------------------
<S>                            <C>                                      <C>                      <C>
                                         CEPHALOSPORIN ANTIBIOTICS
----------------------------------------------------------------------------------------------------------

Beta-lactam                    Antibiotics for treatment of             Phase I Clinical         J&J
                               Gram-positive bacteria, including        Trials
                               resistant strains (MRS, VRE and          (RWJ-54428/MC-02,479);
                               beta-lactam-resistant S. pneumoniae) by
                               parenteral administration
                                                                        Pre-Clinical
                                                                        Candidate (2nd
                                                                        cephalosporin
                                                                        compound)

                               As above, but for oral administration    Lead Optimization of
                               and also includes the important          candidate for oral
                               Gram-negative respiratory tract          bioavailability
                               pathogens, Haemophilus and Moraxella

----------------------------------------------------------------------------------------------------------
                                          EFFLUX PUMP INHIBITION
----------------------------------------------------------------------------------------------------------

Bacterial Efflux Pump          Potentiators principally for use with    Advanced Lead            Daiichi
   Inhibitors                  existing quinolones and beta-lactams     Optimization
     -- Quinolone and beta-    against P. aeruginosa
     lactam efflux

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

Bacterial Efflux Pump          Potentiators principally for use with    Early Lead               SPAH
   Inhibitors                  existing non-quinolone and               optimization
     -- Non-Quinolone, non-    non-beta-lactam antibiotic classes for
     beta-lactam antibiotics   human and animal health applications

Bacterial Efflux Pump          Potentiators for use with                Screening                Internal
   Inhibitors                  Macrolide/Ketolide Antibiotics against
     -- Macrolides             Haemophilus

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

Fungal Efflux Pump Inhibitors  Potentiators to improve the efficacy of  Lead optimization        Internal
                               existing and new azoles against fungal
                               pathogens, including Candida sp. and
                               Aspergillus

----------------------------------------------------------------------------------------------------------
                                            MICROBIAL GENOMICS
----------------------------------------------------------------------------------------------------------

Bacterial In Vitro Essential   Novel classes of broad- and              Screening                Internal
Genes                          narrow-spectrum antibiotics                                       after
                                                                                                 3/1/01
----------------------------------------------------------------------------------------------------------

Animal Health                  Novel agents active against animal       In Vivo                  Pfizer
                               health pathogens                         Evaluation of
                                                                        Targets
----------------------------------------------------------------------------------------------------------

Bacterial In Vivo Essential    Novel classes of antibiotics             Cell-Free Screening      Internal
Genes
----------------------------------------------------------------------------------------------------------

Fungal Genomics                Novel systemic antifungal agents         Lead optimization        Internal

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

Viral Drug Discovery           Novel antiviral therapeutics for HIV,    Screening                Internal
                               HCV, rhinovirus, CMV, HBV, influenza,                             after
                               HPV and RSV                                                       1/14/01

----------------------------------------------------------------------------------------------------------
</TABLE>



                                       10
<PAGE>   11

----------

 (1) The Company's pre-clinical research programs generally consist of the
     following stages, listed chronologically: "Target Identification" --
     development and implementation of methods to identify appropriate gene
     targets to be used in screening.

     "Screening" -- development and implementation of assay technologies to
     identify selective target inhibitors (leads). "Lead Identification" -- lead
     compounds whose in vitro and in vivo characteristics are being evaluated in
     biochemical, microbiological, pharmacological and toxicological tests for
     entry into lead optimization programs.

     "Lead Optimization" -- structure-activity relationships of selected
     compounds are being defined and such compounds optimized through medicinal
     chemistry, microbiology and pharmacological efforts towards selection of a
     Candidate.

     "Candidate Selection" -- optimized leads are being scaled-up and evaluated
     in extensive efficacy, toxicological and pharmacological tests .

     "Pre-clinical Candidate" -- a lead compound undergoing extensive
     pre-clinical investigation including pharmaceutical characterization,
     product formulation, process scale-up for manufacturing, and animal safety
     and tolerability studies, all requisite to entering into human clinical
     trials.

     "Phase I Clinical Trials" -- a compound has entered human clinical trials
     for determination of safety, tolerability and pharmacokinetic/
     pharmacodynamic characteristics.



                                       11
<PAGE>   12

CEPHALOSPORIN ANTIBIOTICS AND EFFLUX PUMP INHIBITION

   Microcide's Cephalosporin Antibiotics and Efflux Pump Inhibition programs
involve two approaches: (i) the development of novel antibiotic compounds which
avoid bacterial resistance mechanisms, and (ii) the development of novel
antibiotic and antifungal potentiators (efflux pump inhibitors) which overcome
microbial resistance by interfering with resistance mechanisms.

   CEPHALOSPORIN PROGRAM

   Microcide's Cephalosporin program is focused on discovering and developing
novel antibiotics for the treatment of infections caused by drug-resistant
Gram-positive bacteria, including MRS, VRE and pneumococci. Gram-positive and
Gram-negative bacteria have fundamentally different surface characteristics.
These surface properties greatly affect the ability of an antibiotic to
penetrate the bacterium and reach its target site. As a result, antibiotics that
are effective against Gram-positive bacteria are often less effective against
Gram-negative bacteria, and vice versa. The problematic Gram-positive bacteria
targeted by this program cause serious infections, including endocarditis,
osteomyelitis, meningitis, deep-seated soft tissue infections, complicated
urinary tract infections, pneumonias, bacteremia and septicemia.

   The Cephalosporin program is being conducted in collaboration with J&J and
consists of the discovery and development of beta-lactam antibiotics with
specific efficacy against resistant Gram-positive bacteria. Traditional
beta-lactam antibiotics work by inhibiting enzymes (penicillin-binding proteins,
or PBPs) that carry out crucial steps in the biosynthesis of the bacterial cell
wall. Resistance to beta-lactam antibiotics in MRS is primarily caused by
bacterial production of PBP2a, an enzyme capable of conducting cell wall
biosynthesis in the presence of such antibiotics, as well as by the production
of beta-lactamases, which render beta-lactams ineffective.

   Microcide's Gram-Positive Cephalosporin program has identified novel
beta-lactam antibiotics which are beta-lactamase-stable and inhibit PBPs,
including PBP2a, thereby gaining efficacy against MRS. Compounds emerging from
the Company's Cephalosporin program are active against staphylococci (including
MRS), enterococci (including VRE), streptococci (including penicillin-resistant
strains of pneumococci, PRSP) and other Gram-positive bacteria. The Company has
prepared hundreds of new synthetic analogs and has made significant advances in
drug design, resulting in several compounds with desirable in vitro potency, in
vivo efficacy, favorable pharmacokinetics and solubility, and low toxicity.

   The initial antibiotics developed within this program are expected to be
parenterally administered in the institutional setting to prevent or treat
infections caused by Gram-positive bacteria, including those resistant to other
antibiotics. Such antibiotics could potentially be clinically adopted for the
following uses: as a single agent following treatment failure in patients with a
documented drug-resistant infection, or empirically as a single agent or in
combination with a broad-spectrum antibiotic to extend coverage to resistant
bacterial strains. The Company believes that the clinical adoption of such
antibiotics could be similar to that of vancomycin as a single agent, or
ceftazidime or an aminoglycoside in combination use for empiric therapy.

   The Company, in collaboration with J&J, selected an initial cephalosporin
candidate for pre-clinical development in October 1996. Pre-clinical studies
including product formulation and process scale-up for manufacture of large
quantities of drug substance were completed in early 1999. Sufficient drug
substance was produced in this effort to allow the anticipated pre-clinical
animal safety and tolerability studies as well as Phase I clinical trials.
Pre-clinical animal safety and tolerability studies were successfully completed,
and Phase I clinical trials were initiated in November 1999. The Company
announced in October 2000 that these Phase I clinical trials would be extended
into 2001 in order to evaluate modifications that may reduce or eliminate the
irritation at the injection site seen in some subjects with the current
formulation. The Company has filed patent applications in the United States and
elsewhere on lead structures discovered in this program, and thirteen (13) such
patents have issued in the United States.

   In December 1999, the Company, in collaboration with J&J, committed to the
pre-clinical development of a second cephalosporin compound. This compound has
undergone extensive pre-clinical evaluation of its activity and
pharmacokinetics, and is undergoing pharmaceutical characterization, product
formulation and process scale-up for manufacturing of sufficient bulk drug
substance to conduct requisite pre-clinical animal safety and tolerability
studies. The Company expects that these activities will occur in parallel with
the extended Phase I clinical development of the initial cephalosporin
candidate, and that either or both compounds could be advanced into Phase II
clinical trials.

   In December 2000, the Company entered into an extension of its collaboration
with J&J to include a new series of Microcide-discovered chemically-distinct
cephalosporins, with similar spectrum and potency but with significantly
different physico-chemical properties, offering the additional potential for
oral bioavailability. Orally absorbed cephalosporins may potentially compete in
a significantly enlarged market for community-acquired infections, and be useful
as follow-on therapy to parenteral cephalosporins.



                                       12
<PAGE>   13

   BACTERIAL EFFLUX PUMP INHIBITOR PROGRAM

   Microcide has bacterial efflux pump inhibitor programs with two
collaborators, Daiichi and SPAH. In the collaboration with Daiichi, the program
focuses on the high intrinsic resistance of P. aeruginosa to many antibiotics,
including quinolones. This resistance has generally been attributed to the
impermeable outer membrane of this Gram-negative bacterium. Recent information
indicates that this intrinsic resistance is due to the combined effects of low
membrane permeability and the production of certain membrane proteins (efflux
pumps) that bind to antibiotics of many different classes as they enter the
bacterial cell and eject (efflux) them from the bacterium, preventing their
interaction with specific intracellular targets.

   The Company believes that the combination of bacterial efflux pump inhibitors
with existing antibiotics could restore the activity of antibiotics against
bacteria expressing efflux pump-mediated antibiotic resistance. In addition,
many bacterial species have active efflux pumps that contribute to the overall
intrinsic susceptibility of the species to certain antibiotics; thus the Company
believes that the combination of bacterial efflux pump inhibitors with existing
antibiotics could increase the susceptibility of many Gram-negative bacteria to
these antibiotics, and thereby either extend the clinical usefulness of the
antibiotic, or lower required therapeutic doses. The Company has established a
genetics and molecular biology program which focuses on microbial efflux
systems, and has developed novel screening and lead evaluation technologies to
permit the identification of lead compounds for subsequent lead optimization
efforts.


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------

                         EFFLUX-MEDIATED ANTIBIOTIC RESISTANCE IN BACTERIA

---------------------------------------------------------------------------------------------------
                          ANTIBIOTIC SELECTIVITY OF    PUMP - STRUCTURAL
          BACTERIA               EFFLUX PUMP                FAMILY           ANTIBIOTIC EFFLUXED
---------------------------------------------------------------------------------------------------
<S>                       <C>                          <C>                   <C>
Staphylococcus aureus         Multi-drug               Major Facilitator     Fluoroquinolones
                              resistance
                                                       ABC-transporter       Macrolides
                                                                             Streptogramins
---------------------------------------------------------------------------------------------------
Staphylococcus                Specific drug            Major Facilitator     Tetracyclines
                              resistance
Enterococcus
Streptococcus
---------------------------------------------------------------------------------------------------
Streptococcus pyogenes        Specific drug            Major Facilitator     Macrolides
                              resistance
---------------------------------------------------------------------------------------------------
Streptococcus pneumoniae      Multi-drug               Major Facilitator     Macrolides
                              resistance                                     Fluoroquinolones
---------------------------------------------------------------------------------------------------
Pseudomonas aeruginosa        Multi-drug               RND-class             Fluoroquinolones
                              resistance                                     Beta-lactams

                              Multi-drug               RND-class             Aminoglycosides
                              resistance                                     Macrolides
---------------------------------------------------------------------------------------------------
Haemophilus Influenzae        Multi-drug               RND-class             Macrolides/Ketolides
                              resistance                                     Fluoroquinolones
                                                                             Tetracyclines
                                                                             Chloramphenicol
---------------------------------------------------------------------------------------------------
E. coli/Salmonella            Multi-drug               RND-class             Macrolides/Ketolides
Mannhiemia                    resistance                                     Fluoroquinolones
                                                                             Tetracyclines
                                                                             Chloramphenicol

                              Specific drug            Major Facilitator     Chloramphenicol
                              resistance
---------------------------------------------------------------------------------------------------
</TABLE>


   The Company is designing compounds for activity against RND-class pumps in
Pseudomonas, based on efflux pump inhibitor leads which it discovered with
Daiichi. The Company has worked with Daiichi to progress the lead compounds
toward pre-clinical development, with the primary objective of developing
potentiators which will be combined with Daiichi's oral and parenteral quinolone
antibiotics or with beta-lactamase stable beta-lactam antibiotics to overcome
efflux pump-mediated resistance in P.



                                       13
<PAGE>   14

aeruginosa and other bacteria. In addition, the Company has demonstrated that
inhibitors can be beneficially combined with other classes of antibiotics for
which efflux pump-mediated resistance limits clinical utility, such as
macrolides or ketolides, and is actively screening for inhibitors in this area.
The company is also engaged in the modification of existing antibiotics for
which efflux is known to be a limiting factor in their activity, and believes
this approach may be especially useful when multiple pumps of different
structural families are involved. The Company has filed patent applications in
the U.S. and elsewhere on various lead structures discovered under this program,
and two patents have issued in the U.S.

   In the bacterial efflux pump inhibition program with SPAH, the companies are
conducting joint research to discover and develop compounds to be used in the
treatment of veterinary bacterial infections, based upon application of
Microcide's efflux pump technology to existing SPAH antibacterials.

   FUNGAL EFFLUX PUMP INHIBITOR PROGRAM

   The azoles (inhibitors of the ergosterol biosynthesis pathway) are currently
the most widely used class of agents in the treatment of fungal diseases. Among
the azoles, fluconazole is the most extensively used, but there are increasing
reports of fluconazole therapy failures due to emergence of resistance.
Recently, multi-drug efflux pumps have been implicated in Candida resistance to
fluconazole (and other azoles). As with bacterial efflux, intrinsic fungal
resistance to fluconazole, such as found in C. glabrata, C. krusei and in
Aspergillus, may arise from naturally-occurring multi-drug efflux pumps.
Therefore, similar to its approach with regard to bacteria, the Company believes
that by inhibiting the activity of efflux pumps in fungal pathogens, it may be
possible to achieve a significant decrease of both intrinsic and acquired
resistance, thereby extending the useful life of existing agents, broadening the
antifungal spectra of existing agents, or allowing newer agents to be more
clinically efficacious.

   The Company initiated screens for inhibitors of several efflux pumps in
Candida sp. and Aspergillus, which resulted in several natural product and
synthetic compound screening hits. After an extensive lead identification
effort, the Company has selected a novel chemical class of broad-spectrum
inhibitors of azole efflux in Candida sp. for a lead optimization program. If
successful, this program could result in inhibitors that could be used to
potentiate several different types of azole/triazole antifungals:

      (i) Compounds like fluconazole with good activity against Candida and good
          pharmacokinetic (pk) properties;

     (ii) Triazoles currently in clinical trials or the early stages of
          toxicology, with a broad spectrum of activity including Aspergillus,
          but with less desirable pk properties than fluconazole; and/or

    (iii) A newer triazole with excellent Aspergillus activity.

   The Company is currently pursuing the availability of azoles/triazoles in
each of these three categories, in order to fully realize the potential of its
lead fungal efflux inhibitor series. Patent applications have been filed on this
technology.

MICROBIAL GENOMICS

   Microcide believes that it has developed a unique approach to anti-infective
research using microbial genetics as a foundation for drug discovery. The
Company believes that this approach will yield a large number of relevant novel
drug targets that in turn are expected to lead to the development of new classes
of antimicrobials. The Company's strategy is to focus its gene discovery efforts
on the pharmaceutically-relevant portion of bacterial and fungal genomes, by
identifying genes that are essential to a pathogen's viability in vitro (the
Bacterial In Vitro Essential Genes Program, the Animal Health Program and the
Fungal Genomics Program) or in vivo (the Bacterial In Vivo Essential Genes
Program). These target genes, once identified, are incorporated into the
Company's high-throughput screening systems to identify compounds for further
development. The Company has applied its microbial genomics approach to
bacterial and fungal cellular systems, and more recently has begun to apply this
approach to viruses through its collaboration with Iconix. The Company believes
that this approach offers significant advantages over traditional pharmaceutical
industry biochemical assay approaches, as well as the more recent microbial
genomic sequencing approaches.

   Recently, traditional approaches to antibiotic drug discovery have centered
on biochemically-defined targets. In such approaches, screening assays are
developed based on selected enzyme targets. Appropriately designed biochemical
assays can be highly effective, but have several significant drawbacks as
primary screens. First, such an approach is limited in its application since it
requires pre-existing data with respect to the function or mechanism of an
identified target. Since many targets lack such information, the range of
targets that can be employed to find inhibitors is limited. Second, such
target-specific assays have relatively long set-up times and high costs. Third,
these techniques often employ an extracellular biochemical approach, which may
identify compounds that are excellent inhibitors of essential biochemical
enzymes, but subsequently prove not to be good drug candidates because
sufficient concentrations within the bacterium are not achieved at the target
site. Cell-free assays based on ligand binding approaches can circumvent the
first two of these limitations but not the third limitation, cellular
penetration. Microcide is evolving a new discovery strategy based upon cell-free
primary screens (binding and/or biochemical assays), coupled with its
proprietary whole-cell genetic assays, together providing mechanism-specific
hits with whole-cell activity.

   Drug discovery efforts have more recently employed whole-genome sequencing
approaches to antibiotic target identification. Although such approaches reveal
all of the genetic information in a bacterium, the Company believes that only an
estimated 5% to 15% of the total bacterial genetic material encodes proteins
that are pharmaceutically-relevant as drug targets. Genome sequencing approaches
can only address gene function through sequence analysis and comparison, and do
not adequately address the issue of the relevance of a particular gene as a drug
target. Thus, while numerous microbial genomes have been completely or partially



                                       14
<PAGE>   15

sequenced, considerable research remains necessary to identify the
pharmaceutically-relevant target genes from this information, and to then
develop screens for potential inhibitors. Such screens will then face many of
the same limitations as traditional biochemical screening approaches.

   BACTERIAL IN VITRO ESSENTIAL GENES PROGRAM

   In contrast, Microcide's Bacterial In Vitro Essential Genes Program utilizes
a targeted genomics approach to discover the pharmaceutically-relevant genes
present in bacterial genomes, and focuses on several important and diverse
pathogenic bacteria. The Company has created unique molecular tools and
approaches in bacterial molecular genetics, which allow it to create and use
gene mutants to quickly and directly clone essential bacterial genes. These same
mutants are then used to characterize and prioritize drug targets. This targeted
genomics approach accelerates the entire discovery process by focusing only on
the functionally important portions of the genome and thereby bypassing the task
of sequencing and characterizing irrelevant portions of the genome.

   By the end of 1999, Microcide had identified over 100 essential genes in
Staphylococcus aureus and over 65 essential genes in Salmonella typhimurium.
Since many of these essential genes are known to be common among different
bacteria, the Company believes that many of the drug targets identified to date
could lead to the discovery of new classes of broad-spectrum antibiotics. The
Company has filed patent applications covering 102 essential genes and related
screening methods in the United States, and patents covering 35 essential gene
targets have issued.

   The Company has the ability to move directly and rapidly from gene
identification to drug screening. Using binding assays and biochemical assays
together with genetic assays, many targets are being screened, as opposed to the
traditional screening approach which utilizes few targets in single assay
format. This facilitates and enhances the selection of optimal hits with defined
mechanisms of action and allows the most promising leads from many different
screens to be evaluated prior to commitment to lead optimization.



                                       15
<PAGE>   16





                                   [GRAPHIC]




   The Company's whole-cell screening method has the following benefits:

(i)   it is broadly applicable to all of the pharmaceutically-relevant essential
      genes identified;

(ii)  it identifies compounds that can enter cells and effect inhibitory action;

(iii) it utilizes more sensitive assays than traditional whole-cell screens,
      allowing for the identification of a broader range of potential drug
      candidates; and

(iv)  it can be applied even before the novel genes or biochemical targets are
      fully characterized.

   Combined with mechanism-specific screens, these whole-cell genetic assays
provide the Company with a significant advantage in identifying meaningful lead
structures to enter into lead optimization efforts.

   The Company has successfully applied the paradigm of primary whole-cell
genetic screens followed by biochemical and additional genetic assays, in its
Fungal Genomics program (described below), and believes that it is equally
applicable to its Bacterial In Vitro Essential Genes program.



                                       16
<PAGE>   17

   BACTERIAL IN VIVO ESSENTIAL GENES PROGRAM

   Bacteria possess a set of genes, encoding both metabolic functions and
non-redundant virulence factors and regulators, that are necessary for pathogen
growth in a mammalian environment (in vivo), but which are not required for
bacterial growth in enriched media in a petri dish (in vitro). Microcide refers
to such genes as In Vivo Essential (ivs) genes. Microcide scientists have
developed a proprietary method (Size-based Marker Identification Technology or
SMIT) to identify the ivs mutants from among more than 10,000 mutants which have
been evaluated in infection models. Many of these genes constitute targets not
previously directly utilized in drug discovery programs. The Company has created
a library of over 65 ivs genes which have been characterized in vitro and in
animal systems for selection of priority targets for screening. High-throughput
whole-cell screens have been developed using several of these mutant strains.
The Company has also produced proteins for binding assays and biochemical assays
for a number of these targets and plans to expand this effort to additional high
priority targets in 2001. An extension of the SMIT technology is expected to be
useful as a novel method to enable high-throughput in vivo evaluation of lead
compounds. Products that may emerge from this program are expected to be
bactericidal antibiotics which may be applied in either the human or animal
health market.

   The Company has retained all rights to this program and is self-funding it.
The Company has filed patent applications in the United States covering methods
for discovery and characterization of bacterial in vivo essential genes.

   PFIZER ANIMAL HEALTH PROGRAM

   The Animal Health Program is based on genetic strategies for gene
identification that have been developed successfully in Microcide's Bacterial In
Vivo Essential Genes Program. In collaboration with Pfizer, Microcide has
undertaken molecular genetic approaches to identify essential gene targets in
pathogens important to the animal health market. Over 65 essential genes have
been identified in Salmonella typhimurium.

   FUNGAL GENOMICS PROGRAM

   Microcide's Fungal Genomics Program has identified and utilized for drug
discovery essential fungal gene targets that are functionally conserved among
pathogens and distinct from human genes. The Company has prescreened its
synthetic compound collection against four fungal species and identified a
subset of approximately 5,000 compounds with antifungal activity against one or
more of these organisms. This compound subset has been prioritized according to
a number of pharmacological criteria. In addition, the Company has created a
proprietary collection of conditional growth mutants in over 100 essential genes
of interest in 6 pharmaceutically-relevant pathways. These mutant strains
provided the basis for hypersensitive, target-directed whole-cell screens, and,
together with DNA microarrays, biochemical assays and genetic analysis of
resistant mutants, have provided information about potential
mechanisms-of-action for compounds of highest interest. The Company has selected
one chemical series with broad-spectrum antifungal activity and a
fungal-selective mechanism of action for lead optimization. Newly synthesized
compounds in this series are being evaluated for potency, spectrum, selectivity,
pharmacokinetics and, when appropriate, activity in animal models of fungal
infection.

   The Company has retained all rights to this program and is self-funding it.
The Company has filed patent applications in the United States covering its
multiplex screening technology.

   VIRAL DRUG DISCOVERY PROGRAM

   Viruses are obligate intracellular parasites requiring host cell factors for
their replication. Because of this close relationship, traditional drug
discovery via "whole cell-virus" assays has produced only a limited number of
therapeutically efficacious and non-cytotoxic antiviral drugs. The discovery
efforts in the past decade or so have largely been directed to biochemical
screening and, more recently, to structure-based rational drug design. However,
the rate-limiting step of these approaches is that the biochemical, functional,
or structural information of the target proteins must be known prior to assay
development. Most available antivirals target protein families with
well-characterized enzymatic activities, namely polymerases, reverse
transcriptases and proteases.

   The Microcide-Iconix collaboration in antiviral drug discovery was built on
expertise in microbial genetics and pharmacology and has applied proprietary
surrogate assay technology that may provide advantages over other drug discovery
processes. The premise of this technology is based on the concept that
expression of a viral protein in a surrogate microbial organism (e.g. yeast or
E. coli) can produce discrete changes in the cellular physiology that will
reflect the native function of that viral protein. These changes (or phenotypes)
can include complementation of a defective host gene, a reporter-linked activity
readout, or simply an inhibition of cell growth. The most powerful feature of
this technology is that the precise function of a target protein need not be
known prior to assay development. For example, if expression of a viral protein
causes growth inhibition in yeast, then this phenotype can be used to screen for
potential inhibitors that reverse this growth inhibition. During 2000, the
program focused on surrogate assay development



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<PAGE>   18

and implementation of high-throughput screens for targets in HIV, HCV, CMV, HBV,
influenza, rhinovirus, HPV and RSV. In addition to this surrogate genetic
approach, the Company has acquired the ability to use these targets in cell-free
assays such as ligand binding assays or biochemical assays and is actively
pursuing the integration of these three assay methodologies to antiviral drug
discovery.

COLLABORATIVE AGREEMENTS

   The Company's initial strategy has been to enter into collaborations with
major pharmaceutical companies to develop its initial products. Such
collaborations have provided the Company with funding, discovery technologies,
research staffing, access to molecular diversity, and development and
commercialization capabilities. To date the Company has entered into
Collaborative Agreements with major pharmaceutical companies and an animal
health company: J&J with regard to the Cephalosporin program; Daiichi with
regard to the Bacterial Efflux Pump Inhibitor program; Pfizer with regard to the
Bacterial In Vitro Essential Genes and Animal Health programs; and
Schering-Plough Animal Health with regard to application of its Bacterial Efflux
Pump Inhibitor technology to certain veterinary medicine applications. The
Company has certain rights to co-promote in North America products developed
pursuant to the collaborations with the three pharmaceutical partners.

   In addition, the Company entered into a series of agreements with Iconix
Pharmaceuticals, a company which it formed in January 1998. These agreements,
which include a Core Technology and License Agreement, an Antiviral and
Surrogate Genetics Research Collaboration, and a Support Services Agreement,
concluded their three-year term in January 2001. The Support Services Agreement
is being extended in order to provide Iconix with facilities and various
administrative services. Microcide now conducts its own viral research
activities.

   J&J -- CEPHALOSPORIN PROGRAM

   In October 1995, Microcide and J&J entered into collaboration agreements (the
J&J Agreements) to discover and develop certain antibiotics and antibiotic
potentiators targeted at Gram-positive bacteria. The term of the J&J Agreements
was three years with J&J having an option to extend the term for an additional
one-year period. J&J provided the Company with $3.5 million per year in research
support payments throughout the original term of the J&J Agreements. J&J
extended this collaboration with respect to parenteral cephalosporins through
the end of 1999, at a funding level approximately 40% of that of the prior
level, reflecting the focused scope of the research effort. No significant,
additional research support funding occurred in the year 2000. J&J made a $3.0
million up-front license payment to the Company and an affiliate of J&J made a
$5.0 million equity investment in the Company. Microcide received milestone
payments upon the selection of a pre-clinical development candidate for
parenteral administration in 1996, and upon the commencement of Phase I clinical
trials for compound MC-02,479/RWJ54428 in November 1999. Microcide may receive
from J&J milestone payments of up to $16.5 million for the first parenteral
product and up to $15.5 million for each subsequent parenteral product upon the
achievement of product development milestones and, in addition, royalties on the
worldwide sale of drugs resulting from the collaboration. For the first product,
Microcide has received $3.0 million to date in milestone payments. The J&J
Agreements provide J&J with exclusive worldwide rights to products developed
during the collaboration. The development, manufacture and sale of drugs
resulting from the collaboration will be conducted by J&J, provided that
Microcide has the right to undertake certain co-promotion activity in North
America subject to J&J's approval.

   In December 2000, the Company extended the original agreement with J&J one
year to include the development of a new chemical series of cephalosporins with
similar spectrum and potency, and with the potential for oral bioavailability.
The Company received a $3.0 million upfront payment, will receive research
support payments in 2000, and can receive up to an additional $18.5 million for
each orally absorbed product upon achievement of product development milestones
and royalties on the worldwide sale of drugs resulting from the collaboration.

   In addition to extending the cephalosporin research program, Microcide and
RWJPRI, an affiliate of J&J, established a second collaboration in December
2000. In this two-year collaboration, Microcide will make available to RWJPRI
its Natural Products Extract collection for screening by RWJPRI in their
proprietary assays. The Company has received upfront and licensing fees and will
be reimbursed for research support provided to RWJPRI in identifying and
isolating active compounds. The Company will also receive certain milestone
payments and royalties on worldwide sales. There can be no assurance that J&J
will elect to proceed with the development of such potential products. As a
result, there can be no assurance that any of the future milestone or royalty
payments contemplated by the J&J Agreements will be made.

   DAIICHI -- BACTERIAL EFFLUX PUMP INHIBITOR PROGRAM

   In November 1995, Microcide and Daiichi entered into a collaboration
agreement (the Daiichi Agreement) to discover and develop antibiotics and
antibiotic potentiators, acting through inhibition of efflux pumps, primarily
targeted at Pseudomonas. The original



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<PAGE>   19

term of the research program under the Daiichi Agreement expired March 31, 1998.
Daiichi exercised its option to extend the collaboration for an additional year
(through March 31, 1999) during which Daiichi provided research support funding
to Microcide of $3.5 million. In May 2000, Daiichi and the Company agreed to
continue joint research in this area for an additional year with the goal of
selecting compounds for pre-clinical development. Pursuant to this extension of
the Daiichi Agreement, Microcide is entitled to receive from Daiichi milestone
payments of up to $6.5 million for each product developed during the
collaboration upon the achievement of certain drug development milestones and,
in addition, royalties on the worldwide sale of drugs resulting from the
collaboration. The development, manufacture and sale of drugs resulting from the
collaboration will be conducted by Daiichi subject to Microcide's right to
co-promote such drugs in North America, for which Microcide shall receive
reasonable compensation. Although Daiichi and Microcide have made progress
towards the goal of selecting compounds for pre-clinical development, there can
be no assurance that Daiichi will fund further research by Microcide beyond
April 2001, that any potential products will be discovered during the
collaboration or that, if discovered, Daiichi will elect to proceed with the
development of such potential products. As a result, there can be no assurance
that any of the milestone or royalty payments contemplated by the Daiichi
Agreement will be made.

   PFIZER -- BACTERIAL IN VITRO ESSENTIAL GENES PROGRAM

   In March 1996, Microcide and Pfizer entered into five-year collaboration
agreements (the Pfizer Agreements) to implement genetics-based screening
technology to identify and subsequently develop antibacterial products. Pfizer
made a $1.0 million up-front license payment and a $5.0 million equity
investment in the Company. Through March 2000, Pfizer paid Microcide up to $4.2
million per year in research support payments. In March 2000, Pfizer and the
Company amended the Pfizer Agreements to shift research focus from optimization
of a lead compound series identified during the screening phase, to a
biology-focused investigation of the essential gene targets. In conjunction with
this shift in focus, the parties established a funding level of $2.1 million for
the fifth year commencing March 2000. Microcide received a $1.0 million
milestone payment in February 1997 upon the identification, characterization and
sequencing of a specific number of essential genes. Unless the parties jointly
agree to an extension, this collaboration concludes at the end of February 2001.
At the conclusion of the Pfizer Agreements, each party will have the right
without further obligation to the other to independently use the technology
developed during the collaboration for its own purposes. The Company anticipates
using these validated essential gene targets in its Microcide-owned Microbial
Genomics program beginning in March 2001.

   PFIZER -- ANIMAL HEALTH PROGRAM

   In January 1999, Microcide and Pfizer entered into agreements (the Pfizer
Animal Health Agreements) that expanded their existing antibiotic research
collaboration to include a focused effort on new genetic targets for discovery
of novel approaches to the control of bacterial infections important in animal
health. The term of the Pfizer Animal Health Agreements is three years, subject
to Pfizer's right to terminate earlier, beginning January 2001 with six months'
prior written notice. The Company announced in October 2000 that Pfizer elected
to continue this collaboration for the full 3 years. Pfizer is obligated to
provide Microcide with up to $630,000 per year in research support payments
during the term of the Pfizer Animal Health Agreement. Microcide may also
receive from Pfizer milestone payments for each product developed during the
collaboration upon the achievement of product development milestones and, in
addition, royalties on the worldwide sale of drugs resulting from the
collaboration. The Pfizer Animal Health Agreements provide Pfizer with exclusive
worldwide rights to products developed during the collaboration. The
development, manufacture and sale of products resulting from the collaboration
will be conducted by Pfizer. There can be no assurance that any potential
products will be discovered during the collaboration or that if discovered,
Pfizer will elect to proceed with the development of such potential products. As
a result, there can be no assurance that any of the milestone or royalty
payments contemplated by the Pfizer Animal Health Agreements will be made.

   SCHERING-PLOUGH ANIMAL HEALTH (SPAH)

   In October 2000, the Company entered into a research and license agreement
effective September 2000 with SPAH for joint research to discover and develop
compounds to be used in the treatment of veterinary bacterial infections, based
upon application of the Company's efflux pump technology to existing SPAH
antibacterials. The term of the agreement is two years, subject to SPAH 's right
to terminate earlier, with 90 days prior written notice. The agreement provides
for an up-front license fee, research support funding for two years and certain
milestone payments for reaching certain research and development goals. SPAH
will have worldwide rights to products resulting from the collaboration. There
can be no assurance that any of the milestone or royalty payments contemplated
by the SPAH agreement will be made.

   ICONIX

   In January 1998, Microcide formed Iconix, a biotechnology company that is
developing surrogate genetics and chemical informatics into a technology
platform with broad applicability to multiple human diseases. Through a private
placement, Iconix arranged a $12.5 million equity investment from institutional
investors during 1998. In connection with this transaction, Microcide



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and Iconix entered into a series of agreements covering the transfer of certain
technologies from Microcide to Iconix, joint technology development in core drug
discovery areas, an antiviral drug discovery and development program, and
support services to be provided by Microcide to Iconix for a three-year period.

   Microcide and Iconix worked together over a three-year period under a Core
Technology Development and License Agreement to jointly develop and utilize new
technology in the areas of molecular diversity, high-throughput screening,
computational sciences and genome sciences. Under the terms of an Antiviral and
Surrogate Genetics Research Collaboration Agreement, during this three-year
period, Iconix also applied its Surrogate Genetics technology to a number of
viral disease targets in the search for novel inhibitors. Microcide has provided
Iconix with research support payments of $1.5 million in the last year of the
collaboration. Microcide is entitled to worldwide development, manufacturing
and marketing rights to antiviral products which may emerge from the
collaboration and, if specified research and development milestones are
achieved, will be obligated to pay Iconix milestone payments of up to $11.0
million for the first product and up to $10.5 million for each subsequent
product, in addition to royalties on worldwide sales.

   Microcide, according to a Support Service Agreement, provided Iconix with
facilities and various business support services with reimbursement to
Microcide. Microcide and Iconix did not extend the Core Technology Development
and License Agreement beyond January 14, 2001, the scheduled conclusion, but
Microcide will continue to provide Iconix with facilities and various business
support services under an amended Support Services Agreement, currently under
negotiation, that provides for reimbursement to the Company.

   An equity investment by Motorola, Inc. in July 2000 associated with a
collaboration to further Iconix's development of a chemical genomics database
reduced Microcide's 32% ownership of the fully diluted outstanding equity of
Iconix to 29%.

MANUFACTURING AND MARKETING

   The Company does not have any expertise in the manufacture of commercial
quantities of drugs, and its current facilities and staff are inadequate for the
commercial production or distribution of drugs. The Company intends to rely on
its major pharmaceutical partners for the manufacturing, marketing and sale of
any products which result from such collaborations. The Company will be required
to contract with third parties for the manufacture of other products or to
acquire or build production facilities before it can manufacture any such
products itself. There can be no assurance that the Company will be able to
enter into such contractual manufacturing arrangements with third parties on
acceptable terms, if at all, or acquire or build such production facilities
itself. To date the Company has no experience with sales, marketing or
distribution. Consequently, in order to market any of its products, the Company
will be required to develop marketing and sales capabilities, either on its own
or in conjunction with others. There can be no assurance that the Company will
be able to develop any of these capabilities. In instances where the Company
relies on partners for the manufacturing, marketing and sales of any products
which result from such collaborations, there can be no assurance that these
partners will satisfactorily perform these functions.

   There can be no assurance that any products successfully developed by the
Company or its collaborative partners, if approved for marketing, will achieve
market acceptance. The antimicrobial products which the Company is attempting to
develop will compete with a number of well-established drugs manufactured and
marketed by major pharmaceutical companies. The degree of market acceptance of
any products developed by the Company will depend on a number of factors,
including the establishment and demonstration in the medical community of the
clinical efficacy and safety of the Company's product candidates, their
potential advantage over existing treatment methods, and reimbursement policies
of government and third-party payors. There is no assurance that physicians,
patients or the medical community in general will accept and utilize any
products that may be developed by the Company or its collaborative partners.

   The ability of the Company and its collaborative partners to receive revenues
and income with respect to drugs, if any, developed through the use of the
Company's technology will depend, in part, upon the extent to which
reimbursement for the cost of such drugs will be available from third-party
payors, such as government health administration authorities, private health
care insurers, health maintenance organizations, pharmacy benefits management
companies and other organizations. Third-party payors are increasingly
challenging the prices charged for pharmaceutical products. There can be no
assurance that third-party reimbursement will be available or sufficient to
allow profitable price levels to be maintained for drugs developed by the
Company or its collaborative partners. The inability to maintain profitable
price levels for such drugs could adversely affect the Company's business.

PATENTS, PROPRIETARY TECHNOLOGY AND TRADE SECRETS

   Protection of the Company's proprietary compounds and technology is essential
to the Company's business. The Company's policy is to seek, when appropriate,
protection for its lead compounds, gene discoveries, screening technologies and
certain other proprietary technology by filing patent applications in the United
States and other countries. The Company has filed 80 patent applications in the



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<PAGE>   21

United States, in addition to applications filed in other countries, covering
its inventions. As of February 8, 2001, the Company had been issued 22 patents
in the United States and various other patents relating to these inventions in
foreign countries.

   Patent law as it relates to inventions in the biotechnology field is still
evolving, and involves complex legal and factual questions for which legal
principles are not firmly established. Accordingly, there can be no assurance
that patents will be granted with respect to any of the Company's pending patent
applications or with respect to any patent applications filed by the Company in
the future. The patent position of biotechnology and pharmaceutical companies is
highly uncertain and involves many complex legal and technical issues. There can
be no assurance that patents will be granted with respect to any of the
Company's patent applications currently pending in the United States or in other
countries, or with respect to applications filed by the Company in the future.
The failure by the Company to obtain patents pursuant to the applications
referred to herein and any future applications could have a material adverse
effect on the Company. Furthermore, no assurance can be given that any patents
which may be issued to the Company will not be infringed, challenged,
invalidated or circumvented by others, or that the rights granted thereunder
will provide competitive advantages to the Company. In particular, it is
difficult to enforce patents covering methods of use of screening and other
similar technologies. Litigation to establish the validity of patents, to defend
against patent infringement claims and to assert infringement claims against
others can be expensive and time-consuming, even if the outcome is favorable to
the Company. If the outcome of patent prosecution or litigation is not favorable
to the Company, the Company could be materially adversely affected. Moreover,
because patent applications in the United States are maintained in secrecy until
patents issue, because patent applications in certain other countries generally
are not published until more than eighteen months after they are filed, because
publication of technological developments in the scientific or patent literature
often lags behind the date of such developments, and because searches of prior
art may not reveal all relevant prior inventions, the Company cannot be certain
that it was the first to invent the subject matter covered by its patent
applications or that it was the first to file patent applications for such
inventions.

   The commercial success of the Company will depend in part on not infringing
patents or proprietary rights of others. There can be no assurance that the
Company will be able to obtain a license to any third-party technology it may
require to conduct its business or that if obtainable, such technology can be
licensed at reasonable cost. Failure by the Company to obtain a license to
technology that it may require to utilize its technologies or commercialize its
products may have a material adverse effect on the Company. In some cases,
litigation or other proceedings may be necessary to defend against or assert
claims of infringement, to enforce patents issued to the Company, to protect
trade secrets, know-how or other intellectual property rights owned by the
Company, or to determine the scope and validity of the proprietary rights of
third parties. Any potential litigation could result in substantial costs to and
diversion of resources by the Company and could have a material adverse impact
on the Company. There can be no assurance that any of the Company's issued or
licensed patents would ultimately be held valid or that efforts to defend any of
its patents, trade secrets, know-how or other intellectual property rights would
be successful. An adverse outcome in any such litigation or proceeding could
subject the Company to significant liabilities, require the Company to cease
using the subject technology or require the Company to license the subject
technology from the third party, all of which could have a material adverse
effect on the Company's business.

   In addition to patent protection, the Company relies upon trade secrets,
proprietary know-how and continuing technological advances to develop and
maintain its competitive position. To maintain the confidentiality of its trade
secrets and proprietary information, the Company requires its employees,
consultants and collaborative partners to execute confidentiality agreements
upon the commencement of their relationships with the Company. In the case of
employees, the agreements also provide that all inventions resulting from work
performed by them while in the employ of the Company will be the exclusive
property of the Company. There can be no assurance, however, that these
agreements will not be breached, that the Company would have adequate remedies
in the event of any such breach or that the Company's trade secrets or
proprietary information will not otherwise become known or developed
independently by others.

   The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain, but not all, commercial partners and
consultants. There can be no assurance that relevant inventions will not be
developed by a person not bound by an invention assignment agreement. There can
be no assurance that binding 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 discovered by competitors.

   As is commonplace in the biotechnology industry, the Company employs
individuals who were previously employed at other biotechnology or
pharmaceutical companies, including competitors or potential competitors of the
Company. To the extent such Company employees are involved in research areas at
the Company which are similar to those areas in which they were involved at
their former employer, the Company may be subject to claims that such employees
and/or the Company have inadvertently or otherwise used or disclosed the alleged
trade secrets or other proprietary information of the former employers.
Litigation may be



                                       21
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necessary to defend against such claims, which could result in substantial costs
and be a distraction to management, and which may have a material adverse effect
on the Company, even if the Company were successful in defending such claims.

COMPETITION

   The biotechnology and pharmaceutical industries are intensely competitive.
Many companies, including large, multinational pharmaceutical and biotechnology
companies, are actively engaged in activities similar to those of the Company.
Many of these companies may employ in such activities greater financial and
other resources, including larger research and development staffs and more
extensive marketing and manufacturing organizations, than the Company or its
collaborative partners. There are also academic institutions, governmental
agencies and other research organizations that are conducting research in areas
in which the Company is working. Competing technologies may be developed which
would render the Company's technologies obsolete or non-competitive. The Company
is aware of many pharmaceutical and biotechnology companies that are engaged in
efforts to treat each of the infectious diseases for which the Company is
seeking to develop therapeutic products.

   The Company also expects to encounter significant competition with respect to
the drugs that it and its collaborative partners plan to develop. Companies that
complete clinical trials, obtain required Regulatory Agency approvals and
commence commercial sale of their drugs before their competitors may achieve a
significant competitive advantage. In order to compete successfully, the
Company's goal is to obtain patent protection for its potential products and to
make those available selectively to pharmaceutical companies through
collaborative and licensing arrangements. There can be no assurance that
competitors of the Company will not develop competing drugs that are more
effective than those developed by the Company and its collaborative partners or
obtain regulatory approvals of their drugs more rapidly than the Company and its
collaborative partners, thereby rendering the Company's and its collaborative
partners' drugs obsolete or noncompetitive. Moreover, there can be no assurance
that the Company's competitors will not obtain patent protection or other
intellectual property rights that would limit the Company's or its collaborative
partners' ability to use the Company's technology or commercialize its or their
drugs.

GOVERNMENT REGULATION

   The development, manufacture and marketing of drugs developed by the Company
or its collaborative partners are subject to regulation by numerous governmental
agencies in the United States and in other countries. The United States Food and
Drug Administration (FDA) and comparable Regulatory Agencies in other countries
impose mandatory procedures and standards for the conduct of certain
pre-clinical testing and clinical trials and the production and marketing of
drugs for human therapeutic use. Product development and approval of a new drug
are likely to take a number of years and involve the expenditure of substantial
resources.

   Any compound developed by the Company or its collaborative partners must
receive Regulatory Agency approval before it may be marketed as a drug in a
particular country. The regulatory process, which includes pre-clinical testing
and clinical trials of each compound in order to establish its safety and
efficacy, can take many years and requires the expenditure of substantial
resources. The steps required by the FDA before new drugs may be marketed in the
United States include: (i) pre-clinical studies; (ii) the submission to the FDA
of a request for authorization to conduct clinical trials on an investigational
new drug (IND); (iii) adequate and well-controlled clinical trials to establish
the safety and efficacy of the drug for its intended use; (iv) submission to the
FDA of a new drug application (NDA); and (v) review and approval of the NDA by
the FDA before the drug may be shipped or sold commercially.

   In the United States, pre-clinical testing includes both in vitro and in vivo
laboratory evaluation and characterization of the safety and efficacy of a drug
and its formulation. Laboratories involved in pre-clinical testing must comply
with FDA regulations regarding Good Laboratory Practices. Pre-clinical testing
results are submitted to the FDA as part of the IND and are reviewed by the FDA
prior to the commencement of human clinical trials. Unless the FDA objects to an
IND, the IND becomes effective 30 days following its receipt by the FDA. There
can be no assurance that submission of an IND will result in the commencement of
human clinical trials.

   Clinical trials, which involve the administration of the investigational drug
to healthy volunteers or to patients under the supervision of a qualified
principal investigator, are typically conducted in three sequential phases,
although the phases may overlap with one another. Clinical trials must be
conducted in accordance with the FDA's Good Clinical Practices under protocols
that detail the objectives of the study, the parameters to be used to monitor
safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Further, each clinical study must be
conducted under the auspices of an independent Institutional Review Board (the
IRB) at the institution where the study will be conducted. The IRB will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution. Compounds must be formulated
according to the FDA's Good Manufacturing Practices (GMP).



                                       22
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   Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more rarely,
to a group of selected patients with the targeted disease or disorder. The goal
of Phase I clinical trials is typically to test for safety (adverse effects),
dose tolerance, absorption, biodistribution, metabolism, excretion and clinical
pharmacology and, if possible, to gain early evidence regarding efficacy.

   Phase II clinical trials involve a small sample of the actual intended
patient population and seek to assess the efficacy of the drug for specific
targeted indications, to determine dose tolerance and the optimal dose range and
to gather additional information relating to safety and potential adverse
effects.

   Once an investigational drug is found to have some efficacy and an acceptable
safety profile in the targeted patient population, Phase III clinical trials are
initiated to establish further clinical safety and efficacy of the
investigational drug in a broader sample of the general patient population at
geographically dispersed study sites in order to determine the overall
risk-benefit ratio of the drug and to provide an adequate basis for all
physician labeling. The results of the research and product development,
manufacturing, pre-clinical testing, clinical trials and related information are
submitted to the FDA in the form of an NDA for approval of the marketing and
shipment of the drug.

   Data obtained from pre-clinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent Regulatory Agency
approval. In addition, delays or rejections may be encountered based upon
changes in Regulatory Agency policy during the period of drug development and/or
the period of review of any application for Regulatory Agency approval for a
compound. Delays in obtaining Regulatory Agency approvals could adversely affect
the marketing of any drugs developed by the Company or its collaborative
partners, impose costly procedures upon the Company's and its collaborative
partners' activities, diminish any competitive advantages that the Company or
its collaborative partners may attain and adversely affect the Company's ability
to receive royalties. There can be no assurance that, even after such time and
expenditures, Regulatory Agency approvals will be obtained for any compounds
developed by or in collaboration with the Company. Moreover, if Regulatory
Agency approval for a drug is granted, such approval may entail limitations on
the indicated uses for which it may be marketed that could limit the potential
market for any such drug. Furthermore, approved drugs and their manufacturers
are subject to continual review, and discovery of previously unknown problems
with a drug or its manufacturer may result in restrictions on such drug or
manufacturer, including withdrawal of the drug from the market. In addition,
Regulatory Agency approval of prices is required in many countries and may be
required for the marketing of any drug developed by the Company or its
collaborative partners in such countries.

   Timetables for the various phases of clinical trials and NDA approval cannot
be predicted with any certainty. The Company, its collaborative partners or the
FDA may suspend clinical trials at any time if it is believed that individuals
participating in such trials are being exposed to unacceptable health risks.
Even assuming that clinical trials are completed and that an NDA is submitted to
the FDA, there can be no assurance that the NDA will be reviewed by the FDA in a
timely manner or that once reviewed, the NDA will be approved. The approval
process is affected by a number of factors, including the severity of the
targeted indications, the availability of alternative treatments and the risks
and benefits demonstrated in clinical trials. The FDA may deny an NDA if
applicable regulatory criteria are not satisfied, or may require additional
testing or information with respect to the investigational drug. Even if initial
FDA approval is obtained, further studies, including post-market studies, may be
required in order to provide additional data on safety and will be required in
order to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested. The FDA
will also require post-market reporting and may require surveillance programs to
monitor the side effects of the drug. Results of post-marketing programs may
limit or expand the further marketing of the drug. Further, if there are any
modifications to the drug, including changes in indication, manufacturing
process or labeling, an NDA supplement may be required to be submitted to the
FDA.

   Each manufacturing establishment for new drugs is also required to receive
some form of approval by the FDA. Among the conditions for such approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to GMP, which must be followed at all times. In
complying with standards set forth in these regulations, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to ensure full technical compliance. Manufacturing establishments, both
foreign and domestic, are also subject to inspections by or under the authority
of the FDA and may be subject to inspections by foreign and other federal, state
or local agencies.

   There can be no assurance that the regulatory framework described above will
not change or that additional regulations will not arise that may affect
approval of or delay an IND or an NDA. Moreover, because the Company's present
collaborative partners are, and it is expected that the Company's future
collaborative partners may be, primarily responsible for pre-clinical testing,
clinical trials, regulatory approvals, manufacturing and commercialization of
drugs, the ability to obtain and the timing of regulatory approvals are not
within the control of the Company.



                                       23
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   Prior to the commencement of marketing a product in other countries, approval
by the Regulatory Agencies in such countries is required, whether or not FDA
approval has been obtained for such product. The requirements governing the
conduct of clinical trials and product approvals vary widely from country to
country, and the time required for approval may be longer or shorter than the
time required for FDA approval. Although there are some procedures for unified
filings for certain European countries, in general, each country has its own
procedures and requirements.

   The Company is also subject to regulation under other federal laws and
regulation under state and local laws, including laws relating to occupational
safety, laboratory practices, the use, handling and disposition of radioactive
materials, environmental protection and hazardous substance control. Although
the Company believes that its safety procedures for handling and disposing of
radioactive compounds and other hazardous materials used in its research and
development activities comply with the standards prescribed by federal, state
and local regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of any such accident,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company.

   The drug development process and regulatory framework for animal drugs are
similar in many respects to that for human therapeutics. In the United States,
the Center for Veterinary Medicine of the FDA is charged with assuring that a
new animal drug will not be introduced into interstate commerce unless it is the
subject of an approved new animal drug application (NADA). Like an NDA, an NADA
must be supported by proof that the drug is safe and effective. An NADA
application must include reports of adequate and well-controlled investigations.
Procedures for the initiation of studies on an investigational new animal drug
are similar to those for an IND. Compliance with Good Laboratory Practices and
Good Clinical Practices is required.

EMPLOYEES

   As of December 31, 2000, the Company had 104 full-time, regular employees, 36
of whom hold Ph.D. degrees and 20 of whom hold other advanced degrees.
Approximately 82 of the 104 employees are engaged in scientific activities and
22 are engaged in general, managerial and administrative functions. None of the
Company's employees are represented by a collective bargaining agreement, nor
has the Company experienced work stoppages. The Company considers its relations
with its employees to be good.

SCIENTIFIC CONSULTANTS

   The Company supplements its internal scientific staff with consulting
arrangements with a number of leading academic and industrial scientists and
clinicians. Microcide's Scientific Advisory Board formally meets once or twice
per year to review the Company's programs and provide general scientific
guidance and direction. On a more frequent basis, the Company utilizes
consultants either in small focused groups or as individuals on an ad hoc basis
to provide detailed scientific guidance in such areas as Genetics and Molecular
Biology, Chemistry, Clinical Microbiology/Pharmacology and Molecular
Diversity/Natural Products. In 2000, the Company paid its consultants
approximately $321,000 in the aggregate, as compared to approximately $231,000
in 1999 and approximately $407,000 in 1998.

   None of the consultants is an employee of the Company. Most of the
consultants have other commitments to, or consulting or advisory contracts with,
their employers and other institutions.

RISKS AND UNCERTAINTIES

FORWARD-LOOKING STATEMENTS

   This document contains forward-looking statements. In some cases, these
statements can be identified by the use of forward-looking terminology such as
"may," "will," "could," "should," "would," "expect," "anticipate," "continue" or
other similar words. These statements discuss future expectations, contain
projections of results of operations or of financial condition or state trends
and known uncertainties or other forward-looking information. Such statements
are based on current expectations that involve a number of uncertainties
including those set forth in the risk factors below. When considering
forward-looking statements, you should keep in mind that the risk factors noted
below and other factors noted throughout this prospectus or incorporated by
reference could cause our actual results to differ significantly from those
contained in any forward-looking statement. We undertake no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof.



                                       24
<PAGE>   25

THE FOLLOWING IS A SUMMARY DESCRIPTION OF SOME OF THE MANY RISKS WE FACE IN OUR
BUSINESS. YOU SHOULD CAREFULLY REVIEW THESE RISKS IN EVALUATING OUR BUSINESS IN
ADDITION TO CONSIDERING THE OTHER INFORMATION CONTAINED IN THIS REPORT. IF ANY
OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, OPERATING RESULTS OR
FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED, AND THIS COULD CAUSE
THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.

RISK FACTORS

   Before you purchase our securities, you should be aware that there are risks,
including those described below. You should consider carefully these risk
factors together with all of the other information contained elsewhere in this
prospectus or incorporated by reference before you decide to purchase our
securities.

WE MAY FAIL TO SUCCESSFULLY DEVELOP PHARMACEUTICAL PRODUCTS.

   Our first potential pharmaceutical product, a cephalosporin compound,
commenced Phase I Clinical Trials under the direction of our partner, The R.W.
Johnson Pharmaceutical Research Institute, an affiliate of J&J, in November
1999. The purpose of these studies is to assess the compound's safety,
tolerability and pharmacokinetics. Various modifications to the method of
administration of this compound are being explored. Based on data from three
Phase I protocols conducted to date, additional efforts to improve tolerability
will be undertaken which will extend completion of such Phase I trials to the
3rd Quarter of 2001, if not later. Phase I trials for such cephalosporin
compound may not be successfully completed. There are two other Microcide
cephalosporin compounds in the J&J collaboration: one in pre-clinical
development and the other, a potentially orally-absorbed cephalosporin, in the
research stage. Our other potential products are in the pre-clinical or research
stage. Our potential products will require significant additional research and
development efforts before we can sell them. These efforts include extensive
pre-clinical and clinical testing prior to submission to the FDA or other
regulatory authority. Pre-clinical and clinical testing will likely take several
years. After submission, such potential products will be subject to lengthy
regulatory review. We cannot predict with accuracy the time required to
commercialize new pharmaceutical products.

   The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. We do not expect any of our potential
products to be commercially available for a number of years, if at all.
Pharmaceuticals that appear to be promising at early stages of development may
not reach the market for a number of reasons including the following:

-  we or our collaborators may not successfully complete our research and
   development efforts;

-  any pharmaceuticals we or our collaborators develop may be found to be
   ineffective or to cause harmful side effects during pre-clinical testing or
   clinical trials;

-  we may fail to obtain required regulatory approvals for any products we
   develop;

-  we may be unable to manufacture enough of any potential products at an
   acceptable cost and with appropriate quality;

-  our products may not be competitive with other existing or future products;
   and

-  proprietary rights of third parties may prevent us from commercializing our
   products.

WE MAY BE UNABLE TO MAINTAIN OUR CURRENT CORPORATE COLLABORATIONS OR ENTER INTO
NEW COLLABORATIONS, WHICH COULD DELAY DEVELOPMENT OF OUR POTENTIAL PRODUCTS.

   Our strategy for enhancing our research and development capability and
funding, in part, our capital requirements involves entering into collaboration
agreements with major pharmaceutical companies. We have entered into such
collaboration agreements with affiliates of Johnson & Johnson, Daiichi
Pharmaceutical Co., Ltd., Pfizer Inc. and Schering-Plough Animal Health
Corporation. Under such agreements, our collaborative partners are responsible
for:

-  selecting which compounds discovered in the collaboration will proceed into
   subsequent development, if any;

-  conducting pre-clinical testing, clinical trials and obtaining required
   approvals for such potential products; and

-  manufacturing and commercializing any such approved products.

   We cannot control the timing of such actions or the amount of resources
devoted to such activities by our partners. In addition, these agreements are
subject to cancellation or the election not to extend by our partners. As a
result, our receipt of revenue (whether in the form of continued research
funding, product development milestones, or royalties on sales) depends upon the
decisions made and the actions taken by our partners. Our collaborative partners
may view compounds that we may discover as competitive with such partner's
products or potential products, and therefore such partner may elect not to
proceed with the development of our potential product. Our partners are free to
pursue their own existing or alternative technologies to develop products in
preference to our potential products. We cannot be certain that our interests
will continue to coincide with those of our partners, or that disagreements
concerning our rights, technology, or other proprietary interests will not arise
with our partners.



                                       25
<PAGE>   26

   A large portion of our revenues to date have resulted from our
collaborations. We intend to continue to rely on our collaborations to fund a
substantial portion of our research and development activities over the next
several years. If our existing partners do not extend our collaborations or if
we are unable to enter into new collaborations, the development and
commercialization of our potential products may be delayed. In addition, we may
be forced to seek alternative sources of financing for such product development
and commercialization activities.

OUR DRUG DISCOVERY AND DEVELOPMENT PROGRAMS WILL REQUIRE SUBSTANTIAL ADDITIONAL
FUNDING.

   The development of our potential pharmaceutical products will require
substantially more money than we currently have. We intend to seek to raise such
additional funding from sources including other collaborative partners and
through public or private financings involving the sale of equity or debt
securities. We cannot be certain that any financings will be available when
needed, or if available will be on acceptable terms. Funding from collaborative
partners could limit our ability to control the research, development and
commercialization of potential products, and could limit our revenues in profits
from such products, if any. Pursuant to such agreements we may be required to
give up rights to products or technologies that we would otherwise seek to
develop or commercialize ourselves. Any additional equity financing will result
in dilution to our current shareholders. If we fail to secure sufficient
additional funding we will have to delay or terminate some or all of our drug
discovery and development programs.

WE HAVE INCURRED SUBSTANTIAL LOSSES IN THE PAST AND EXPECT TO CONTINUE TO INCUR
LOSSES FOR THE NEXT SEVERAL YEARS.

   We have incurred substantial net losses in every year since our inception in
December 1992. We had net losses of $9.8 million in 1998, $10.7 million in 1999,
and $13.9 million in 2000. We had an accumulated deficit of $53.2 million
through December 31, 2000. We expect to continue to incur operating losses over
the next several years.

   Substantially all of our revenues to date have resulted from license fees,
research support and milestone payments under our collaborative agreements. We
will not receive revenues or royalties from drug sales until we or our
collaborative partners successfully complete clinical trials with regard to a
drug candidate, obtain regulatory approval for such drug candidate, and
successfully commercialize the drug. We do not expect to receive revenues or
royalties from sales of drugs for a number of years, if at all. If we fail to
achieve sufficient revenues to become profitable or sustain profitability, we
may be unable to continue operations.

OUR APPROACH TO DRUG DISCOVERY IS UNPROVEN AND WE MAY NOT SUCCEED IN IDENTIFYING
ANY DRUG CANDIDATES WITH CLINICAL BENEFITS.

   We are developing a gene function based technology platform and other
proprietary technology to attempt to identify and commercialize novel
antibiotics, antifungals and antiviral agents. To date these technologies have
identified a small number of compounds that have demonstrated potential clinical
benefits. We cannot be certain that these or any other technology we may develop
will allow us to identify drug candidates that may have clinical benefits. The
failure to identify and develop new drug candidates will have a material adverse
effect on our business.

WE MAY FAIL TO SATISFY SAFETY AND EFFICACY REQUIREMENTS IN OUR CLINICAL TRIALS
FOR OUR POTENTIAL PRODUCTS.

   Either we or our collaborators must show through pre-clinical studies and
clinical trials that each of our pharmaceutical products is safe and effective
in humans for each indication before obtaining regulatory clearance from the FDA
for the commercial sale of that pharmaceutical. If we fail to adequately show
the safety and effectiveness of a pharmaceutical, regulatory approval could be
delayed or denied. The results from pre-clinical studies and early clinical
trials are often different than the results that are obtained in large-scale
testing. We cannot be certain that we will show sufficient safety and
effectiveness in our clinical trials that would allow us to obtain the needed
regulatory approval. A number of companies in the pharmaceutical industry,
including biotechnology companies, have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier trials.

   Any drug is likely to produce some level of toxicity or undesirable side
effects in animals and in humans when administered at sufficiently high doses
and/or for a long period of time. Unacceptable toxicities or side effects may
occur in the course of toxicity studies or clinical trials. We have observed
local irritation at the injection site in some subjects receiving our
cephalosporin product in Phase I clinical trials. This will require additional
efforts to improve tolerability, thereby extending the time to complete such
Phase I trials. If we observe unacceptable toxicities or other side effects, we,
our collaborators or regulatory authorities may interrupt, limit, delay or halt
the development of the drug. In addition, such unacceptable toxicities or side
effects could prevent approval by the FDA or foreign regulatory authorities for
any or all indications.



                                       26
<PAGE>   27

   We must obtain regulatory approval before marketing or selling our future
drug products. In the United States, we must obtain FDA approval for each drug
that we intend to commercialize. The FDA approval process is lengthy and
expensive, and approval is never certain. Products distributed abroad are also
subject to foreign government regulation. The process of obtaining FDA and other
required regulatory approvals can vary a great deal based upon the type,
complexity and novelty of the products involved. Delays or rejections may be
encountered based upon additional government regulation from future legislation
or administrative action or changes in FDA policy during the period of clinical
trials and FDA regulatory review. Similar delays also may be encountered in
foreign countries.

   None of our drug candidates has received regulatory approval. If we fail to
obtain this approval, we will be unable to commercially manufacture and sell our
drug products. Even if we obtain regulatory approval, we may be required to
continue clinical studies even after we have started selling a pharmaceutical.
In addition, identification of certain side effects after a drug is on the
market or the occurrence of manufacturing problems could cause subsequent
withdrawal of approval, reformulation of the drug, additional pre-clinical
testing or clinical trials and changes in labeling of the product. This could
delay or prevent us from generating revenues from the sale of that drug or cause
our revenues to decline.

   If we obtain regulatory approval, we will also be subject to ongoing existing
and future FDA regulations and guidelines and continued regulatory review. In
particular, we, our collaborators, or any third party that we use to manufacture
the drug will be required to adhere to regulations setting forth current good
manufacturing practices. The regulations require that we manufacture our
products and maintain our records in a particular way with respect to
manufacturing, testing and quality control activities. Furthermore, we, our
collaborators, or our third-party manufacturers must pass a pre-approval
inspection of manufacturing facilities by the FDA before obtaining marketing
approval.

   Failure to comply with the FDA or other relevant regulatory requirements may
subject us to administrative or legally imposed restrictions. These include:
warning letters, civil penalties, injunctions, product seizure or detention,
product recalls, total or partial suspension of production and FDA refusal to
approve pending NDAs, or supplements to approved NDAs.

WE DEPEND ON EFFECTIVELY PROTECTING OUR INTELLECTUAL PROPERTY.

   Our success depends in part on our ability to establish, protect and enforce
our proprietary rights relating to our lead compounds, gene discoveries,
screening technology and certain other proprietary technology. We have filed
approximately 80 patent applications in the United States, in addition to
applications filed in other countries, in order to protect lead compounds, gene
discoveries and screening technology, and 22 United States patents have been
issued to date on such applications. The patent position of biotechnology and
pharmaceutical companies is highly uncertain and involves many complex legal and
technical issues. We cannot be certain that patents will be granted with respect
to any of our patent applications currently pending in the United States or in
other countries, or with respect to applications filed in the future. Our
failure to obtain patents pursuant to our current or future applications could
have a material adverse effect on our business. Furthermore, we cannot be
certain that any patents issued to us will not be infringed, challenged,
invalidated or circumvented by others, or that the rights granted thereunder
will provide competitive advantages to us. In particular, it is difficult to
enforce patents covering methods of use of screening and other similar
technologies. Litigation to establish the validity of patents, to defend against
copatent infringement claims and to assert infringement claims against others
can be expensive and time-consuming, even if the outcome is favorable to us. If
the outcome of patent prosecution or litigation is not favorable to us, our
business could be materially adversely affected.

   Our commercial success also depends on our ability to operate without
infringing patents and proprietary rights of third parties. There can be no
assurance that our products will not infringe on the patents or proprietary
rights of others. We may be required to obtain licenses to patents or other
proprietary rights of others. Such licenses may not be available on terms
acceptable to us, if at all. The failure to obtain such licenses could delay or
prevent our collaborative partners' activities, including the development,
manufacture or sale of drugs requiring such licenses.

   In addition to patent protection, we rely on trade secrets, proprietary
know-how and technological advances which we seek to protect, in part, by
confidentiality agreements with our collaborative partners, employees, and
consultants. There can be no assurance that these agreements will not be
breached, that we would have adequate remedies for any such breach, or that our
trade secrets, proprietary know-how and technological advances will not
otherwise become known or be independently discovered by others.

OUR INDUSTRY IS HIGHLY COMPETITIVE.

   We operate in a field in which new developments are occurring at an
increasing pace. Competition from biotechnology and pharmaceutical companies,
joint ventures, academic and other research institutions and others is intense
and is expected to increase.


                                       27
<PAGE>   28

Many of our competitors have substantially greater financial, technical and
personnel resources than we have. Although we believe that we have identified
new and distinct approaches to drug discovery, there are other companies with
drug discovery programs, at least some of the objectives of which are the same
as or similar to ours. Competing technologies may be developed which would
render our technologies obsolete or non-competitive. We are aware of many
pharmaceutical and biotechnology companies that are engaged in efforts to treat
each of the infectious diseases for which we are seeking to develop therapeutic
products. There can be no assurance that our competitors will not develop
competing drugs that are more effective than those developed by us and our
collaborative partners or obtain regulatory approvals of their drugs more
rapidly than we and our collaborative partners, thereby rendering our and our
collaborative partners' drugs obsolete or noncompetitive. Moreover, there can be
no assurance that our competitors will not obtain patent protection or other
intellectual property rights that would limit our and our collaborative
partners' ability to use our technology or commercialize our or their drugs.

OUR POTENTIAL PRODUCTS MAY NOT BE ACCEPTABLE IN THE MARKET OR ELIGIBLE FOR THIRD
PARTY REIMBURSEMENT.

   Any products successfully developed by us or our collaborative partners may
not achieve market acceptance. The antibiotic products which we are attempting
to develop will compete with a number of well-established traditional antibiotic
drugs manufactured and marketed by major pharmaceutical companies. The degree of
market acceptance of any of our products will depend on a number of factors,
including:

-  the establishment and demonstration in the medical community of the clinical
   efficacy and safety of such products,

-  the potential advantage of such products over existing treatment methods, and

-  reimbursement policies of government and third-party payors.

   Physicians, patients or the medical community in general may not accept or
utilize any products that may be developed by us or our collaborative partners.
Our ability to receive revenues and income with respect to drugs, if any,
developed through the use of our technology will depend, in part, upon the
extent to which reimbursement for the cost of such drugs will be available from
third-party payors, such as government health administration authorities,
private health care insurers, health maintenance organizations, pharmacy
benefits management companies and other organizations. Third-party payors are
increasingly challenging the prices charged for pharmaceutical products. If
third-party reimbursement was not available or sufficient to allow profitable
price levels to be maintained for drugs developed by us or our collaborative
partners, it could adversely affect our business.

WE DO NOT HAVE MANUFACTURING, MARKETING OR SALES CAPABILITIES.

   We do not have any experience in the manufacture of commercial quantities of
drugs, and our current facilities and staff are inadequate for the commercial
production or distribution of drugs. We intend to rely on our collaborative
partners for the manufacturing, marketing and sales of any products which result
from such collaborations. The current third-party manufacturer of our
beta-lactam potential product has in the past encountered difficulties with the
manufacture of such compound in sufficient quantities for clinical trial
purposes. Manufacturers often encounter difficulties in scaling up to
manufacture commercial quantities of pharmaceutical products. We cannot be
certain that our current or any other manufacturer will not encounter similar
delays in the scale-up to manufacture this or any other compound in commercial
quantities in the future.

   We will be required to contract with third parties for the manufacture of our
products or to acquire or build production facilities before we can manufacture
any such products. There can be no assurance that we will be able to enter into
such contractual manufacturing arrangements with third parties on acceptable
terms, if at all, or acquire or build such production facilities ourselves.

   To date we have no experience with sales, marketing or distribution. In order
to market any of our products, we will be required to develop marketing and
sales capabilities, either on our own or in conjunction with others. We cannot
be certain that we will be able to develop any of these capabilities.

HEALTH CARE REFORM MEASURES MAY IMPACT PHARMACEUTICAL PRICING.

   The levels of revenue and profitability of pharmaceutical companies may be
affected by continuing governmental efforts to contain or reduce the costs of
health care through various means. For example, in certain foreign markets
pricing or profitability of prescription pharmaceuticals is already subject to
governmental control. In the United States, there have been, and we expect that
there will continue to be, a number of federal and state proposals to implement
similar governmental control. Cost control initiatives could decrease the price
that we or our collaborative partners receive for any products which we or they
may develop in the future which would adversely affect our business. Further, to
the extent that such proposals or initiatives have a material adverse effect on
our collaborative partners or potential collaborative partners, our ability to
commercialize our potential products may be materially adversely affected.



                                       28
<PAGE>   29

WE MAY EXPERIENCE PRODUCT LIABILITY CLAIMS.

   We face an inherent business risk of exposure to potential product liability
claims in the event that drugs, if any, developed through the use of our
technology are alleged to have caused adverse effects on patients. Such risk
exists for products being tested in human clinical trials, as well as products
that receive regulatory approval for commercial sale. We will, if appropriate,
seek to obtain product liability insurance with respect to drugs developed by us
and our collaborative partners. However, we may not be able to obtain such
insurance. Even if such insurance is obtainable, it may not be available at a
reasonable cost or in a sufficient amount to protect us against liability.

WE DEPEND ON KEY PERSONNEL.

   We are highly dependent on management and scientific staff, including James
E. Rurka, our President and Chief Executive Officer, George H. Miller, Ph.D.,
our Senior Vice President - Research and Development, Donald D. Huffman, our
Vice President of Finance and Corporate Development and on our other executive
officers. Loss of the services of any key individual could have an adverse
effect on the Company. We do not carry key-man life insurance on any of our
executives. We believe that our future success will depend, in part, on our
ability to attract and retain highly talented managerial and scientific
personnel and consultants. We face intense competition for such personnel from,
among others, biotechnology and pharmaceutical companies, as well as academic
and other research institutions. We cannot be certain that we will be able to
attract and retain the personnel we require on acceptable terms.

WE ARE SUBJECT TO STRINGENT REGULATIONS RELATING TO HAZARDOUS MATERIALS.

   As with many biotechnology and pharmaceutical companies, our activities
involve the use of radioactive compounds and hazardous materials. As a
consequence, we are subject to numerous environmental and safety laws and
regulations. Any violation of, and the cost of compliance with, these
regulations could materially adversely affect our operations. We are subject to
periodic inspections for possible violations of any environmental or safety law
or regulation.

WE HAVE CERTAIN ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BYLAWS.

   Certain provisions of our Restated Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire, or
discouraging a third party from attempting to acquire, control of our company.
Such provisions could limit the price that certain investors might be willing to
pay in the future for shares of our Common Stock. Certain of these provisions
allow us to issue Preferred Stock without any vote or further action by the
stockholders, provide for staggered elections of our Board of Directors and
specify procedures for director nominations by stockholders and submission of
other proposals for consideration at stockholder meetings. None of these
provisions provide for cumulative voting in the election of directors. Certain
provisions of Delaware law applicable to us could also delay or make more
difficult a merger, tender offer or proxy contest involving us, including
Section 203 of the Delaware General Corporation Law, which prohibits a Delaware
corporation from engaging in any business combination with any stockholder
owning fifteen percent or more of the Company's outstanding voting stock
(interested stockholder) for a period of three years from the date a stockholder
becomes an interested stockholder unless certain conditions are met. The
possible issuance of Preferred Stock, the procedures required for director
nominations and stockholder proposals and Delaware law could have the effect of
delaying, deferring or preventing a change in control of Microcide, including
without limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of our Common Stock. These provisions could
also limit the price that investors might be willing to pay in the future for
shares of our Common Stock.

VOLATILITY OF STOCK PRICE.

   The market price of our Common Stock, like that of the securities of many
other biopharmaceutical companies, has been and is likely to continue to be
highly volatile. The stock market has experienced significant price and volume
fluctuations that are often unrelated to the operating performance of particular
companies. Factors contributing to such volatility include:

-  results of pre-clinical studies and clinical trials by us or our competitors;

-  announcements of new collaborations;

-  announcements of our technological innovations or new therapeutic products or
   that of our competitors;

-  developments in our patent or other proprietary rights or that of our
   competitors, including litigation;



                                       29
<PAGE>   30

-  governmental regulation; and

-  healthcare legislation.

   Fluctuations in our operating results and market conditions for biotechnology
stocks in general could have a significant impact on the volatility of the
market price for our Common Stock and on the future price of our Common Stock.

WE HAVE NO INTENTION TO PAY DIVIDENDS.

   We have never paid any cash dividends on Microcide Common Stock. We currently
intend to retain all future earnings, if any, for use in our business and do not
expect to pay any dividends in the foreseeable future.

ITEM 2.  PROPERTIES

   The Company has three facilities consisting of approximately 84,170 square
feet of leased laboratory and office space in Mountain View, California under
lease agreements expiring in 2005. The Company has another building lease
through 2005 in Mountain View, of approximately 18,040 square feet which has
been sublet to another company through October 2003. The Company believes that
its facilities are sufficient to accommodate the anticipated research and
administrative needs of the Company through 2002. Thereafter, the Company
believes that it will be able to secure adequate additional facilities for its
continued operations.

ITEM 3.  LEGAL PROCEEDINGS

   Not applicable.

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

   Not applicable.



                                       30
<PAGE>   31

                                     PART II


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

   The Company's Common Stock is traded on the Nasdaq National Market System
under the symbol MCDE. The following table sets forth for the periods indicated
the high and low sale price for the Common Stock. The Company's stock was first
publicly traded on May 15, 1996.

<TABLE>
<CAPTION>
                                               HIGH        LOW
                                              ------      -----
<S>                                           <C>         <C>
FISCAL YEAR 2000
     4th Quarter........................      $13.88      $3.25
     3rd Quarter........................       15.75       7.25
     2nd Quarter........................       13.13       5.28
     1st Quarter........................       26.00       8.06

FISCAL YEAR 1999
     4th Quarter........................       $9.25      $6.38
     3rd Quarter........................        7.34       4.63
     2nd Quarter........................        4.75       3.82
     1st Quarter........................        4.50       3.97
</TABLE>

   As of February 8, 2001, there were 131 holders of record of Common Stock.

DIVIDEND POLICY

   The Company has not paid any cash dividends on its Common Stock since its
inception and does not anticipate paying cash dividends on its Common Stock in
the foreseeable future.

FINANCIAL RESULTS BY FISCAL QUARTERS (UNAUDITED)
(In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                         2000*                                  1999
                         -----------------------------------------------------------------------------
                          First    Second     Third    Fourth     First    Second     Third    Fourth
                         -----------------------------------------------------------------------------
<S>                      <C>       <C>       <C>       <C>       <C>       <C>       <C>      <C>

Total revenues           $ 1,183   $ 1,571   $ 1,504   $ 1,606   $ 2,692   $ 1,545   $ 1,592   $ 3,619

Net loss before
 cumulative effect of
 change in accounting
 principle                (3,520)   (3,451)   (3,563)   (3,378)   (2,723)   (3,643)   (3,294)   (1,086)

Cumulative effect of
 change in accounting
 principle                  (183)       50        50        50        --        --        --        --

Net loss                  (3,703)   (3,401)   (3,513)   (3,328)   (2,723)   (3,643)   (3,294)   (1,086)

Basic and diluted net
 loss per share:

Net loss per share
 before cumulative
 effect of change in
 accounting principle     $(0.31)   $(0.31)   $(0.31)   $(0.29)   $(0.25)   $(0.33)   $(0.30)   $(0.10)

Cumulative effect of
 change in accounting
 principle                $(0.02)   $ 0.01        --        --        --        --        --        --

Net loss per share        $(0.33)   $(0.30)   $(0.31)   $(0.29)   $(0.25)   $(0.33)   $(0.30)   $(0.10)
</TABLE>
-------------------
* The impact of the accounting change has resulted in an increase in total
revenues of $50,000 per quarter for each of the four quarters of 2000.


ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                  FOR THE YEARS ENDED DECEMBER 31,
                                                --------------------------------------------------------------------
                                                  2000           1999           1998           1997           1996
                                                --------       --------       --------       --------       --------
                                                               (In thousands, except per share data)
<S>                                             <C>            <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
Total revenues ...........................      $  5,864       $  9,448       $ 11,181       $ 14,894       $ 11,273
Net loss .................................       (13,945)       (10,746)        (9,758)        (4,602)          (670)
Basic and diluted net loss per share .....         (1.23)         (0.97)         (0.89)         (0.43)         (0.10)
Shares used in computing basic and
 diluted net loss per share ..............        11,320         11,085         10,962         10,817          7,034
</TABLE>

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                ----------------------------------------------------------------
                                                  2000          1999          1998          1997          1996
                                                --------      --------      --------      --------      --------
                                                                         (In thousands)
<S>                                             <C>           <C>           <C>           <C>           <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
 investments .............................      $ 12,589      $ 24,868      $ 33,192      $ 40,387      $ 47,508
Trade and other receivables ..............         7,575           139           111         1,026           169
Working capital ..........................         9,214        21,447        30,269        37,235        42,542
Total assets .............................        27,198        33,831        44,490        51,782        56,826
Long-term obligations ....................           603         2,164         3,039           450           952
Total stockholders' equity ...............        15,324        27,803        37,938        46,896        50,574
</TABLE>



                                       31
<PAGE>   32

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

OVERVIEW

   Microcide is a biopharmaceutical company committed to the discovery,
development and commercialization of novel antimicrobials for the improved
treatment of serious bacterial, fungal and viral infections. The Company's three
discovery research platforms address the growing problems of antibiotic
resistance and the need for improved antifungal and antiviral therapeutics. The
Company's Cephalosporin Antibiotics and Efflux Pump Inhibition platforms focus
on developing novel antibiotics and antibiotic potentiators (efflux inhibitors)
to directly address existing bacterial and fungal resistance problems.
Microcide's Microbial Genomics platform utilizes proprietary bacterial, fungal
and viral genetics and genomics tools to discover entirely new classes of
antimicrobial agents.

   As part of the Company's strategy to enhance its research and development
capabilities and to fund, in part, its capital requirements, Microcide has
entered into collaborative agreements with major pharmaceutical companies.
Pursuant to the Company's collaborative agreements with J&J, Daiichi, Pfizer and
Schering-Plough Animal Health (the Collaborative Agreements), the Company has
received license fees, milestone payments and research support payments, and can
potentially receive additional research support payments, milestone payments and
royalty payments. License payments are typically nonrefundable up-front payments
for licenses to develop, manufacture and market products, if any, that are
developed as a result of the collaboration. Research support payments are
typically contractually obligated payments to fund research and development over
the term of the collaboration. Milestone payments are payments contingent upon
the achievement of specified milestones, such as selection of candidates for
drug development, the commencement of clinical trials or receipt of regulatory
approvals. If drugs are successfully developed and commercialized as a result of
the Collaborative Agreements, the Company will receive royalty payments based
upon the net sales of such drugs. In addition, the Company has derived other
revenues principally through the sale of molecular diversity samples to other
pharmaceutical and biotechnology companies for use in their research programs.

   Through December 31, 2000, the Company had received in the aggregate $54.5
million in license fees, milestone payments and research support payments under
the Collaborative Agreements. Research support funding for Daiichi and J&J
concluded at the end of the first and fourth quarters of 1999, respectively.
Research support funding from Daiichi resumed in the second quarter of 2000, and
from J&J in the first quarter of 2001 pursuant to new agreements signed in
December 2000. Microcide and Pfizer amended the collaboration agreement in March
2000 resulting in lower funding for the fifth year. Assuming none of the
agreements are terminated prior to their scheduled expiration, the Company will
be entitled to receive up to $13.2 million in research support payments.

   In the event that the Company and its collaborators achieve the specified
research and product development milestones, Microcide will be entitled to
receive milestone payments as follows: up to $16.5 million for the first
parenteral product and up to $15.5 million for each additional parenteral
product developed pursuant to the J&J Agreements, and up to $18.5 million for
any orally absorbed product developed pursuant to the December 2000 amendment to
the J&J Agreement. The December 2000 Natural Products Agreement signed with
RWJPRI establishes potential milestone payments of $1.0 million. The
Schering-Plough Animal Health Agreement signed in October 2000 contains
potential milestone payments amounting to $3.3 million. The Pfizer Animal Health
collaboration also provides for milestone payments, and similar to the
Schering-Plough Agreement, at a lower level than those applicable to human
health applications. Receipt of these milestone payments is contingent upon
achieving specified research and product development milestones, a number of
which may not be achieved for several years, if ever. The Company does not
expect to receive royalties based upon net sales of drugs for a significant
number of years, if at all.

   In January 1998, the Company formed Iconix Pharmaceuticals, Inc. Iconix is a
biotechnology company that plans to develop surrogate genetics and chemical
informatics into a technology platform with broad applicability to multiple
human diseases. Through a private placement, Iconix arranged a $12.5 million
equity investment from institutional investors during 1998. As of December 31,
2000, after giving effect to this investment, the equity investment by Motorola,
Inc. in June 2000 associated with a corporate collaboration, and the stock
option pool reserved for employees and consultants of Iconix, Microcide holds
approximately 32% interest in Iconix, or 29% of Iconix's outstanding equity on a
fully diluted basis. Microcide accounts for its investment using the equity
method of accounting and since Microcide's investment has a zero book basis, the
losses of Iconix do not impact Microcide's statement of operations. Under the
Core Technology Development and License Agreement, Microcide and Iconix worked
together through January 14, 2001 to jointly develop and utilize new technology
in the areas of molecular diversity, high-throughput screening, informatics and
genome sciences. Under the Support Services Agreement, Microcide has provided
Iconix with facilities and various business support services for which the
Company received reimbursement. In addition, through the Antiviral and Surrogate
Genetics Research Agreement, Microcide was obligated to provide Iconix with
research support payments of up to $6.1 million for a three-year term. Microcide
has made payments to Iconix of $1.5 million, $1.9 million and $823,000 during
2000, 1999 and 1998, respectively. Microcide is entitled to worldwide
development, manufacturing and marketing rights to antiviral products which may
emerge from the collaboration and, if specified research and development
milestones are achieved, will be obligated to pay Iconix milestone payments of
up to $11.0 million for the



                                       32
<PAGE>   33
first product and up to $10.5 million for each subsequent product, in addition
to royalties on worldwide sales. Microcide and Iconix did not extend the Core
Technology Development and License Agreement beyond January 14, 2001, but
Microcide will continue to provide Iconix with facilities and various business
support services for which the Company will be reimbursed under an amended
Support Services Agreement, currently under negotiation.

   Quarterly results of operations are subject to significant fluctuations based
on the timing and amount of certain revenues earned under the Collaborative
Agreements. The Company expects to continue to incur operating losses in the
future.

   This Report contains forward-looking statements which involve risks and
uncertainties, including but not limited to statements concerning the
continuation of the Company's Collaborative Agreements with its strategic
partners and the continued receipt of research support payments and potential
receipt of milestone payments thereunder, the successful development and
commercialization of drugs and the receipt of royalties thereon or sales revenue
therefrom, and the expected period of time the Company's existing financial
resources will enable the Company to maintain its current and planned future
operations. The Company's actual results and timing of certain events may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause a difference include risks inherent in the Company's
business and the pharmaceutical industry in general, such as uncertainties with
regard to the successful continuation of the research and development activities
under the Collaborative Agreements and in the Company's own programs, the
possible decision of a strategic partner to cancel a collaborative program, the
achievement of research and product milestones, the successful completion of
clinical trials and obtaining of required regulatory approvals, the achievement
of product commercialization goals and the availability of adequate financing to
support operations, as well as other factors set forth in this Form 10-K.

RESULTS OF OPERATIONS

FISCAL YEARS ENDED DECEMBER 31, 2000 AND 1999

   Revenues. Total revenues decreased 38% from $9.4 million in 1999 to $5.9
million in 2000. Research revenues decreased from $7.1 million in 1999 to $5.7
million in 2000 principally due the conclusion of the funded research portion of
the collaboration with J&J in December 1999 and a reduction in research funding
from Pfizer due to a contract amendment that modified the research plan. The
decrease was partially offset by research revenues recognized from the joint
research agreement signed with Daiichi in May 2000, and from the collaboration
with SPAH announced in October 2000. Research revenue in 2000 also includes
$200,000 of revenue included in the cumulative effect adjustment made on January
1, 2000 upon the adoption of a new revenue recognition policy. There were
$58,000 in milestone revenues earned in 2000 as compared to $2.0 million in 1999
when a milestone fee was received from J&J for entry of the Company's
cephalosporin product into Phase I clinical trials. Other revenues, consisting
of short-term contract research payments and the sale of molecular diversity
samples to other biotechnology companies for use in their research programs,
were $122,000 in 2000 as compared to $335,000 in 1999.

   Research and Development Expenses. The Company's research and development
expenses decreased 7% from $17.3 million in 1999 to $16.1 million in 2000. The
decrease was due primarily to lower headcount and reduced compensation costs, as
well as lower external research support expenses.

   General and Administrative Expenses. General and administrative expenses
increased 10% from $4.0 million in 1999 to $4.4 million in 2000, due primarily
to higher spending for outside services.

   Interest Income and Expense. Interest income decreased from $1.4 million in
1999 to $1.1 million in 2000 as a result of a decrease in average investment
balances. Interest expense decreased from $345,000 to $251,000 as a result of a
lower outstanding balance under an equipment financing arrangement.

   Net Loss. Net loss increased from $10.7 million in 1999 to $13.9 million in
2000 as a result of the items discussed above.

FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998

   Revenues. Total revenues decreased 16% from $11.2 million in 1998 to $9.4
million in 1999. The Company received a $2.0 million milestone payment from the
J&J research collaboration earned in conjunction with J&J's commencement of
cephalosporin Phase I clinical trials in 1999. In comparison, there were no
milestone revenues earned in 1998. Research revenues decreased from $11.1
million in 1998 to $7.1 million in 1999 principally due to the conclusion of the
extended Daiichi research collaboration at the end of the first quarter of 1999,
and reduced research funding during the extension period of the J&J
collaboration, offset by revenues from the initiation of research under the
Pfizer Animal Health agreement. Other revenues, consisting of the sale of
molecular diversity samples to other pharmaceutical and biotechnology companies
for use in their research programs, were $335,000 in 1999 as compared to $40,000
in 1998.



                                       33
<PAGE>   34

   Research and Development Expenses. The Company's research and development
expenses decreased 8% from $18.8 million in 1998 to $17.3 million in 1999. The
decrease was due primarily to lower compensation expenses resulting from a
reduction in headcount, lower spending for research supplies, materials and
compounds, and lower spending for outside services, partially offset by higher
research support expenses associated with the Company's antiviral discovery and
joint technology programs with Iconix Pharmaceuticals.

   General and Administrative Expenses. General and administrative expenses were
$4.0 million in 1999, the same as in 1998.

   Interest Income and Expense. Interest income decreased from $1.9 million in
1998 to $1.4 million in 1999 as a result of a decrease in average investment
balances. Interest expense increased from $32,000 to $345,000 as a result of
borrowing $4.4 million in December 1998 under a three-year debt facility bearing
an interest rate of approximately 11%.

   Net Loss. Net loss increased from $9.8 million in 1998 to $10.7 million in
1999 as a result of the items discussed above.

LIQUIDITY AND CAPITAL RESOURCES

   The Company has financed its operations since inception primarily through the
sale of equity securities, through funds provided under the Collaborative
Agreements, through other revenues principally consisting of sales of molecular
diversity and through equipment financing. As of December 31, 2000, the Company
had received $66.2 million from the sale of equity and $54.5 million in cash
from license and milestone fees and research support payments under the
Collaborative Agreements.

   Cash, cash equivalents and short-term investments at December 31, 2000 were
$12.6 million compared to $24.9 million at December 31, 1999. Trade and other
receivables at December 31, 2000 were $7.6 million compared to $139,000 at
December 31, 1999. During the first week of January 2001, the Company received
approximately $6.4 million for the amounts due from J&J, in conjunction with the
signing of new and amended agreements in December 2000. The decrease in cash was
due primarily to the net loss during 2000 and the repayment of $1.4 million on
its three-year debt obligations, offset by proceeds of $1.4 million received in
conjunction with the sale of Common Stock to employees and consultants through
the exercise of stock options. Net cash used in the Company's operations was
$11.5 million in 2000 in contrast to net cash used by the Company's operations
of $7.3 million in 1999.

   The Company invested $779,000 and $473,000 in 2000 and 1999, respectively,
primarily for research capital expenditures. The Company does not expect to
incur an increase in capital spending in 2001. At December 31, 2000, the Company
had debt obligations of $1.9 million. The Company made principal payments under
its debt obligations of $1.4 million in 2000.

   The Company expects that its existing capital resources, interest income and
future payments due under the Collaborative Agreements will enable the Company
to maintain current and planned operations at least through 2001. In the event
that the Company requires additional funding at any point in the future, the
Company will seek to raise such additional funding from other sources, including
other collaborative arrangements, and through public or private financings,
including sales of equity or debt securities. Any such collaborative or
licensing arrangement could result in limitations on the Company's ability to
control the commercialization of resulting drugs, if any, and could limit
profits, if any, therefrom. On February 9, 2001, the Company filed a shelf
registration statement with the Securities and Exchange Commission to allow the
Company to raise the first new equity capital since its initial public offering
in 1996. Any such equity financing could result in dilution to the Company's
existing stockholders. There can be no assurance that additional funds will be
available on favorable terms or at all, or that such funds, if raised, would be
sufficient to permit the Company to continue to conduct its operations. If
adequate funds are not available, the Company may be required to curtail
significantly or eliminate one or more of its research programs.

   The Company has not generated significant taxable income to date. At December
31, 1999, the net operating losses available to offset future taxable income for
federal income tax purposes were approximately $38.0 million. Because the
Company has experienced ownership changes, future utilization of the
carryforwards may be limited in any one fiscal year pursuant to Internal Revenue
Code regulations. The carryforwards expire at various dates beginning in 2008
through 2020 if not utilized. As a result of the annual limitation, a portion of
these carryforwards may expire before becoming available to reduce the Company's
federal income tax liabilities.



                                       34
<PAGE>   35

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

   In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133).
The Company is required to adopt SFAS 133 for the year ending December 31, 2001.
SFAS 133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments. Microcide does not
currently engage in hedging activities; adoption of SFAS 133 is expected to have
no material impact on Microcide's financial condition and results of operations.

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes certain areas of the staff's views in applying
generally accepted accounting principles to revenue recognition. The Company
adopted SAB 101 in the fourth quarter of 2000, effective January 1, 2000, and
recorded a cumulative effect of a change in accounting principle related to
upfront license payments recognized in prior periods of $233,000. Of this
amount, $200,000 was recognized in revenue in 2000, and the remainder will be
recognized in 2001 as the Company fulfills its obligations under the contract.
The cumulative effect was the result of the change in the  Company's policy
related to the recognition of upfront nonrefundable license payments received
under collaborative agreements.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   The following discussion about the Company's market risk disclosure involves
forward-looking statements. The Company is exposed to market risk related mainly
to changes in interest rates. The Company does not invest in derivative
financial instruments.

INTEREST RATE SENSITIVITY

   The fair value of the Company's investments in marketable securities at
December 31, 2000 was $11.5 million, with a weighted average-maturity of 210
days and a weighted-average interest rate of 6.77%. The fair value of the
Company's investments in marketable securities at December 31, 1999 was $20.5
million, with a weighted average-maturity of 211 days and a weighted-average
interest rate of 5.66%. The decrease in investments was primarily due to a
decrease in revenues earned for the year. The Company's investment policy is to
manage its marketable securities portfolio to preserve principal and liquidity
while maximizing the return on the investment portfolio. The Company's
marketable securities portfolio is primarily invested in corporate debt
securities with an average maturity of under one year and a minimum investment
grade rating of A or A-1 or better to minimize credit risk. Although changes in
interest rates may affect the fair value of the marketable securities portfolio
and cause unrealized gains or losses, such gains or losses would not be realized
unless the investments are sold prior to maturity. See also Note 4 to Financial
Statements.

FOREIGN CURRENCY EXCHANGE RISK

   At this time, the Company does not participate in any foreign currency
exchange activities, therefore, is not subject to risk of gains or losses for
changes in foreign exchange rates.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

   See Index to Financial Statements on page F-1.

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

   Not applicable.



                                       35
<PAGE>   36

                                    PART III

ITEM 10.  EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

   Information required by this item will be contained in the Company's Notice
of 2001 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after December 31, 2000. Such information is incorporated herein by
reference.

ITEM 11.  EXECUTIVE COMPENSATION

   Information required by this item will be contained in the Company's Notice
of 2001 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after December 31, 2000. Such information is incorporated herein by
reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   Information required by this item will be contained in the Company's Notice
of 2001 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after December 31, 2000. Such information is incorporated herein by
reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   Information required by this item will be contained in the Company's Notice
of 2001 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after December 31, 2000. Such information is incorporated herein by
reference.



                                       36
<PAGE>   37

                                     PART IV

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

(a) Documents filed as part of this report:

   1. List of Financial Statements. The following financial statements of
      Microcide Pharmaceuticals, Inc. and Report of Ernst & Young LLP,
      Independent Auditors, are included in this report:

      Balance Sheets as of December 31, 2000 and 1999, Statements of Operations
      for the years ended December 31, 2000, 1999 and 1998, Statement of
      Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998,
      Statements of Cash Flows for the years ended December 31, 2000, 1999 and
      1998, and Notes to Financial Statements (pages F-1 to F-17).

   2. List of all Financial Statement schedules:

      (i) All schedules are omitted because they are not applicable or the
          required information is shown in the Financial Statements or notes
          thereto.

   3. List of exhibits required by Item 601 of Regulation S-K.

   The following exhibits are filed as part of, or incorporated by reference
into, this report.

<TABLE>
<CAPTION>
   EXHIBITS                               DESCRIPTION
   --------                               -----------
<S>             <C>
     2.1        Iconix Pharmaceuticals, Inc. (formerly EpiGenix, Inc.) Series A
                Preferred Stock Purchase Agreement.(2)

     2.2*       Core Technology Development and License Agreement by and between
                Microcide Pharmaceuticals, Inc. and Iconix Pharmaceuticals, Inc.
                (formerly EpiGenix, Inc.)(2)

     2.3*       Antiviral and Surrogate Genetics Research Collaboration
                Agreement by and between Microcide Pharmaceuticals, Inc. and
                Iconix Pharmaceuticals, Inc. (formerly EpiGenix, Inc.)(2)

     3.2        Restated Certificate of Incorporation of the Registrant.(1)

     3.5        Bylaws of the Registrant.(1)

     4.2        Form of Common Stock Certificate.(1)

     4.3        Series A Preferred Warrant Purchase Agreement and Warrant
                between Dominion Ventures, Inc. and the Registrant dated May 10,
                1993.(1)

     4.4        Series B Preferred Warrant Purchase Agreement and Warrant
                between Dominion Ventures, Inc. and the Registrant dated May 10,
                1993.(1)

     4.5        Series C Preferred Warrant Purchase Agreement and Warrant
                between Dominion Ventures, Inc. and the Registrant dated June
                10, 1994.(1)

     4.6        Series B Preferred Warrant Agreement between Comdisco, Inc. and
                the Registrant dated September 1, 1993.(1)

     4.7        Series C Preferred Warrant Agreement between Comdisco, Inc. and
                the Registrant dated September 1, 1993.(1)

    10.1        Information and Registration Rights Agreement, dated June 29,
                1994 as amended.(1)

    10.2        1993 Amended Incentive Stock Plan.(1)

    10.3        1996 Employee Stock Purchase Plan.(1)

    10.4        1996 Director Option Plan.(1)

    10.5        401(k) Plan.(1)

    10.6*       Research and License Agreement between the Registrant and Ortho
                Pharmaceutical Corporation and the R.W. Johnson Pharmaceutical
                Research Institute dated October 24, 1995.(1)

    10.7*       Research and License Agreement between the Registrant and Ortho
                Pharmaceutical Corporation and the R.W. Johnson Pharmaceutical
                Research Institute dated October 24, 1995.(1)

    10.8*       Joint Research Agreement between the Registrant and Daiichi
                Pharmaceutical Co., Ltd. dated November 6, 1995.(1)

    10.9*       Collaborative Research Agreement between the Registrant and
                Pfizer Inc dated March 1, 1996.(1)

    10.10*      License and Royalty Agreement between the Registrant and Pfizer
                Inc dated March 1, 1996.(1)

    10.11       Master Lease Agreement between Dominion Ventures, Inc. and the
                Registrant, dated May 10, 1993, as amended on
</TABLE>



                                       37
<PAGE>   38

<TABLE>
<CAPTION>
   EXHIBITS                               DESCRIPTION
   --------                               -----------
<S>             <C>
                June 10, 1994 and November 22, 1994.(1)

    10.12       Master Lease Agreement between the Registrant and Comdisco, Inc.
                dated September 1, 1993.(1)

    10.13       Lease Agreement between the Registrant and Portola Land Company
                dated April 1993.(1)

    10.14       Form of Indemnification Agreement between the Registrant and its
                Officers and Directors.(1)

    10.15       Employment Agreement dated January 31, 1994 between the
                Registrant and James E. Rurka.(1)

    10.16       Employment Agreement dated December 23, 1992 between the
                Registrant and Keith A. Bostian, Ph.D.(1)

    10.17       Lease Agreement commencing November 1, 1996 between the
                Registrant and Logue Investments L.P., a California limited
                partnership.(3)

    10.18*      Synthetic Compound Purchase Agreement between the Registrant and
                Daiichi Pharmaceutical Co., Ltd. dated June 25, 1997.(4)

    10.19       Sublease agreement between the Registrant, Quickturn Design
                Systems, Inc. and Portola Land Co. dated September 1997.(5)

    10.20       Sub-sublease agreement between the Registrant, Alpha Blox
                Corporation, Quickturn Design Systems, Inc. and Portola Land Co.
                dated September 1997.(5)

    10.21       Consulting Agreement dated January 14, 1998 between the
                Registrant and Keith Bostian, Ph.D.(6)

    10.22       Lease Agreement between the Registrant and Portola Land Co.
                dated May 11, 1998.(7)

    10.23       Promissory Note between the Registrant and Heller Financial
                Leasing, Inc. dated December 22, 1998.(9)

    10.24       Security Agreement between the Registrant and Heller Financial
                Leasing, Inc. dated December 22, 1998.(9)

    10.25+      Amendment of Research and License Agreement between the
                Registrant and Ortho Pharmaceutical Corporation and the R.W.
                Johnson Pharmaceutical Research Institute dated October 23,
                1998.(9)

    10.26+      Collaborative Research Agreement between the Registrant and
                Pfizer Inc dated January 13, 1999.(9)

    10.27+      License and Royalty Agreement between the Registrant and Pfizer
                Inc dated January 13, 1999.(9)

    10.28       Preferred Shares Rights Agreement dated February 2, 1999 between
                the Registrant and Chase Mellon Shareholder Services, L.L.C.(8)

    10.29+      Amendment to Joint Research Agreement between the Registrant and
                Daiichi Pharmaceutical Co., Ltd. dated February 4, 2000.(10)

    10.30+      Amendment to Collaborative Research Agreement between the
                Registrant and Pfizer Inc. dated March 1, 2000.(10)

    10.31+      Research Agreement by and between the Registrant and Daiichi
                Pharmaceutical Co., Ltd. dated May 8, 2000.(11)

    10.32+      Amendment of Research and License Agreement between the
                Registrant and Ortho Pharmaceutical Corporation and the R.W.
                Johnson Pharmaceutical Research Institute dated December 19,
                2000.

    23.1        Consent of Ernst & Young LLP, Independent Auditors.

    24.1        Power of Attorney (see page 40).

</TABLE>

----------

(1)   Incorporated by reference to the same-numbered exhibit in Registrant's
      Registration Statement on Form S-1, registration number 333-2400, filed
      with the Securities and Exchange Commission and dated May 14, 1996.

(2)   Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 8-K filed with the Securities and Exchange Commission and dated
      January 29, 1998.

(3)   Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 10-Q for the period ended September 30, 1996, filed with the
      Securities and Exchange Commission and dated November 8, 1996.

(4)   Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 10-Q for the period ended June 30, 1997, filed with the Securities
      and Exchange Commission and dated August 14, 1997.

(5)   Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 10-Q for the period ended September 30, 1997, filed with the
      Securities and Exchange Commission and dated November 14, 1997.



                                       38
<PAGE>   39

(6)   Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 10-K for the fiscal year ended December 31, 1997, filed with the
      Securities and Exchange Commission and dated March 31, 1998.

(7)   Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 10-Q for the period ended June 30, 1998, filed with the Securities
      and Exchange Commission and dated August 14, 1998.

(8)   Incorporated by reference to Exhibit 1 in Registrant's Form 8-A filed with
      the Securities and Exchange Commission and dated February 4, 1999.

(9)   Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 10-K for the fiscal year ended December 31, 1998, filed with the
      Securities and Exchange Commission and dated March 31, 1999.

(10)  Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 10-Q for the period ended March 31, 2000, filed with the
      Securities and Exchange Commission and dated June 19, 2000.

(11)  Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 10-Q for the period ended June 30, 2000, filed with the
      Securities and Exchange Commission and dated August 14, 2000.

----------

*   Confidential Treatment granted

+   Confidential Treatment requested

(b) Reports on Form 8-K:

    No reports on Form 8-K were filed during the quarter ended December 31,
2000.

(c) See part a(3) above.

(d) All schedules have been omitted because the information required to be set
    forth therein is not applicable.



                                       39
<PAGE>   40

                                   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.


                                 MICROCIDE PHARMACEUTICALS, INC.
                                 a Delaware Corporation


                                 By: /s/   JAMES E. RURKA
                                     -------------------------------------------
                                           James E. Rurka
                                           President and Chief Executive Officer

                                 Date:     March 1, 2001


                                POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James E. Rurka, attorney-in-fact, with the power
of substitution, for him in any and all capacities, to sign any 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 said attorney-in-fact, or his
substitute or substitutes, may cause to be done by virtue hereof.

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                  SIGNATURE                                   TITLE                                DATE
                  ---------                                   -----                                ----
<S>                                            <C>                                          <C>
/s/            JAMES E. RURKA                  President, Chief Executive Officer and       March 1, 2001
--------------------------------------------   Director (Principal Executive Officer)
                James E. Rurka

/s/           DONALD D. HUFFMAN                Chief Financial Officer (Principal           March 1, 2001
--------------------------------------------   Financial Officer)
              Donald D. Huffman

/s/            JOHN P. WALKER                  Chairman of the Board of Directors           March 1, 2001
--------------------------------------------
               John P. Walker

/s/        KEITH A. BOSTIAN, Ph.D.             Director                                     March 1, 2001
--------------------------------------------
           Keith A. Bostian, Ph.D.

/s/        DANIEL L. KISNER, M.D.              Director                                     March 1, 2001
--------------------------------------------
           Daniel L. Kisner, M.D.

/s/      HUGH Y. RIENHOFF, JR., M.D.           Director                                     March 1, 2001
--------------------------------------------
         Hugh Y. Rienhoff, Jr., M.D.

/s/          DAVID SCHNELL, M.D.               Director                                     March 1, 2001
--------------------------------------------
             David Schnell, M.D.

/s/           MARK B. SKALETSKY                Director                                     March 1, 2001
--------------------------------------------
              Mark B. Skaletsky
</TABLE>



                                       40
<PAGE>   41
                         MICROCIDE PHARMACEUTICALS, INC.

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S>                                                                          <C>
Report of Ernst & Young LLP, Independent Auditors.........................   F-2

Financial Statements:
      Balance Sheets......................................................   F-3
      Statements of Operations............................................   F-4
      Statement of Stockholders' Equity...................................   F-5
      Statements of Cash Flows............................................   F-6
      Notes to Financial Statements.......................................   F-7
</TABLE>



                                      F-1
<PAGE>   42

                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Microcide Pharmaceuticals, Inc.

      We have audited the accompanying balance sheets of Microcide
Pharmaceuticals, Inc. as of December 31, 2000 and 1999, and the related
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 of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Microcide Pharmaceuticals,
Inc. at December 31, 2000 and 1999 and the 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.

      As discussed in Note 1 to the Financial Statements, in 2000, the Company
changed its method of accounting for revenue recognition.

                                          /s/ ERNST & YOUNG LLP

Palo Alto, California
February 2, 2001



                                      F-2
<PAGE>   43

                         MICROCIDE PHARMACEUTICALS, INC.

                                 BALANCE SHEETS
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                             -----------------------
                                                               2000           1999
                                                             --------       --------
<S>                                                          <C>            <C>
ASSETS
Current assets:
   Cash and cash equivalents ..........................      $  3,744       $  5,660
   Short-term investments .............................         8,845         19,208
   Trade and other receivables ........................         7,575            139
   Prepaid expenses and other current assets ..........           321            304
                                                             --------       --------
Total current assets ..................................        20,485         25,311

Property and equipment, net ...........................         5,856          7,592
Other assets ..........................................           857            928
                                                             --------       --------
                                                             $ 27,198       $ 33,831
                                                             ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable ...................................      $    566       $    358
   Accrued compensation ...............................           879            984
   Current portion of notes payable ...................         1,597          1,440
   Deferred revenue ...................................         7,323            387
   Other accrued liabilities ..........................           906            695
                                                             --------       --------
Total current liabilities .............................        11,271          3,864

Long-term portion of notes payable ....................           309          1,907
Accrued rent ..........................................           294            257
Stockholders' equity:
   Preferred stock, par value $0.001; 5,000,000
      shares authorized; no shares issued and
      outstanding .....................................            --             --
   Common stock, par value $0.001; 50,000,000
      shares authorized, 11,410,847 and 11,146,789
      shares issued and outstanding at
      December 31, 2000 and 1999, respectively ........        68,483         67,112
   Accumulated deficit ................................       (53,188)       (39,243)
   Accumulated other comprehensive gain (loss)  .......            29            (66)
                                                             --------       --------
Total stockholders' equity ............................        15,324         27,803
                                                             --------       --------
                                                             $ 27,198       $ 33,831
                                                             ========       ========
</TABLE>

                             See accompanying notes.



                                      F-3
<PAGE>   44
                         MICROCIDE PHARMACEUTICALS, INC.

                            STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                  YEARS ENDED DECEMBER 31,
                                                                            ------------------------------------
                                                                              2000          1999          1998
                                                                            --------      --------      --------
<S>                                                                         <C>           <C>           <C>
Revenues:
   Research revenues ..................................................     $  5,684      $  7,113      $ 11,141
   Milestone revenues .................................................           58         2,000            --
   Other revenues .....................................................          122           335            40
                                                                            --------      --------      --------
Total revenues ........................................................        5,864         9,448        11,181

Operating expenses:
   Research and development ...........................................       16,082        17,288        18,806
   General and administrative .........................................        4,353         3,956         3,971
                                                                            --------      --------      --------
Total operating expenses ..............................................       20,435        21,244        22,777
                                                                            --------      --------      --------

Loss from operations ..................................................      (14,571)      (11,796)      (11,596)

Interest and other income .............................................        1,110         1,395         1,870
Interest expense ......................................................         (251)         (345)          (32)
                                                                            --------      --------      --------
Net loss before cumulative effect of change in accounting principle ...      (13,712)      (10,746)       (9,758)

Cumulative effect of change in accounting principle ...................         (233)           --            --
                                                                            --------      --------      --------
Net loss ..............................................................     $(13,945)     $(10,746)     $ (9,758)
                                                                            ========      ========      ========

Basic and diluted net loss per share:
Net loss before cumulative effect of change in accounting principle ...     $  (1.21)     $  (0.97)     $  (0.89)
Cumulative effect of change in accounting principle ...................        (0.02)           --            --
                                                                            --------      --------      --------
Net loss per share ....................................................     $  (1.23)     $  (0.97)     $  (0.89)
                                                                            ========      ========      ========

Pro forma amounts assuming accounting change was applied retroactively:
   Net loss ...........................................................     $(13,945)     $ (9,983)     $ (8,808)
                                                                            ========      ========      ========
   Basic and diluted net loss per share ...............................     $  (1.23)     $  (0.90)     $  (0.80)
                                                                            ========      ========      ========

Shares used in computing basic and diluted net loss per share .........       11,320        11,085        10,962
</TABLE>

                             See accompanying notes.



                                      F-4
<PAGE>   45

                         MICROCIDE PHARMACEUTICALS, INC.

                        STATEMENT OF STOCKHOLDERS' EQUITY

                   FOR THE THREE YEARS ENDED DECEMBER 31, 2000
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                        ACCUMULATED
                                                                                           OTHER          TOTAL
                                                COMMON       DEFERRED     ACCUMULATED  COMPREHENSIVE  STOCKHOLDERS'
                                                 STOCK     COMPENSATION     DEFICIT    INCOME (LOSS)     EQUITY
                                               --------    ------------   -----------  -------------  -------------
<S>                                            <C>         <C>            <C>          <C>            <C>
Balances at December 31, 1997 ............     $ 66,930      $ (1,251)     $(18,739)     $    (44)     $ 46,896
Net loss .................................           --            --        (9,758)           --        (9,758)
Net unrealized gain on securities
   available-for-sale ....................           --            --            --            41            41
                                                                                                       --------
Comprehensive loss .......................                                                               (9,717)
Issuance of 38,773 shares of common
   stock under the employee stock
   purchase plan .........................          202            --            --            --           202
Issuance of 71,613 shares of common
   stock due to options exercised by
   employees and consultants .............           34            --            --            --            34
Reversal of deferred compensation
   for terminated employees ..............         (264)          264            --            --            --
Amortization of deferred compensation ....           --           523            --            --           523
                                               --------      --------      --------      --------      --------
Balances at December 31, 1998 ............       66,902          (464)      (28,497)           (3)       37,938
Net loss .................................           --            --       (10,746)           --       (10,746)
Net unrealized loss on securities
   available-for-sale ....................           --            --            --           (63)          (63)
                                                                                                       --------
Comprehensive loss .......................                                                              (10,809)
Issuance of 48,406 shares of
   common stock under the employee
   stock purchase plan ...................          160            --            --            --           160
Issuance of 29,679 shares of common
   stock due to options exercised by
   employees and consultants .............           50            --            --            --            50
Issuance of 51,275 shares of common
   stock under vendor warrant
   agreements ............................           --            --            --            --            --
Amortization of deferred compensation ....           --           464            --            --           464
                                               --------      --------      --------      --------      --------
Balances at December 31, 1999 ............       67,112            --       (39,243)          (66)       27,803
Net loss .................................           --            --       (13,945)           --       (13,945)
Net unrealized gain on securities
   available-for-sale ....................           --            --            --            95            95
                                                                                                       --------
Comprehensive loss .......................                                                              (13,850)
Issuance of 26,191 shares of
   common stock under the employee
   stock purchase plan ...................          192            --            --            --           192
Issuance of 237,867 shares of common
   stock due to options exercised by
   employees and consultants .............        1,179            --            --            --         1,179
                                               --------      --------      --------      --------      --------
Balances at December 31, 2000 ............     $ 68,483      $     --      $(53,188)     $     29      $ 15,324
                                               ========      ========      ========      ========      ========
</TABLE>

                             See accompanying notes.



                                      F-5
<PAGE>   46

                         MICROCIDE PHARMACEUTICALS, INC.

                            STATEMENTS OF CASH FLOWS
                                 (In thousands)

                Increase (Decrease) In Cash and Cash Equivalents

<TABLE>
<CAPTION>
                                                                                 YEARS ENDED DECEMBER 31,
                                                                         --------------------------------------
                                                                           2000           1999           1998
                                                                         --------       --------       --------
<S>                                                                      <C>            <C>            <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss ..........................................................      $(13,945)      $(10,746)      $ (9,758)
Adjustments to reconcile net loss to net cash used in
   operating activities:
   Depreciation and amortization ..................................         2,515          2,636          2,874
   Amortization of deferred compensation ..........................            --            464            523
   Accrued rent ...................................................            37            130            (99)
   Changes in assets and liabilities:
      Trade and other receivables .................................        (7,436)           (28)           915
      Prepaid expenses and other current assets ...................           (17)           175           (221)
      Other assets ................................................            71             25           (382)
      Accounts payable ............................................           208           (284)        (1,018)
      Accrued compensation and other liabilities ..................           106            237             64
      Deferred revenue ............................................         6,936             87           (486)
                                                                         --------       --------       --------
Net cash used in operating activities .............................       (11,525)        (7,304)        (7,588)
                                                                         --------       --------       --------

CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of short-term investments ................................        (7,542)       (32,280)       (85,790)
Maturities of short-term investments ..............................        18,000         38,407         89,057
Capital expenditures ..............................................          (779)          (473)        (3,089)
                                                                         --------       --------       --------
Net cash provided by investing activities .........................         9,679          5,654            178
                                                                         --------       --------       --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations ...................            (4)           (41)          (795)
Principal payments on equipment financing..........................        (1,437)        (1,088)            --
Proceeds from debt financing ......................................            --            435          4,000
Proceeds from issuances of common stock............................         1,371            210            236
                                                                         --------       --------       --------
Net cash provided by (used in) financing activities ...............           (70)          (484)         3,441
                                                                         --------       --------       --------

Net decrease in cash and cash equivalents .........................        (1,916)        (2,134)        (3,969)
Cash and cash equivalents at beginning of period ..................         5,660          7,794         11,763
                                                                         --------       --------       --------
Cash and cash equivalents at end of period ........................      $  3,744       $  5,660       $  7,794
                                                                         ========       ========       ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid .....................................................      $    251       $    345       $     32
                                                                         ========       ========       ========
</TABLE>

                             See accompanying notes.



                                      F-6
<PAGE>   47
                         MICROCIDE PHARMACEUTICALS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 2000

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Organization and Basis of Presentation

      Microcide Pharmaceuticals, Inc. (the Company) is a biopharmaceutical
company whose mission is to discover, develop and commercialize novel
antimicrobials for the improved treatment of serious bacterial, fungal and viral
infections. The Company's three discovery research platforms address the growing
problems of antibiotic resistance and the need for improved antifungal and
antiviral therapeutics. The Company's Cephalosporin Antibiotics and Efflux Pump
Inhibition platforms focus on developing novel antibiotics and antibiotic
potentiators (efflux inhibitors) to directly address existing bacterial and
fungal resistance problems. Microcide's Microbial Genomics platform utilizes
proprietary bacterial, fungal and viral genetics and genomics tools to discover
entirely new classes of antimicrobial agents.

      The Company anticipates working on a number of long-term development
projects which involve experimental and unproven technology. The projects
require many years and substantial expenditures to complete, and may ultimately
be unsuccessful. Therefore, the Company will need to obtain additional funds
from outside sources to continue its research and development activities, fund
operating expenses, pursue regulatory approvals and build production, sales and
marketing capabilities, as necessary.

      In January 1998, Microcide formed Iconix Pharmaceuticals, Inc. (Iconix), a
biotechnology company which seeks to develop surrogate genetics and chemical
informatics into a technology platform with broad applicability to multiple
human diseases. At December 31, 2000, Microcide holds approximately 32% of
Iconix's outstanding equity, or 29% on a fully diluted basis. Microcide accounts
for its investment using the equity method of accounting and since Microcide's
investment has a zero book basis, the losses of Iconix do not impact Microcide's
statement of operations.

      Use of Estimates

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

      Cash, Cash Equivalents and Investments

      The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. The Company
maintains deposits with financial institutions in the United States and invests
its excess cash in commercial paper and corporate debt securities which bear
minimal risk.

      Management determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
At December 31, 2000 and 1999, respectively, all securities were designated as
available-for-sale. These securities are stated at fair value based upon market
quotes, with the unrealized gains and losses reported in stockholders' equity.
Amortization of premiums and discounts are included in interest income. Realized
gains and losses and declines in value judged to be other than temporary, if
any, are included in other income. The cost of securities sold is based on the
specific identification method.



                                      F-7
<PAGE>   48

      Property and Equipment

      Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets,
which varies between one to seven years. Equipment under capital lease and
leasehold improvements are amortized using the straight-line method over the
estimated useful lives of the assets or the term of the lease, whichever is
shorter.

      Revenue Recognition

      Revenues related to research contracts are recognized over the related
funding periods for each contract. The Company is required to perform research
activities as specified in each respective agreement on a best efforts basis and
the Company is reimbursed based on the costs associated with the number of
full-time equivalent employees working on each specific contract, which is
generally recognized on a ratable basis as the research services are performed.
Deferred revenue may result when the Company does not incur the required level
of effort during a specific period in comparison to funds received under the
respective contracts. Upfront, non-refundable license payments received at the
inception of a collaboration agreement are recognized over the expected research
term on a ratable basis. Milestone payments are recognized pursuant to
collaborative agreements upon the achievement of specified milestones, such as
selection of candidates for drug development following a screening effort, the
commencement of clinical trials or receipt of regulatory approvals. The Company
reports other revenues which principally related to the sale of molecular
diversity samples to pharmaceutical or biotechnology companies for use in their
drug discovery programs.

      The Company previously recognized non-refundable upfront license fees as
revenue when received and when all contractual obligations of the Company
relating to the fees had been fulfilled. Effective January 1, 2000, the Company
changed its method of accounting for non-refundable license fees to recognize
such fees over the term of the related research collaboration agreement. The
Company believes the change in accounting principle is preferable based on
guidance provided in SEC Staff Accounting Bulletin No. 101 -- Revenue
Recognition in Financial Statements. The $233,000 cumulative effect of the
change in accounting principle, calculated as of January 1, 2000, was reported
as a charge in the year ended December 31, 2000. The cumulative effect was
initially recorded as deferred revenue that will be recognized as revenue over
the remaining contractual term of the collaborative research and development
agreement. During the year ended December 31, 2000, Microcide recognized
$200,000 in revenue that was included in the cumulative effect adjustment as of
January 1, 2000, which had the effect of decreasing the net loss by the same
amount. For the year ended December 31, 2000, the impact of the change in
accounting was to increase the loss before cumulative effect of the accounting
change by $3.3 million, or $0.29 per share, comprised of $3.5 million of upfront
license fees which would have been recognized as revenue upon receipt under the
Company's prior accounting policy, offset by the $200,000 recognized from the
cumulative effect adjustment. The remainder of the deferred revenue related to
the cumulative effect will be recognized as revenue in the quarter ended March
31, 2001. The pro forma amounts presented in the statement of operations were
calculated assuming the accounting change was made retroactive to prior periods.

      Stock-Based Compensation

      In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations, and to adopt the "disclosure only" alternative described in
SFAS 123. Under APB 25, if the exercise price of the Company's employee stock
options equals or exceeds the fair market value on the date of the grant or the
fair value of the underlying stock on the date of the grant as determined by the
Company's Board of Directors, no compensation expense is recognized.

      Net Loss Per Share

      The Company's basic and diluted net loss per share amounts have been
computed using the weighted-average number of shares of common stock outstanding
during the period. Had the Company been in a net income position, diluted
earnings per share for 2000, 1999 and 1998 would have included an additional
455,000, 226,000, and 349,000 shares, respectively, related to outstanding
options and warrants not included above (as determined using the treasury stock
method).

      Comprehensive Loss

      In accordance with Statement of Financial Accounting Standard No. 130,
(SFAS 130), "Reporting Comprehensive Income," the Company presents comprehensive
income (loss) and its components in the Statement of Stockholders' Equity.



                                      F-8
<PAGE>   49

      Segment Information

      Effective January 1, 1998, the Company adopted Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information" (Statement
131). Statement 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. As the Company operates in a single segment, the adoption
of Statement 131 had no significant effect on results of operations or the
financial position of the Company.

      Other Recent Accounting Pronouncements

      In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS
133). The Company is required to adopt SFAS 133 for the year ending December 31,
2001. SFAS 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments. As Microcide
does not currently engage in hedging activities or hold derivatives, the
adoption of SFAS 133 is expected to have no material impact on Microcide's
financial condition and results of operations.

      Reclassifications

      Certain reclassifications of prior year amounts have been made to conform
to current year presentation.

2.    COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS

      Johnson & Johnson

      In October 1995, the Company entered into a research and development
agreement with Ortho-McNeil Pharmaceuticals and the R.W. Johnson Pharmaceutical
Research Institute, affiliates of Johnson & Johnson collectively referred to as
"J&J", to discover and develop novel beta-lactam antibiotics, antibiotic
potentiators and inhibitors of bacterial signal transduction targeted at
problematic Gram-positive bacteria, including staphylococci and enterococci. The
agreement provided for certain revenue payments, including payments for research
and development costs for three years and for reaching certain research and
development goals. J&J subsequently exercised its option to extend the research
collaboration with respect to beta-lactam antibiotics for an additional year,
which concluded at the end of 1999. J&J received exclusive worldwide rights to
products developed during the collaboration in the field of use as defined in
the agreement. The development, manufacturing, marketing and sale of drugs
resulting from the collaboration will be conducted by J&J, provided that the
Company has the right to undertake certain co-promotion activities in North
America, subject to J&J approval. Should the development efforts result in a
marketable product, the Company will receive royalty payments based on product
sales. In connection with the agreement, J&J made a nonrefundable $3,000,000
up-front license payment to the Company, and an affiliate of J&J made an equity
investment of $5,000,000. In November 1999, J&J made a $2,000,000 milestone
payment in conjunction with J&J's commencement of cephalosporin Phase I clinical
trials. In December 2000, the Company extended the original agreement with J&J
one year to include the development of a new chemical series of cephalosporins
with similar spectrum and potency, and with the potential for oral
bioavailability. Under the terms of the agreement, J&J was obligated to pay a
non-refundable up-front license payment of $3,000,000 and $2,125,000 in research
support for the additional one-year term. The Company received these payments
during the first week of January 2001. Total revenue recognized under the
agreement for the years ended December 31, 2000, 1999 and 1998 was nil,
$3,384,000, and $3,206,000, respectively.

      In December 2000, the Company signed a new research and license agreement
with RWJPRI, an affiliate of J&J. Under the terms of the agreement, Microcide
will make available to RWJPRI its Natural Products Extract collection for
screening by RWJPRI in their proprietary assays. The agreement provides for
certain revenue payments, including an up-front license fee, a library access
fee and additional research support payments for the two-year term of the
agreement.



                                      F-9
<PAGE>   50

      Daiichi Pharmaceutical Co. Ltd.

      In November 1995, the Company entered into a research and development
agreement with Daiichi Pharmaceutical Co. Ltd. (Daiichi) to discover and develop
antibiotics and antibiotic potentiators, acting through inhibition of efflux
pumps, primarily targeted at Pseudomonas. The agreement provided for certain
revenue payments, including payments for research and development costs for two
years and nine months commencing July 1, 1995 and for reaching certain research
and development goals. Daiichi subsequently exercised its option to extend the
research collaboration for an additional year, which concluded at the end of the
first quarter of 1999. In February 2000, the agreement was amended to focus on
advancing a particular class of efflux pump inhibitors for pre-clinical
development. In May 2000, the Company and Daiichi agreed to continue joint
research in this area for an additional year during which Daiichi will provide
research support payments, with the goal of selecting compounds for pre-clinical
development. The development, manufacturing and sale of drugs resulting from the
collaboration would be conducted by Daiichi, subject to the Company's right to
co-promote such drugs in North America. If development efforts result in a
marketable product, the Company would receive royalty payments based on product
sales. Total research revenue recognized under the agreements for the years
ended December 31, 2000, 1999 and 1998 was $1,496,000, $875,000, and $3,749,000,
respectively.

      Pfizer Inc.

      In March 1996, the Company entered into a research and development
agreement with Pfizer Inc. (Pfizer) to implement genetics-based screening
technology to identify and subsequently develop antibacterial products. The
agreement provides for certain revenue payments, including payments for research
and development costs for five years and for reaching certain research and
development goals. In connection with the agreement, Pfizer made a $1,000,000
up-front license payment and a $5,000,000 equity investment. In March 2000,
Pfizer and the Company amended the agreement to shift research focus from
optimization of a lead compound series identified during the screening phase to
a biology-focused investigation of the essential gene targets. In conjunction
with this shift in focus, funding for the fifth year was at a reduced amount.
This agreement concludes at the end of February 2001. Revenue recognized under
the agreement for the years ended December 31, 2000, 1999 and 1998 was
$2,650,000, $4,200,000, and $4,186,000, respectively.

      In January 1999, the Company expanded its existing antibiotic research
collaboration with Pfizer to include a focused effort on new genetic targets for
discovery of novel approaches to the control of bacterial infections important
in animal health. The agreement provides for certain revenue payments, including
payments for research and development costs for three years and for reaching
certain research and development goals. Pfizer received exclusive worldwide
rights to products developed during the collaboration. The development,
manufacture and sale of products resulting from the collaboration will be
conducted by Pfizer, subject to the Company's right to co-promote such products
in North America. Should the development efforts result in a marketable product,
the Company will receive royalty payments based on product sales. Revenue
recognized under the agreement for the years ended December 31, 2000 and 1999
was $630,000 and $604,000, respectively.

      Schering-Plough Animal Health

      In October 2000, the Company signed a research and license agreement with
Schering-Plough Animal Health (SPAH) for joint research to discover and develop
improved veterinary antimicrobial drugs using Microcide's technology and
knowledge of bacterial efflux pumps and other resistance mechanisms that limit
drug effectiveness. The agreement provides for an up-front license fee, payments
for research and development costs for two years and milestone payments for
reaching certain research and development goals. SPAH will have worldwide rights
to products resulting from the collaboration. Revenue recognized under the
agreement for the year ended December 31, 2000 was $671,000.

      Costs related to research revenues under the above agreements for the
years ended December 31, 2000, 1999 and 1998 approximated the related research
revenue recognized (exclusive of license and milestone fees).



                                      F-10
<PAGE>   51

      Iconix Pharmaceuticals, Inc.

      In January 1998, Microcide and Iconix entered into several collaborative
agreements. Through the Core Technology Development and License Agreement,
Microcide and Iconix have worked together over the three-year term to jointly
develop and utilize new technology in the areas of molecular diversity,
high-throughput screening, computational sciences and genome sciences. For the
years ended December 31, 2000, 1999 and 1998, projects jointly undertaken
pursuant to this agreement resulted in a cost to Microcide of approximately
$238,000, $515,000 and $274,000, respectively, reduced by $4,000, $130,000 and
nil for research services to Iconix, respectively. Through the Antiviral and
Surrogate Genetics Research Collaboration, Iconix has applied its Surrogate
Genetics technology to a number of viral disease targets in the search for novel
inhibitors. Microcide incurred research expenses pursuant to the antiviral
collaboration of approximately $1,528,000, $1,873,000 and $823,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. Microcide is entitled to
worldwide development, manufacturing and marketing rights to antiviral products
which may emerge from the collaboration and, if specified research and
development milestones are achieved, will be obligated to pay Iconix milestone
payments of up to $11.0 million for the first product and up to $10.5 million
for each subsequent product, in addition to royalties on worldwide sales.
Pursuant to the Support Services Agreement, Microcide provided Iconix with
facilities and various business support services for which Microcide was
reimbursed. For the years ended December 31, 2000, 1999 and 1998, Microcide
received approximately $1,067,000, $1,108,000 and $763,000, respectively, from
Iconix pursuant to the Support Services Agreement which it treated as a
reduction of expenses. Microcide and Iconix did not extend the Core Technology
Development and License Agreement beyond January 14, 2001, the scheduled
conclusion, but Microcide will continue to provide Iconix with facilities and
various business support services under an amended Support Services Agreement,
which is currently under negotiation, that provides for reimbursement to the
Company.

3.    PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                                                DECEMBER 31,
                                                                                          -----------------------
                                                                                            2000           1999
                                                                                          --------       --------
                                                                                               (In thousands)
<S>                                                                                       <C>            <C>
Laboratory and office equipment .....................................................     $ 10,526       $  9,919
Leasehold improvements ..............................................................       10,071          9,899
                                                                                          --------       --------
                                                                                            20,597         19,818
Less accumulated depreciation and amortization ......................................      (14,741)       (12,226)
                                                                                          --------       --------
Property and equipment, net .........................................................     $  5,856       $  7,592
                                                                                          ========       ========
</TABLE>

      Properties leased under capital leases are included above with a cost of
approximately $20,000 and with accumulated amortization of approximately $9,000
and $5,000 at December 31, 2000 and 1999, respectively. Under an equipment
financing arrangement with a lender, a security agreement was executed in
December 1998, granting a lien and security interest to specific property of the
Company (see Note 5).

4.    INVESTMENTS

The following is a summary of available-for-sale securities as of:

<TABLE>
<CAPTION>
                                                                        AVAILABLE-FOR-SALE SECURITIES
                                                            -----------------------------------------------------
                                                                             GROSS          GROSS       ESTIMATED
                                                            AMORTIZED     UNREALIZED     UNREALIZED       FAIR
                                                               COST          GAINS         LOSSES         VALUE
                                                            ---------     ----------     ----------     ---------
                                                                               (In thousands)
<S>                                                          <C>           <C>            <C>            <C>
December 31, 2000
Cash equivalents and short-term investments:
Money market funds ....................................      $  2,654      $     --       $     --       $  2,654
Corporate debt securities .............................         8,816            29             --          8,845
                                                             --------      --------       --------       --------
                                                             $ 11,470      $     29       $     --       $ 11,499
                                                             ========      ========       ========       ========
December 31, 1999
Cash equivalents and short-term investments:
Money market funds ....................................      $  1,333      $     --       $     --       $  1,333
Corporate debt securities .............................        19,271             3            (66)        19,208
                                                             --------      --------       --------       --------
                                                             $ 20,604      $      3       $    (66)      $ 20,541
                                                             ========      ========       ========       ========
</TABLE>



                                      F-11
<PAGE>   52

      Maturities of securities available-for-sale were as follows:

<TABLE>
<CAPTION>
                                               AS OF DECEMBER 31,
                                ------------------------------------------------
                                         2000                     1999
                                ----------------------    ----------------------
                                             ESTIMATED                 ESTIMATED
                                AMORTIZED      FAIR       AMORTIZED      FAIR
                                   COST        VALUE         COST        VALUE
                                ---------    ---------    ---------    ---------
                                                 (In thousands)
<S>                              <C>          <C>          <C>          <C>
Due in less than 1 year ...      $ 9,681      $ 9,682      $18,591      $18,545
Due in 1 to 2 years .......        1,789        1,817        2,013        1,996
                                 -------      -------      -------      -------
                                 $11,470      $11,499      $20,604      $20,541
                                 =======      =======      =======      =======
</TABLE>

5.    LEASES AND DEBT FINANCING

      In December 1998, Microcide borrowed $4.0 million under an equipment
financing arrangement whose terms include a fixed interest rate of 9.55% per
annum with a repayment term of 36 months. In December 1999, the Company borrowed
an additional $435,000 at a fixed interest rate of 10.99% with a repayment term
of 36 months. This loan is collaterized by property and equipment.

      The Company leases its office and research facilities under various
operating leases whose terms expire in 2005. The Company has options to extend
its facilities leases for an additional five years. Future principal payments on
equipment loans and minimum lease payments under noncancelable leases are as
follows:

<TABLE>
<CAPTION>
                                                                 EQUIPMENT     OPERATING
                                                                 FINANCING       LEASES
                                                                 ---------     ---------
                                                                      (IN THOUSANDS)
<S>                                                               <C>           <C>
Year ended December 31,
2001 .......................................................      $ 1,597       $ 2,064
2002 .......................................................          291         2,142
2003 .......................................................           18         2,221
2004 .......................................................           --         2,299
2005 .......................................................           --         1,770
                                                                  -------       -------
Total minimum principal and lease payments, respectively ...        1,906       $10,496
                                                                                =======
Less current portion of principal payments .................       (1,597)
                                                                  -------
Noncurrent portion of principal payments ...................      $   309
                                                                  =======
</TABLE>

Rent expense for operating leases was approximately $1,329,000, $1,149,000, and
$1,215,000; net of rental income of $478,000, $445,000 and $422,000 in 2000,
1999 and 1998, respectively.

6.    STOCKHOLDERS' EQUITY

      Preferred Stock

      The Company is authorized to issue 5,000,000 shares of preferred stock.
The Company's Board of Directors may set rights and privileges of any preferred
stock issued.

      Preferred Share Purchase Rights

      In February 1999, the Board of Directors approved the adoption of a
Preferred Share Purchase Rights Plan under which all stockholders of record as
of February 2, 1999, received rights to purchase shares of a new series of
Preferred Stock. The rights were distributed as a non-taxable dividend and will
expire February 2, 2009. The rights are exercisable only if a person or a group
acquires 20% or more of the Company's Common Stock or announces a tender offer
for 20% or more of the Company's Common Stock. If a person acquires 20% or more
of the Company's Common Stock, all rights holders except that person will be
entitled to acquire the Company's Common Stock at a discount. The effect will be
to discourage acquisitions of more than 20% of the Company's Common Stock
without negotiations with the Board.



                                      F-12
<PAGE>   53

      1996 Stock Purchase Plan

      During 1996, the shareholders ratified the adoption of the 1996 Employee
Stock Purchase Plan (Purchase Plan). The Company has reserved 220,000 shares of
common stock for issuance to employees. Under the Purchase Plan, employees may
purchase common stock through payroll deductions in semi-annual offerings at a
price equal to the lower of 85% of the closing price on the applicable offering
commencement date or 85% of the closing price on the applicable offering
termination date. At December 31, 2000, 73,476 shares of stock remained
available for future purchase under the Purchase Plan.

      1996 Director Option Plan

      During 1996, the shareholders approved the 1996 Directors' Stock Option
Plan (Director Plan). The Company has reserved 150,000 shares of common stock
for issuance to non-employee directors pursuant to options granted under this
Plan. The Director Plan provides for the automatic grant of an option (First
Option) to purchase 16,000 shares of Common Stock to each non-employee director
provided that such director was not an employee director of the Company
immediately prior to becoming a non-employee director. Each non-employee
director, whether or not eligible to receive a First Option, is automatically
granted an option to purchase 4,000 shares of Common Stock (Subsequent Option)
each year on the date of the Company's annual stockholders meeting, if on such
date he or she has served on the Board for at least six months. First Options
and Subsequent Options have terms of ten years. First Options vest and become
exercisable as to 1/6th of the shares subject to the option six months after the
date of grant, and as to 1/36th of the shares each month thereafter. Subsequent
Options vest as to 1/12th of the shares subject to the option each month after
the date of grant. The exercise prices of First Options and Subsequent Options
are 100% of the fair market value per share of the Common Stock, generally
determined with reference to the closing price of the Common Stock as reported
on the Nasdaq National Market on the date of grant.

      1993 Amended Incentive Stock Plan

      At the Annual Shareholders' Meeting held on June 15, 2000, the
shareholders approved the amendment of the 1993 Amended Incentive Stock Plan
(the Plan), thereby increasing the number of shares of common stock reserved for
issuance by 450,000. The total number of shares of common stock now reserved for
issuance under the Plan is 3,030,000.

      Under the Plan, options and stock purchase rights may be granted by the
board of directors to employees and consultants. Options granted may be either
incentive stock options or nonstatutory stock options. Incentive stock options
may be granted to employees with exercise prices of no less than the fair value
and nonstatutory options may be granted to employees or consultants at exercise
prices of no less than 85% of the fair value of the common stock on the grant
date as determined by the board of directors. Initial options, usually granted
with an initial vesting date of the employee's date of hire, generally vest at
the rate of 25% at the end of the first year with the remaining balance vesting
ratably over the next three years. Stock award options are granted as determined
by the board of directors, with a vesting schedule in which 1/48 of the total
number of shares granted becomes exercisable one month from the date of grant
and each subsequent 1/48 becomes exercisable each full month thereafter.



                                      F-13
<PAGE>   54

      Combined activity under the Director Option Plan and Amended Incentive
Stock Option Plan was as follows:

<TABLE>
<CAPTION>
                                        NUMBER OF     RANGE OF EXERCISE   WEIGHTED-AVERAGE
                                          SHARES           PRICES          EXERCISE PRICE
                                       -----------    -----------------   ----------------
<S>                                    <C>            <C>                 <C>
Balance at December 31, 1997 ....        1,105,586       $0.20-$14.00         $ 7.50
   Options granted ..............          683,845       $3.81-$12.12         $ 6.58
   Options exercised ............          (71,613)      $0.20-$2.50          $ 0.42
   Options canceled .............         (286,472)      $0.38-$12.50         $10.99
                                       -----------
Balance at December 31, 1998 ....        1,431,346       $0.20-$14.00         $ 6.71
   Options granted ..............          502,853       $3.94-$6.97          $ 5.32
   Options exercised ............          (29,679)      $0.20-$6.25          $ 1.70
   Options canceled .............         (282,333)      $0.38-$12.25         $ 8.11
                                       -----------
Balance at December 31, 1999 ....        1,622,187       $0.20-$14.00         $ 6.13
   Options granted ..............          556,069       $4.94-$22.00         $ 9.63
   Options exercised ............         (237,867)      $0.20-$12.50         $ 4.95
   Options canceled .............         (160,194)      $2.50-$16.88         $ 6.90
                                       -----------
Balance at December 31, 2000 ....        1,780,195       $0.20-$22.00         $ 7.31
                                       ===========
</TABLE>

      Under the Amended Incentive Stock Option Plan, options to purchase 781,331
and 729,121 shares of common stock were exercisable at December 31, 2000 and
1999, respectively. At December 31, 2000, 594,788 shares remained available for
grant under the Amended Incentive Stock Option Plan. Through December 31, 2000,
200,000 shares of common stock have been issued pursuant to stock purchase
rights granted under the Plan.

      Under the Director Plan, of the 120,000 options outstanding, 88,667
options were exercisable at December 31, 2000. At December 31, 2000, 30,000
shares remained available for grant under the Director Plan.

      The options outstanding at December 31, 2000 have been segregated into
four ranges for additional disclosure as follows:

<TABLE>
<CAPTION>
                              OPTIONS OUTSTANDING                    EXERCISABLE OPTIONS
                    -------------------------------------------     ----------------------
                                                  WEIGHTED-
                                   WEIGHTED-       AVERAGE                       WEIGHTED-
    RANGE OF                        AVERAGE       REMAINING                       AVERAGE
    EXERCISE                       EXERCISE    CONTRACTUAL LIFE                  EXERCISE
     PRICES           NUMBER        PRICES        (IN YEARS)          NUMBER      PRICES
--------------      ---------      --------    ----------------     ---------    ---------
<S>                 <C>            <C>         <C>                  <C>          <C>
 $0.20-$2.50          220,401       $ 1.67           4.94            220,401      $ 1.67
 $3.938-$5.125        618,769         4.83           8.66            203,360        4.80
 $5.438-$10.25        537,733         7.36           8.40            199,790        7.92
$10.375-$22.00        403,292        14.11           7.47            246,447       12.34
                    ---------                                        -------
                    1,780,195         7.31           7.85            869,998        6.86
                    =========                                        =======
</TABLE>

      Stock Compensation

      The Company has elected to follow APB 25 and related interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS 123 requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of the
grant, no compensation expense is recognized. Because SFAS 123 is applicable
only to options granted subsequent to 1994, its pro forma effect was not fully
reflected until 1999 since the options granted by Microcide generally vest over
four years.

      The Company has recorded $2,315,000 in deferred compensation (net of
reversals for stock option cancellations) pursuant to APB 25 for the difference
between the grant price and the deemed fair value of the Company's common stock
for certain options in the 12-month period prior to the Company's initial public
offering. The Company also recorded deferred compensation for stock options
granted to consultants. The deferred compensation was fully amortized to expense
at December 31, 1999.

      Pro forma information regarding the net income (loss) and earnings (loss)
per share is required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options granted subsequent to 1994 under the
fair value method of that Statement. The fair value for these options was
estimated at the date of grant using the Black-Scholes option pricing model for
the multiple option approach with the following assumptions for 2000, 1999 and
1998: weighted-average volatility factor of 0.82, 0.7 and 0.75, respectively; no
expected



                                      F-14
<PAGE>   55

dividend payments; weighted-average risk-free interest rates in effect of 6.2%,
5.34% and 4.76%, respectively; and a weighted-average expected life of 3.85,
3.87 and 3.63 years, respectively.

      The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a single
measure of the fair value of the Company's employee stock options.

      Based upon the above methodology, the weighted-average grant date fair
value of options granted during the years ended December 31, 2000, 1999 and 1998
was $5.96, $2.93 and $3.51, respectively.

      For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net income (loss) over the options' vesting
period. The Company's pro forma information is as follows:

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                             ---------------------------------------------
                                                  2000           1999            1998
                                             -------------   -------------   -------------
<S>                                          <C>             <C>             <C>
Net loss as reported ....................    $(13,945,077)   $(10,745,770)   $ (9,758,319)
Pro forma net loss ......................    $(15,887,915)   $(11,665,817)   $(10,601,000)
Net loss per share as reported ..........    $      (1.23)   $      (0.97)   $      (0.89)
Pro forma net loss per share ............    $      (1.40)   $      (1.05)   $      (0.97)
</TABLE>

7.    NOTES RECEIVABLE FROM RELATED PARTIES

      At December 31, 2000, the Company had notes receivable from employees in
the amount of $674,000. These notes generally bear interest at 6%, are secured
by property and are due within one year following termination of employment.

8.    INCOME TAXES

      As of December 31, 2000, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $38,000,000 which expire in the
years 2008 through 2020, and federal research and development tax credits of
approximately $300,000 which expire in the years 2008 through 2020.

      Utilization of the Company's net operating loss may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.

      Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                    -----------------------
                                                      2000           1999
                                                    --------       --------
                                                         (In thousands)
<S>                                                 <C>            <C>
Deferred Tax Assets:
   Net operating loss carryforwards ..........      $ 13,700       $ 11,500
   Research and other credits ................           600            600
   Capitalized research expenses .............           500            500
   Other .....................................         4,800          2,100
                                                    --------       --------
Total Deferred Tax Assets ....................        19,600         14,700
Valuation Allowance ..........................       (19,600)       (14,700)
                                                    --------       --------
Net Deferred Tax Assets ......................      $     --       $     --
                                                    ========       ========
</TABLE>

      Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by $4,900,000 and $3,800,000 during the years ended December
31, 2000 and 1999, respectively.



                                      F-15

<PAGE>   56

                                 EXHIBIT INDEX



<TABLE>
<CAPTION>
   EXHIBITS                               DESCRIPTION
   --------                               -----------
<S>             <C>
     2.1        Iconix Pharmaceuticals, Inc. (formerly EpiGenix, Inc.) Series A
                Preferred Stock Purchase Agreement.(2)

     2.2*       Core Technology Development and License Agreement by and between
                Microcide Pharmaceuticals, Inc. and Iconix Pharmaceuticals, Inc.
                (formerly EpiGenix, Inc.)(2)

     2.3*       Antiviral and Surrogate Genetics Research Collaboration
                Agreement by and between Microcide Pharmaceuticals, Inc. and
                Iconix Pharmaceuticals, Inc. (formerly EpiGenix, Inc.)(2)

     3.2        Restated Certificate of Incorporation of the Registrant.(1)

     3.5        Bylaws of the Registrant.(1)

     4.2        Form of Common Stock Certificate.(1)

     4.3        Series A Preferred Warrant Purchase Agreement and Warrant
                between Dominion Ventures, Inc. and the Registrant dated May 10,
                1993.(1)

     4.4        Series B Preferred Warrant Purchase Agreement and Warrant
                between Dominion Ventures, Inc. and the Registrant dated May 10,
                1993.(1)

     4.5        Series C Preferred Warrant Purchase Agreement and Warrant
                between Dominion Ventures, Inc. and the Registrant dated June
                10, 1994.(1)

     4.6        Series B Preferred Warrant Agreement between Comdisco, Inc. and
                the Registrant dated September 1, 1993.(1)

     4.7        Series C Preferred Warrant Agreement between Comdisco, Inc. and
                the Registrant dated September 1, 1993.(1)

    10.1        Information and Registration Rights Agreement, dated June 29,
                1994 as amended.(1)

    10.2        1993 Amended Incentive Stock Plan.(1)

    10.3        1996 Employee Stock Purchase Plan.(1)

    10.4        1996 Director Option Plan.(1)

    10.5        401(k) Plan.(1)

    10.6*       Research and License Agreement between the Registrant and Ortho
                Pharmaceutical Corporation and the R.W. Johnson Pharmaceutical
                Research Institute dated October 24, 1995.(1)

    10.7*       Research and License Agreement between the Registrant and Ortho
                Pharmaceutical Corporation and the R.W. Johnson Pharmaceutical
                Research Institute dated October 24, 1995.(1)

    10.8*       Joint Research Agreement between the Registrant and Daiichi
                Pharmaceutical Co., Ltd. dated November 6, 1995.(1)

    10.9*       Collaborative Research Agreement between the Registrant and
                Pfizer Inc dated March 1, 1996.(1)

    10.10*      License and Royalty Agreement between the Registrant and Pfizer
                Inc dated March 1, 1996.(1)

    10.11       Master Lease Agreement between Dominion Ventures, Inc. and the
                Registrant, dated May 10, 1993, as amended on June 10, 1994 and
                November 22, 1994.(1)

    10.12       Master Lease Agreement between the Registrant and Comdisco, Inc.
                dated September 1, 1993.(1)

    10.13       Lease Agreement between the Registrant and Portola Land Company
                dated April 1993.(1)

    10.14       Form of Indemnification Agreement between the Registrant and its
                Officers and Directors.(1)

    10.15       Employment Agreement dated January 31, 1994 between the
                Registrant and James E. Rurka.(1)

    10.16       Employment Agreement dated December 23, 1992 between the
                Registrant and Keith A. Bostian, Ph.D.(1)

    10.17       Lease Agreement commencing November 1, 1996 between the
                Registrant and Logue Investments L.P., a California limited
                partnership.(3)

    10.18*      Synthetic Compound Purchase Agreement between the Registrant and
                Daiichi Pharmaceutical Co., Ltd. dated June 25, 1997.(4)

    10.19       Sublease agreement between the Registrant, Quickturn Design
                Systems, Inc. and Portola Land Co. dated September 1997.(5)

    10.20       Sub-sublease agreement between the Registrant, Alpha Blox
                Corporation, Quickturn Design Systems, Inc. and Portola Land Co.
                dated September 1997.(5)

    10.21       Consulting Agreement dated January 14, 1998 between the
                Registrant and Keith Bostian, Ph.D.(6)

    10.22       Lease Agreement between the Registrant and Portola Land Co.
                dated May 11, 1998.(7)

    10.23       Promissory Note between the Registrant and Heller Financial
                Leasing, Inc. dated December 22, 1998.(9)

    10.24       Security Agreement between the Registrant and Heller Financial
                Leasing, Inc. dated December 22, 1998.(9)

    10.25+      Amendment of Research and License Agreement between the
                Registrant and Ortho Pharmaceutical Corporation and the R.W.
                Johnson Pharmaceutical Research Institute dated October 23,
                1998.(9)

    10.26+      Collaborative Research Agreement between the Registrant and
                Pfizer Inc dated January 13, 1999.(9)

    10.27+      License and Royalty Agreement between the Registrant and Pfizer
                Inc dated January 13, 1999.(9)

    10.28       Preferred Shares Rights Agreement dated February 2, 1999 between
                the Registrant and Chase Mellon Shareholder Services, L.L.C.(8)

    10.29+      Amendment to Joint Research Agreement between the Registrant and
                Daiichi Pharmaceutical Co., Ltd. dated February 4, 2000.(10)

    10.30+      Amendment to Collaborative Research Agreement between the
                Registrant and Pfizer Inc. dated March 1, 2000.(10)

    10.31+      Research Agreement by and between the Registrant and Daiichi
                Pharmaceutical Co., Ltd. dated May 8, 2000.(11)

    10.32+      Amendment of Research and License Agreement between the
                Registrant and Ortho Pharmaceutical Corporation and the R.W.
                Johnson Pharmaceutical Research Institute dated December 19,
                2000.

    23.1        Consent of Ernst & Young LLP, Independent Auditors.

    24.1        Power of Attorney (see page 40).

</TABLE>

----------

(1)   Incorporated by reference to the same-numbered exhibit in Registrant's
      Registration Statement on Form S-1, registration number 333-2400, filed
      with the Securities and Exchange Commission and dated May 14, 1996.

(2)   Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 8-K filed with the Securities and Exchange Commission and dated
      January 29, 1998.

(3)   Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 10-Q for the period ended September 30, 1996, filed with the
      Securities and Exchange Commission and dated November 8, 1996.

(4)   Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 10-Q for the period ended June 30, 1997, filed with the Securities
      and Exchange Commission and dated August 14, 1997.

(5)   Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 10-Q for the period ended September 30, 1997, filed with the
      Securities and Exchange Commission and dated November 14, 1997.

(6)   Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 10-K for the fiscal year ended December 31, 1997, filed with the
      Securities and Exchange Commission and dated March 31, 1998.

(7)   Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 10-Q for the period ended June 30, 1998, filed with the Securities
      and Exchange Commission and dated August 14, 1998.

(8)   Incorporated by reference to Exhibit 1 in Registrant's Form 8-A filed with
      the Securities and Exchange Commission and dated February 4, 1999.

(9)   Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 10-K for the fiscal year ended December 31, 1998, filed with the
      Securities and Exchange Commission and dated March 31, 1999.

(10)  Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 10-Q for the period ended March 31, 2000, filed with the
      Securities and Exchange Commission and dated June 19, 2000.

(11)  Incorporated by reference to the same-numbered exhibit in Registrant's
      Form 10-Q for the period ended June 30, 2000, filed with the
      Securities and Exchange Commission and dated August 14, 2000.


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*   Confidential Treatment granted

+   Confidential Treatment requested