PHARMACOPEIA INC, S-4/A, 1998-05-07

PHARMACOPEIA INC
S-4/A, 1998-05-07
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1998

REGISTRATION NO. 333-47475
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT

NO. 3 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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PHARMACOPEIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 8731 33-0557266
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)

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101 COLLEGE ROAD EAST, PRINCETON, NEW JERSEY 08540, TELEPHONE: (609) 452-3600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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MR. LEWIS J. SHUSTER
EXECUTIVE VICE PRESIDENT, CORPORATE DEVELOPMENT, CHIEF FINANCIAL OFFICER AND
SECRETARY
PHARMACOPEIA, INC.
101 COLLEGE ROAD EAST, PRINCETON, NEW JERSEY 08540, TELEPHONE: (609) 452-3600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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COPIES TO:

JAMES J. MARINO, ESQ. JAMES R. JONES, ESQ.
DECHERT PRICE & RHOADS COOLEY GODWARD LLP
997 LENOX DRIVE, BUILDING 3, 3000 EL CAMINO REAL
SUITE 210 PALO ALTO, CALIFORNIA 94306
LAWRENCEVILLE, NEW JERSEY 08648 (650) 843-5000
(609) 520-3200

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement and all other conditions under the Agreement and Plan of Merger and
Reorganization (described in the Joint Proxy Statement/Prospectus included
herein) are satisfied or waived.

If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]____________

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]___________

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

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<PAGE>

PHARMACOPEIA, INC.
101 COLLEGE ROAD EAST
PRINCETON, NJ 08540
(609) 452-3600

May 13, 1998

Dear Stockholders:

It is my pleasure to invite you to the Annual Meeting of the Stockholders of
Pharmacopeia, Inc. to be held on June 12, 1998 at 9:00 a.m., local time, at
The Forrestal at Princeton, 100 College Road East, Princeton, New Jersey.

At the Annual Meeting, you will be asked to consider and vote upon the
issuance of up to 8,726,020 shares of Pharmacopeia Common Stock, par value
$.0001 per share ("Pharmacopeia Common Stock"), in order to effect the
proposed acquisition of Molecular Simulations Incorporated ("MSI") pursuant to
an Agreement and Plan of Merger and Reorganization dated as of February 4,
1998 among Pharmacopeia, Micro Acquisition Corporation, a wholly-owned
subsidiary of Pharmacopeia, and MSI. The Pharmacopeia Board of Directors has
determined that this transaction is fair to and in the best interests of
Pharmacopeia and its stockholders and recommends that you vote to approve this
transaction.

At the Annual Meeting, you will also be asked to elect two directors to the
Board of Directors for a term of three years, to amend Pharmacopeia's 1994
Incentive Stock Plan to increase the number of shares of Pharmacopeia Common
Stock authorized for issuance thereunder from 1,750,000 to 2,250,000, to
further amend such stock plan to increase the number of shares of Pharmacopeia
Common Stock authorized for issuance to 2,750,000 shares if Pharmacopeia's
acquisition of MSI is accomplished, and to ratify the appointment of Ernst &
Young LLP as Pharmacopeia's independent auditors for the fiscal year ending
December 31, 1998.

Once you have fully reviewed the enclosed Joint Proxy Statement/Prospectus,
please complete, sign and date the accompanying proxy card and mail your proxy
card back in the enclosed prepaid envelope whether or not you plan to attend
the Annual Meeting. If you attend the Annual Meeting, you may vote in person
whether or not you have previously returned your proxy.

Thank you for your interest and participation in the affairs of
Pharmacopeia.

Sincerely,

/s/Joseph A. Mollica, Ph.D.

Joseph A. Mollica, Ph.D.
<PAGE>

PHARMACOPEIA, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD JUNE 12, 1998

TO THE STOCKHOLDERS:

NOTICE IS HEREBY GIVEN that the 1998 Annual Meeting of Stockholders (the
"Annual Meeting") of Pharmacopeia, Inc., a Delaware corporation
("Pharmacopeia"), will be held on June 12, 1998 at 9:00 a.m., local time, at
The Forrestal at Princeton, 100 College Road East, Princeton, New Jersey, for
the following purposes, as more fully described in the Joint Proxy
Statement/Prospectus accompanying this Notice:

1. To consider and vote upon a proposal to approve the issuance of up to
8,726,020 shares of Pharmacopeia Common Stock, par value $.0001 per share
("Pharmacopeia Common Stock"), in order to effect the proposed acquisition
of Molecular Simulations Incorporated ("MSI") pursuant to an Agreement and
Plan of Merger and Reorganization dated as of February 4, 1998 among
Pharmacopeia, Micro Acquisition Corporation, a wholly-owned subsidiary of
Pharmacopeia ("Merger Subsidiary"), and MSI (the "Merger Agreement").
Pursuant to the Merger Agreement, Merger Subsidiary will be merged with and
into MSI with MSI surviving as a wholly-owned subsidiary of Pharmacopeia
(the "Merger"). At that time, each outstanding share of Common Stock, par
value $.001 per share, of MSI ("MSI Common Stock"), Class B Common Stock,
par value $.001 per share, of MSI, and Series A Convertible Preferred
Stock, par value $.01 per share, of MSI (except for any such shares held by
MSI or any subsidiary of MSI (or held by MSI as treasury stock) and any
such shares held by Pharmacopeia or any subsidiary of Pharmacopeia), will
be converted into the right to receive 0.5292 of a share of Pharmacopeia
Common Stock (the "Exchange Ratio"). Upon effectiveness of the Merger, each
outstanding option to purchase MSI Common Stock (an "MSI Option") will be
converted into an option to purchase that number of shares of Pharmacopeia
Common Stock determined by multiplying the number of shares of MSI Common
Stock subject to such MSI Option immediately prior to the effective time of
the Merger by the Exchange Ratio, rounded down to the nearest whole share
(with cash, less the applicable exercise price, being payable for any
fraction of a share), at an exercise price equal to the exercise price of
such option at the time of the Merger divided by the Exchange Ratio,
rounded up to the nearest hundredth of a cent.

2. To elect two directors to the Board of Directors for a term of three
years.

3. To consider and vote upon a proposal to amend Pharmacopeia's 1994
Incentive Stock Plan to increase the number of shares of Pharmacopeia
Common Stock authorized for issuance thereunder from 1,750,000 to 2,250,000
shares.

4. To consider and vote upon a proposal to amend Pharmacopeia's 1994
Incentive Stock Plan to increase the number of shares of Pharmacopeia
Common Stock authorized for issuance thereunder to 2,750,000 shares,
effective upon consummation of the Merger.

5. To ratify the appointment of Ernst & Young LLP as Pharmacopeia's
independent auditors for the fiscal year ending December 31, 1998.

6. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.

Details of the Merger Agreement and other important matters are set forth in
the accompanying Joint Proxy Statement/Prospectus, which you are urged to read
carefully.

The Board of Directors has fixed the close of business on April 13, 1998
(the "Record Date") as the record date for the determination of those
stockholders entitled to notice of and to vote at the Annual Meeting or any
adjournment or postponement thereof. Accordingly, only stockholders of record
at the close of business on the Record Date will be entitled to notice of and
to vote at the Annual Meeting or any adjournment or postponement thereof. The
presence at the Annual Meeting, in person or by proxy, of the holders of a
majority of the shares of
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Pharmacopoeia Common Stock outstanding on the Record Date and entitled to vote
thereat will constitute a quorum. The election of directors will be decided by
a plurality of the votes cast. The approval of the issuance of Pharmacopeia
Common Stock in connection with the Merger Agreement will require the
affirmative vote of a majority of the votes cast. The approval of the proposed
amendments to the 1994 Incentive Stock Plan and the ratification of the
appointment of Ernst & Young LLP will require the affirmative vote of the
holders of a majority of the shares of Pharmacopeia Common Stock present in
person or represented by proxy and entitled to vote at the Annual Meeting.

By Order of the Board of Directors,

/s/Lewis J. Shuster

Lewis J. Shuster
Secretary

Princeton, New Jersey

May 13, 1998

PLEASE DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD PROMPTLY IN THE
ENVELOPE PROVIDED, WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE ANNUAL
MEETING. EXECUTION OF A PROXY CARD WILL NOT AFFECT YOUR RIGHT TO VOTE IN
PERSON IF YOU ARE PRESENT AT THE ANNUAL MEETING.

2
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED
9685 SCRANTON ROAD
SAN DIEGO, CALIFORNIA 92121

Dear Holders of Common Stock and Series A Convertible Preferred Stock of
Molecular Simulations Incorporated:

You are cordially invited to attend the Special Meeting (the "MSI Special
Meeting") of the stockholders of Molecular Simulations Incorporated ("MSI")
which will be held at the principal executive offices of MSI located at 9685
Scranton Road, San Diego, California 92121, on June 12, 1998, at 9:00 a.m.,
local time.

At the MSI Special Meeting, you will be asked to consider and vote upon the
approval and adoption of the Agreement and Plan of Merger and Reorganization,
dated as of February 4, 1998 (the "Merger Agreement"), among Pharmacopeia,
Inc. ("Pharmacopeia"), Micro Acquisition Corporation, a wholly-owned
subsidiary of Pharmacopeia ("Merger Subsidiary"), and MSI. The foregoing
proposal is described more fully in the accompanying Joint Proxy
Statement/Prospectus, and a copy of the Merger Agreement is attached as Annex
1 to the Joint Proxy Statement/Prospectus.

Pursuant to the Merger Agreement, Merger Subsidiary will be merged with and
into MSI (the "Merger"), whereupon MSI will become a wholly-owned subsidiary
of Pharmacopeia. At that time, each share of Common Stock of MSI, par value
$.001 per share ("MSI Common Stock"), Class B Common Stock of MSI, par value
$.001 per share ("MSI Class B Common Stock"), and Series A Convertible
Preferred Stock of MSI, par value $.01 per share ("MSI Preferred Stock")
(collectively, the "MSI Capital Stock"), issued and outstanding immediately
prior to the effective time of the Merger (except for any such shares held by
MSI or any subsidiary of MSI (or held by MSI as treasury stock) and any such
shares held by Pharmacopeia or any subsidiary of Pharmacopeia) will be
converted into the right to receive 0.5292 of a share of common stock of
Pharmacopeia, par value $.0001 per share ("Pharmacopeia Common Stock").
Holders of MSI Capital Stock will receive cash in lieu of any fractional
shares of Pharmacopeia Common Stock to which such stockholders would otherwise
be entitled. Each outstanding option to purchase MSI Common Stock ("MSI
Option") will be converted into an option to purchase that number of shares of
Pharmacopeia Common Stock determined by multiplying the number of shares of
MSI Common Stock subject to such MSI Option immediately prior to the effective
time of the Merger by 0.5292, rounded down to the nearest whole share (with
cash, less the applicable exercise price, being payable for any fraction of a
share), at an exercise price equal to the exercise price of such option at the
time of the Merger divided by 0.5292, rounded up to the nearest hundredth of a
cent.

Consummation of the proposed Merger is subject to, among other things,
approval by the holders of the majority of the outstanding shares of MSI
Common Stock and MSI Preferred Stock voting as a single class, approval by a
majority of the votes cast by the holders of shares of Pharmacopeia Common
Stock and expiration or termination of the waiting period applicable to the
Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"). The Merger would be consummated shortly after such
stockholder approvals are obtained, such waiting period expires or is
terminated and the other conditions to the Merger are satisfied or waived. If
the requisite approvals of the stockholders of MSI and Pharmacopeia are
received, the Merger is expected to be consummated shortly thereafter.

The approval and adoption of the Merger Agreement and approval of the Merger
requires the affirmative vote of holders of at least a majority of the
outstanding shares of MSI Common Stock and MSI Preferred Stock voting together
as a single class.

Stockholders are urged to review carefully the information contained in the
Joint Proxy Statement/Prospectus prior to deciding how to vote their shares at
the MSI Special Meeting.
<PAGE>

THE MSI BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE TERMS OF THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN
THE BEST INTERESTS OF, MSI STOCKHOLDERS. ACCORDINGLY, THE MSI BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND APPROVED THE
MERGER, AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF MSI VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER.

Whether or not you expect to attend the MSI Special Meeting in person,
please complete, sign and promptly return the enclosed proxy card in the
enclosed postage-prepaid envelope to assure representation of your shares. You
may revoke your proxy at any time before it has been voted, and if you attend
the MSI Special Meeting you may vote in person, even if you previously
returned your proxy card. Your prompt cooperation will be greatly appreciated.

Sincerely,

/s/Michael J. Savage

Michael J. Savage

President and Chief Executive
Officer

May 13, 1998

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MOLECULAR SIMULATIONS INCORPORATED

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 12, 1998

TO THE HOLDERS OF COMMON STOCK AND SERIES A CONVERTIBLE PREFERRED STOCK OF
MOLECULAR SIMULATIONS INCORPORATED:

NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "MSI
Special Meeting") of Molecular Simulations Incorporated, a Delaware
corporation ("MSI"), will be held on June 12, 1998 at 9:00 a.m., local time,
at the principal executive offices of MSI located at 9685 Scranton Road, San
Diego, California 92121, for the purpose of considering and voting upon the
following matters:

1. A proposal to (i) approve and adopt the Agreement and Plan of Merger
and Reorganization, dated as of February 4, 1998 (the "Merger Agreement"),
by and among Pharmacopeia, Inc., a Delaware corporation ("Pharmacopeia"),
Micro Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of Pharmacopeia ("Merger Subsidiary"), and MSI, and (ii) to
approve the merger of Merger Subsidiary with and into MSI upon the terms
and subject to the conditions of the Merger Agreement (the "Merger"). Upon
completion of the Merger, MSI will be a wholly-owned subsidiary of
Pharmacopeia.

2. Such other business as may properly come before the MSI Special
Meeting or any adjournments or postponements thereof.

Detailed information concerning the Merger Agreement and the Merger is
contained in the attached Joint Proxy Statement/Prospectus and the Annexes
thereto; please read it carefully.

THE MSI BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
APPROVED THE MERGER, AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER.

ONLY STOCKHOLDERS WHO WERE HOLDERS OF RECORD OF COMMON STOCK OR SERIES A
CONVERTIBLE PREFERRED STOCK OF MSI AT THE CLOSE OF BUSINESS ON MAY 1, 1998
WILL BE ENTITLED TO RECEIVE NOTICE OF AND TO VOTE AT THE MSI SPECIAL MEETING.

Whether or not you expect to attend the MSI Special Meeting, WE URGE YOU TO
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY in the
enclosed postage-prepaid envelope. You may revoke your proxy at any time
before it is voted by giving written notice of revocation to MSI, by
subsequently filing another proxy or by attending the MSI Special Meeting and
voting in person.

By order of the Board of Directors,

/s/David B. Hiatt

David B. Hiatt
Secretary of the Company

May 13, 1998
San Diego, California

YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN AND PROMPTLY RETURN YOUR PROXY CARD. STOCKHOLDERS SHOULD
NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION--DATED MAY 7, 1998

PHARMACOPEIA, INC. MOLECULAR SIMULATIONS INCORPORATED
101 COLLEGE ROAD EAST 9685 SCRANTON ROAD
PRINCETON, NEW JERSEY 08540 SAN DIEGO, CALIFORNIA 92121

JOINT PROXY STATEMENT/PROSPECTUS

ANNUAL MEETING OF STOCKHOLDERS
OF PHARMACOPEIA, INC.

SPECIAL MEETING OF STOCKHOLDERS OF
MOLECULAR SIMULATIONS INCORPORATED

PHARMACOPEIA, INC. PROSPECTUS
COMMON STOCK, PAR VALUE $.0001 PER SHARE

The Merger Agreement provides that, upon the satisfaction or waiver of
certain conditions to the closing set forth therein, Merger Subsidiary will be
merged with and into MSI with MSI surviving as a wholly-owned subsidiary of
Pharmacopeia (the "Merger"). Upon effectiveness of the Merger, each outstanding
share of Common Stock, par value $.001 per share, of MSI ("MSI Common Stock"),
Class B Common Stock, par value $.001 per share, of MSI ("MSI Class B Common
Stock"), and Series A Convertible Preferred Stock, par value $.01 per share, of
MSI ("MSI Preferred Stock," and together with the MSI Common Stock and the MSI
Class B Common Stock, the "MSI Capital Stock") (except for any such shares held
by MSI or any subsidiary of MSI (or held by MSI as treasury stock) and any such
shares held by Pharmacopeia or any subsidiary of Pharmacopeia), will be
converted into the right to receive 0.5292 (the "Exchange Ratio") of a share of
Common Stock, par value $.0001 per share, of Pharmacopeia ("Pharmacopeia Common
Stock"), subject to appropriate adjustment in the event of any stock split,
stock dividend, reverse stock split, reclassification, recapitalization or
similar transaction with respect to MSI Capital Stock or Pharmacopeia Common
Stock. Holders of MSI Capital Stock will receive cash in lieu of any fractional
shares of Pharmacopeia Common Stock to which such stockholders would otherwise
have been entitled. Upon effectiveness of the Merger, each outstanding option
to purchase MSI Common Stock (an "MSI Option") will be converted into an option
to purchase that number of shares of Pharmacopeia Common Stock determined by
multiplying the number of shares of MSI Common Stock subject to such MSI Option
immediately prior to the effective time of the Merger by the Exchange Ratio,
rounded down to the nearest whole share (with cash, less the applicable
exercise price, being payable for any fraction of a share), at an exercise
price equal to the exercise price of such option at the time of the Merger
divided by the Exchange Ratio, rounded up to the nearest hundredth of a cent.

The respective obligations of Pharmacopeia, MSI and Merger Subsidiary to
consummate the Merger are subject to the fulfillment or waiver (where
permissible) of certain conditions set forth in the Merger Agreement. These
conditions include but are not limited to the approval by Pharmacopeia
stockholders of the Issuance Proposal (as defined below), the approval by
holders of MSI Common Stock and MSI Preferred Stock of the Merger Proposal (as
defined below), the expiration or termination of the waiting period applicable
to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the approval for quotation on the Nasdaq National Market of the
shares of Pharmacopeia Common Stock to be issued in the Merger.

At the Pharmacopeia Annual Meeting, stockholders of Pharmacopeia will vote on
proposals (i) to issue up to an aggregate of 8,726,020 shares of Pharmacopeia
Common Stock in order to effect the Merger, (ii) to elect two directors to the
Pharmacopeia Board of Directors for a term of three years, (iii) to consider
and vote upon a proposal to amend Pharmacopeia's 1994 Incentive Stock Plan to
increase the number of shares of Pharmacopeia Common Stock authorized for
issuance thereunder from 1,750,000 to 2,250,000 shares, (iv) to consider and
vote upon a proposal to amend Pharmacopeia's 1994 Incentive Stock Plan to
increase the number of shares of Pharmacopeia Common Stock authorized for
issuance thereunder to 2,750,000 shares, effective upon consummation of the
Merger, and (v) to ratify the appointment of Ernst & Young LLP as
Pharmacopeia's independent auditors for the fiscal year ending December 31,
1998.

At the MSI Special Meeting, holders of MSI Common Stock and MSI Preferred
Stock will vote on a proposal to approve and adopt the Merger Agreement and to
approve the Merger (the "Merger Proposal").

This Joint Proxy Statement/Prospectus also constitutes the Prospectus of
Pharmacopeia with respect to the issuance of Pharmacopeia Common Stock in
connection with the Merger.

This Joint Proxy Statement/Prospectus and the accompanying forms of proxy are
first being mailed to Pharmacopeia and MSI stockholders on or about May 13,
1998.

All information in this Joint Proxy Statement/Prospectus relating to
Pharmacopeia has been furnished by Pharmacopeia, and all information in this
Joint Proxy Statement/Prospectus relating to MSI has been furnished by MSI.

THE SHARES OF PHARMACOPEIA COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE
MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

SEE "RISK FACTORS" ON PAGE 19 FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD
BE CONSIDERED BY THE STOCKHOLDERS OF PHARMACOPEIA AND MSI WITH RESPECT TO THE
MERGER.

The date of this Joint Proxy Statement/Prospectus is [ ], 1998.
<PAGE>

TABLE OF CONTENTS

<TABLE>
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PAGE
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<S> <C>
AVAILABLE INFORMATION..................................................... 5
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 5
FORWARD-LOOKING STATEMENTS................................................ 6
SUMMARY................................................................... 7
General................................................................. 7
The Companies........................................................... 8
The Stockholder Meetings................................................ 9
The Merger.............................................................. 11
Recommendations of the Boards of Directors; Reasons for the Merger...... 12
Opinions of Financial Advisors.......................................... 13
Interests of Certain Persons in the Merger.............................. 13
Regulatory Approvals.................................................... 13
Appraisal Rights........................................................ 13
Accounting Treatment.................................................... 14
Federal Income Tax Consequences......................................... 14
Risk Factors............................................................ 14
Markets and Market Prices............................................... 14
Comparative Per Share Data.............................................. 15
Dividend Policy......................................................... 15
Selected Historical Financial Data Of Pharmacopeia, Inc................. 16
Selected Historical Consolidated Financial Data Of Molecular Simulations
Incorporated And Subsidiaries.......................................... 17
Selected Pro Forma Combined Financial Data.............................. 18
RISK FACTORS.............................................................. 19
Risks Common to Both Companies.......................................... 19
Risks Related to Pharmacopeia........................................... 23
Risks Related to MSI.................................................... 27
THE STOCKHOLDER MEETINGS.................................................. 31
Introduction............................................................ 31
Pharmacopeia Annual Meeting............................................. 31
MSI Special Meeting..................................................... 35
THE MERGER................................................................ 37
Background.............................................................. 37
Recommendations of the Pharmacopeia Board of Directors; Pharmacopeia's
Reasons for the Merger................................................. 41
Recommendations of the MSI Board of Directors; MSI's Reasons for the
Merger................................................................. 43
Opinion of Pharmacopeia's Financial Advisor............................. 44
Opinion of MSI's Financial Advisor...................................... 48
Interests of Certain Persons in the Merger.............................. 51
Exchange of Stock Certificates.......................................... 52
Management after the Merger............................................. 52
Nasdaq National Market.................................................. 52
Regulatory Approvals.................................................... 52
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS............... 53
THE MERGER AGREEMENT...................................................... 59
Effective Time.......................................................... 59
Conversion of Shares of MSI Capital Stock Pursuant to the Merger;
Treatment of Options................................................... 59
Representations and Warranties.......................................... 59
Conduct of Business Pending the Merger.................................. 60
</TABLE>

2
<PAGE>

<TABLE>
<CAPTION>
PAGE
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<S> <C>
Indemnification; Directors' and Officers' Insurance..................... 63
Conditions to Consummation of the Merger................................ 64
Termination; Termination Fees and Expenses.............................. 65
Amendment of the Merger Agreement....................................... 65
Expenses and Fees....................................................... 66
APPRAISAL RIGHTS.......................................................... 66
ACCOUNTING TREATMENT OF THE MERGER........................................ 68
FEDERAL SECURITIES LAW CONSEQUENCES....................................... 68
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................... 68
The Merger.............................................................. 69
Federal Income Tax Consequences to Dissenters........................... 69
COMPARISON OF STOCKHOLDERS' RIGHTS........................................ 69
Voting.................................................................. 70
Directors............................................................... 70
Liability of Officers and Directors; Indemnification.................... 70
Special Meetings........................................................ 71
Pharmacopeia Preferred Stock............................................ 71
Voting by Ballot........................................................ 71
Amendment of Certificate of Incorporation and By-laws................... 71
Dividends; Liquidation Rights........................................... 71
Special Rights of MSI Preferred Stock and MSI Class B Common Stock...... 72
INFORMATION CONCERNING PHARMACOPEIA....................................... 72
INFORMATION CONCERNING MSI................................................ 73
MSI SELECTED CONSOLIDATED FINANCIAL DATA.................................. 84
MSI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 86
MSI MANAGEMENT............................................................ 91
MSI PRINCIPAL STOCKHOLDERS................................................ 95
EXPERTS................................................................... 97
LEGAL OPINIONS............................................................ 98
ELECTION OF PHARMACOPEIA DIRECTORS........................................ 98
General................................................................. 98
Nominees for Election at the Pharmacopeia Annual Meeting................ 98
Incumbent Directors Whose Terms of Office Continue After the
Pharmacopeia Annual Meeting............................................ 99
Stock Ownership of Principal Stockholders and Management................ 100
Board Meetings and Committees........................................... 101
Board Compensation...................................................... 101
Employment Agreements................................................... 101
PROPOSAL TO AMEND THE 1994 INCENTIVE STOCK PLAN TO INCREASE THE NUMBER OF
SHARES AUTHORIZED FOR ISSUANCE THEREUNDER TO 2,250,000 SHARES............ 102
PROPOSAL TO AMEND THE 1994 INCENTIVE STOCK PLAN TO INCREASE THE NUMBER OF
SHARES AUTHORIZED FOR ISSUANCE THEREUNDER TO 2,750,000 SHARES EFFECTIVE
UPON CONSUMMATION OF THE MERGER.......................................... 102
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS....................... 103
OTHER INFORMATION REGARDING PHARMACOPEIA.................................. 104
Performance Graph....................................................... 104
Compensation Tables..................................................... 105
Report of the Compensation Committee.................................... 106
Section 16(a) Beneficial Ownership Reporting Compliance................. 109
</TABLE>

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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Compensation Committee Interlocks And Insider Participation............ 109
Certain Transactions................................................... 109
STOCKHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING OF PHARMACOPEIA
STOCKHOLDERS............................................................ 109
INDEX TO MSI CONSOLIDATED FINANCIAL STATEMENTS........................... F-1
</TABLE>

Annex 1--Agreement and Plan of Merger and Reorganization
Annex 2--Opinion of BT Alex. Brown Incorporated
Annex 3--Opinion of Goldman Sachs & Co.
Annex 4--Section 262 of the Delaware General Corporation Law
Annex 5--Description of the Pharmacopeia 1994 Incentive Stock Plan

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AVAILABLE INFORMATION

Pharmacopeia is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by
Pharmacopeia can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following Regional Offices of the Commission: New York
Regional Office, Seven World Trade Center, Suite 1300, New York, New York
10048; and Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a World
Wide Web site that contains reports, proxy statements and other information
regarding registrants that file electronically with the Commission and the
address of such site is http://www.sec.gov. Pharmacopeia Common Stock is
listed on the Nasdaq National Market and such reports, proxy statements and
other information concerning Pharmacopeia are available for inspection at the
offices of the National Association of Securities Dealers, Inc. (the "NASD"),
1735 K Street, N.W., Washington, D.C. 20006.

Pharmacopeia has filed the Registration Statement under the Securities Act
with the Commission covering a maximum of 8,726,020 shares of Pharmacopeia
Common Stock to be issued in connection with the Merger. This Joint Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement. Such additional information may be obtained from the
Commission's principal office in Washington, D.C. Statements contained in this
Joint Proxy Statement/Prospectus or in any document incorporated by reference
in this Joint Proxy Statement/Prospectus, as to the contents of any contract
or other document referred to herein or therein, are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such
reference.

MSI is not subject to the informational requirements of the Exchange Act and
does not file reports and other information with the Commission.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

Pharmacopeia hereby incorporates by reference into this Joint Proxy
Statement/Prospectus (i) its Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, as amended, which contains audited financial
statements for Pharmacopeia's latest fiscal year for which a Form 10-K was
required to have been filed, (ii) all other reports filed by Pharmacopeia
pursuant to Section 13(a) or 15(d) of the Exchange Act since December 31,
1997, including but not limited to its Current Report on Form 8-K filed with
the Commission on February 5, 1998 and (iii) the description of Pharmacopeia
Common Stock as contained in its registration statement filed pursuant to
Section 12(g) of the Exchange Act, including any amendments or reports filed
for the purpose of updating such description.

All documents and reports filed by Pharmacopeia with the Commission pursuant
to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the
date hereof and prior to the Stockholder Meetings shall be deemed to be
incorporated by reference into this Joint Proxy Statement/Prospectus and to be
a part hereof from the respective dates of filing of such Joint Proxy
Statement/Prospectus and such documents or reports. Any statement contained in
a document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Joint Proxy
Statement/Prospectus to the extent that a statement contained herein or in a
subsequently filed document that also is or is deemed to be incorporated by
reference herein modified or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Joint Proxy Statement/Prospectus.

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<PAGE>

THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. PHARMACOPEIA HEREBY
UNDERTAKES TO PROVIDE, WITHOUT CHARGE, TO EACH PERSON TO WHOM THIS JOINT PROXY
STATEMENT/PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH
PERSON, A COPY OF ANY AND ALL OF THE INFORMATION THAT HAS BEEN INCORPORATED BY
REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS (NOT INCLUDING EXHIBITS TO
SUCH INFORMATION UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE INTO SUCH INFORMATION). SUCH REQUESTS FOR INFORMATION SHOULD BE
DIRECTED TO LEWIS J. SHUSTER, EXECUTIVE VICE PRESIDENT, CORPORATE DEVELOPMENT
AND CHIEF FINANCIAL OFFICER, AT PHARMACOPEIA'S PRINCIPAL EXECUTIVE OFFICES AT
101 COLLEGE ROAD EAST, PRINCETON, NEW JERSEY 08540; TELEPHONE (609) 452-3600.
IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE
MADE NO LATER THAN JUNE 5, 1998.

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND, IF
SO GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN WHICH,
OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR THE SALE OF
ANY SECURITIES HEREUNDER UNDER ANY CIRCUMSTANCES IS INTENDED TO CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF EITHER
PHARMACOPEIA OR MSI SINCE THE DATE AS OF WHICH INFORMATION IS FURNISHED OR THE
DATE HEREOF.

This Joint Proxy Statement/Prospectus contains trademarks of Pharmacopeia
and MSI as well as trademarks of other companies.

FORWARD-LOOKING STATEMENTS

THIS JOINT PROXY STATEMENT/PROSPECTUS CONTAINS AND INCORPORATES BY REFERENCE
CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE RESULTS OF
OPERATIONS AND BUSINESS OF PHARMACOPEIA. THESE FORWARD-LOOKING STATEMENTS
INVOLVE CERTAIN RISKS AND UNCERTAINTIES. FACTORS THAT MAY CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED OR PROJECTED, FORECAST, ESTIMATED
OR BUDGETED IN SUCH FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE
FOLLOWING POSSIBILITIES: (i) FAILURE TO ACHIEVE THE SYNERGIES AND OTHER
BENEFITS THAT PHARMACOPEIA BELIEVES MAY RESULT FROM THE MERGER; (ii)
HEIGHTENED COMPETITION, THE ENTRY OF NEW COMPETITORS AND THE FORMATION OF NEW
PRODUCTS BY NEW AND EXISTING COMPETITORS; (iii) FAILURE TO OBTAIN NEW
CUSTOMERS OR RETAIN EXISTING CUSTOMERS; (iv) INABILITY TO CARRY OUT MARKETING
AND/OR EXPANSION PLANS; (v) LOSS OF KEY EXECUTIVES; (vi) GENERAL ECONOMIC AND
BUSINESS CONDITIONS WHICH ARE LESS FAVORABLE THAN EXPECTED; (vii)
UNANTICIPATED CHANGES IN INDUSTRY TRENDS; (viii) GREATER THAN EXPECTED COSTS
OR DIFFICULTIES RELATING TO THE INTEGRATION OF PHARMACOPEIA AND MSI; (ix)
GREATER THAN EXPECTED COSTS OR DIFFICULTIES IN DEVELOPING AND MAINTAINING
RIGHTS IN PROPRIETARY AND PATENTED TECHNOLOGIES; (x) GREATER THAN EXPECTED
COSTS OR DIFFICULTIES IN OBTAINING ANY REGULATORY APPROVALS REQUIRED FOR THE
MARKETING OF PRODUCTS; AND (xi) THE FACTORS DISCUSSED UNDER THE HEADING "RISK
FACTORS" AND ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS. PHARMACOPEIA
DOES NOT UNDERTAKE ANY OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS.

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<PAGE>

SUMMARY

The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus, or incorporated by reference herein. This
summary is not intended to be complete and is qualified in its entirety by
reference to the more detailed information appearing elsewhere herein or
incorporated by reference herein. Stockholders of each of Pharmacopeia and MSI
are urged to review in their entirety this Joint Proxy Statement/Prospectus,
the Annexes hereto and the documents incorporated herein by reference.

GENERAL

This Joint Proxy Statement/Prospectus relates to the proposed acquisition of
Molecular Simulations Incorporated, a Delaware corporation ("MSI"), by
Pharmacopeia, Inc., a Delaware corporation ("Pharmacopeia"), pursuant to an
Agreement and Plan of Merger and Reorganization dated as of February 4, 1998
(the "Merger Agreement"), among MSI, Pharmacopeia and Micro Acquisition
Corporation, a Delaware corporation and a wholly-owned subsidiary of
Pharmacopeia ("Merger Subsidiary"). Pursuant to the Merger Agreement, Merger
Subsidiary will be merged with and into MSI (the "Merger"), as a result of
which the separate corporate existence of Merger Subsidiary shall cease and MSI
shall continue as a wholly-owned subsidiary of Pharmacopeia (the "Surviving
Corporation"). Upon effectiveness of the Merger, each then outstanding share of
Common Stock, par value $.001 per share, of MSI ("MSI Common Stock"), Class B
Common Stock, par value $.001 per share, of MSI ("MSI Class B Common Stock"),
and Series A Convertible Preferred Stock, par value $.01 per share, of MSI
("MSI Preferred Stock," and with the MSI Common Stock and the MSI Class B
Common Stock, the "MSI Capital Stock") (except for any such shares held by MSI
or any subsidiary of MSI (or held by MSI as treasury stock) and any such shares
held by Pharmacopeia or any subsidiary of Pharmacopeia) will be converted into
the right to receive 0.5292 (the "Exchange Ratio") of a share of Common Stock,
par value $.0001 per share, of Pharmacopeia ("Pharmacopeia Common Stock").
Holders of MSI Capital Stock will receive cash in lieu of any fractional shares
of Pharmacopeia Common Stock to which such stockholders would have been
entitled. Each outstanding option to purchase MSI Common Stock (an "MSI
Option") will be converted into an option to purchase that number of shares of
Pharmacopeia Common Stock determined by multiplying the number of shares of MSI
Common Stock subject to such MSI Option immediately prior to the effective time
of the Merger by the Exchange Ratio, rounded down to the nearest whole share
(with cash, less the applicable exercise price, being payable for any fraction
of a share), at an exercise price equal to the exercise price of such option at
the time of the Merger divided by the Exchange Ratio, rounded up to the nearest
hundredth of a cent.

At the Effective Time (as defined below), each share of MSI Capital Stock
then outstanding will be converted into the right to receive shares of
Pharmacopeia Common Stock based on the Exchange Ratio. Based upon the
13,367,215 shares of MSI Capital Stock outstanding on the MSI Record Date (as
defined below), without making any adjustment for fractional share interests
and assuming no exercise of MSI Options outstanding as of the MSI Record Date,
Pharmacopeia will issue 7,073,930 shares of Pharmacopeia Common Stock at the
Effective Time in connection with the Merger. Furthermore, assuming that the
number of shares of Pharmacopeia Common Stock issued and outstanding on the
Pharmacopeia Record Date (as defined below) is equal to the number of shares of
Pharmacopeia Common Stock issued and outstanding immediately prior to the
consummation of the Merger, such 7,073,930 shares of Pharmacopeia Common Stock
issued to MSI stockholders in connection with the Merger will constitute
approximately 37.5% of the issued and outstanding shares of Pharmacopeia Common
Stock. The value of such 7,073,930 shares of Pharmacopeia Common Stock, based
on the closing price of Pharmacopeia Common Stock on May 6, 1998, the most
recent practicable date prior to the printing of this Joint Proxy
Statement/Prospectus was approximately $143,247,000.

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<PAGE>

Merger Proposal (as defined below), the expiration or termination of the
waiting period applicable to the Merger under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), and the approval for
quotation on the Nasdaq National Market of the shares of Pharmacopeia Common
Stock to be issued in the Merger. See "THE MERGER AGREEMENT--Conditions to
Consummation of the Merger."

A copy of the Merger Agreement is attached hereto as Annex 1, and the terms
of the Merger Agreement are summarized herein. See "THE MERGER AGREEMENT."

THE COMPANIES

Pharmacopeia. Since its inception in March 1993, Pharmacopeia has focused its
research efforts on developing a novel, proprietary technology for accelerating
the pace of drug discovery for its pharmaceutical and biotechnology customers.
Pharmacopeia's Encoded Combinatorial Library on Polymeric Support
("ECLiPS(TM)") technology addresses a key challenge in the drug discovery
process: generating and evaluating large numbers of diverse and readily
identifiable small molecule compounds to find new, orally active drugs. ECLiPS
enables Pharmacopeia to generate hundreds of thousands of small molecule
compounds at a fraction of the cost of traditional chemical synthesis methods.
Pharmacopeia focuses on drug discovery, and seeks customers to develop,
manufacture, market and sell resulting drugs. To date, Pharmacopeia has signed
contracts with several customers, including Schering Corporation and Schering-
Plough Ltd., Berlex Laboratories, Inc., Novartis Corporation, Bayer
Corporation, Daiichi Pharmaceutical Co., Ltd., N.V. Organon and Bristol-Myers
Squibb Company.

Pharmacopeia's technology supports its pharmaceutical and biotechnology
customers in improving their drug discovery productivity. Pharmacopeia uses a
patented "Direct Divide" approach to combinatorial chemistry to build
collections, or libraries, of 10,000 to 500,000 or more small molecule
compounds by performing only 50 to 200 individual chemical reactions. This
"Direct Divide" approach yields a more controlled distribution of final
compounds than does the "pool and split" method currently used by certain other
companies in drug discovery and previously practiced at Pharmacopeia.
Pharmacopeia's ECLiPS technology offers substantial productivity improvements
as compared to the 10,000 to 500,000 or more reactions that would be required
to prepare similarly sized chemical libraries by synthesizing each compound
individually. The ECLiPS productivity advantage results from Pharmacopeia's
synthesis of compounds on tiny plastic beads in large mixtures. After each
solid phase synthesis step, proprietary tag sets are attached to the beads to
indicate the chemical building block and reaction conditions used in that step.
These stable, easily detectable tag sets enable Pharmacopeia to rapidly
identify from the mixture any compound that is active in a biological screening
assay. Pharmacopeia's tagging technology is licensed exclusively from Columbia
University ("Columbia") and Cold Spring Harbor Laboratory ("Cold Spring").

Pharmacopeia's objective is to be among the industry leaders in the discovery
and optimization of novel drug candidates. Pharmacopeia's commercialization
strategy is to pursue collaborations with pharmaceutical and biotechnology
companies. Pursuant to collaborative agreements, Pharmacopeia licenses its
libraries for screening by customers, forms drug discovery collaborations with
its customers and plans to license internally-developed compounds.
Pharmacopeia's technology strategy is to enhance productivity through cost
reductions and increased throughput and to build Pharmacopeia's library
collection and its knowledge base of the relationships between chemical
structures and biological targets for use in future drug discovery programs.

Pharmacopeia is a Delaware corporation with its principal executive offices
at 101 College Road East, Princeton, New Jersey 08540. Its telephone number is
(609) 452-3600. Its email address is pcop.com.

MSI. MSI is a leading provider of molecular modeling and simulation software.
MSI designs, develops, markets and supports software that facilitates the
discovery and development of new products and processes in the pharmaceutical,
biotechnology, chemical and materials industries. Using MSI's products,
researchers are able

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<PAGE>

to increase the speed and efficiency of the research and development cycle,
thereby reducing product development costs and shortening the time to market
for new product introductions and process improvements. MSI's customers
comprise leading commercial, governmental and academic organizations, including
many of the largest pharmaceutical, biotechnology, chemical, petroleum and
semiconductor companies worldwide.

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

MSI plans to continue enhancing its product and service offerings for
simulation specialists, who are the principal users of MSI's products. In
addition, MSI plans to broaden significantly its user base to include the much
larger population of experimentalists--laboratory scientists and engineers that
engage in experimental activities. MSI has packaged its core simulation
technologies into solutions-oriented applications known as computational
instruments. These products are easier to use than traditional simulation
products and perform specific functions analogous to typical laboratory
procedures. Recently, MSI has developed its WebLab family of products, which
are computational instruments accessible over corporate intranets. These
instruments create a "virtual laboratory" of computational instruments and
other products for use on desktop computers by a broad range of scientists to
perform computational chemistry, biology and materials experiments.

MSI was incorporated in Delaware in June 1984. MSI's principal executive
offices are located at 9685 Scranton Road, San Diego, California 92121. Its
telephone number is (619) 458-9990. Its e-mail address is [email protected].

Merger Subsidiary. Merger Subsidiary is a wholly-owned subsidiary of
Pharmacopeia recently formed for the sole purpose of facilitating the Merger.
Other than in connection with the Merger Agreement, Merger Subsidiary has no
assets (other than those received in connection with its initial
capitalization) or liabilities. Merger Subsidiary is a Delaware corporation
with its principal executive offices at 101 College Road East, Princeton, New
Jersey 08540. Its telephone number is (609) 452-3600.

THE STOCKHOLDER MEETINGS

Pharmacopeia. The Annual Meeting of Stockholders of Pharmacopeia (the
"Pharmacopeia Annual Meeting") will be held on June 12, 1998 at 9:00 a.m.,
local time, at The Forrestal at Princeton, 100 College Road East, Princeton,
New Jersey. At the Pharmacopeia Annual Meeting, holders of Pharmacopeia Common
Stock will be asked to consider and vote upon (i) a proposal to issue up to an
aggregate of 8,726,020 shares of Pharmacopeia Common Stock in order to effect
the proposed acquisition of MSI pursuant to the Merger Agreement (the "Issuance
Proposal"), (ii) a proposal to elect two directors to the Board of Directors
for a term of three years, (iii) a proposal to amend Pharmacopeia's 1994
Incentive Stock Plan (the "Incentive Plan") to increase the number of shares of
Pharmacopeia Common Stock authorized for issuance thereunder from 1,750,000 to
2,250,000 shares, (iv) a proposal to amend the Incentive Plan to increase the
number of shares of Pharmacopeia Common Stock authorized for issuance
thereunder to 2,750,000 shares, effective upon consummation of the Merger, (v)
the ratification of Ernst & Young LLP as Pharmacopeia's independent auditors
for the fiscal year ending December 31, 1998 and (vi) such other business as
may properly come before the Pharmacopeia Annual Meeting or any adjournment
thereof.

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<PAGE>

Only holders of record of Pharmacopeia Common Stock at the close of business
on April 13, 1998 (the "Pharmacopeia Record Date") are entitled to notice of
and to vote at the Pharmacopeia Annual Meeting or any adjournment or
postponement thereof. At the close of business on the Pharmacopeia Record Date,
there were outstanding and entitled to vote 11,811,079 shares of Pharmacopeia
Common Stock. Each holder of record of Pharmacopeia Common Stock is entitled to
cast one vote per share on any matter that may properly come before the
Pharmacopeia Annual Meeting. A majority of the issued and outstanding shares of
Pharmacopeia Common Stock entitled to vote at the Pharmacopeia Annual Meeting
must be represented at the Pharmacopeia Annual Meeting, in person or by proxy,
to constitute a quorum for the transaction of business. The affirmative vote of
the holders of a majority of the shares of Pharmacopeia Common Stock present in
person or represented by proxy is required to approve and adopt the proposed
amendments to the Incentive Plan, and to ratify the appointment of Ernst &
Young LLP. The election of the two nominees to the Pharmacopeia Board of
Directors named herein will be determined by a plurality of the votes cast. The
approval of the Issuance Proposal will be decided by a majority of the votes
cast.

As of the Pharmacopeia Record Date, the directors and executive officers of
Pharmacopeia owned or had voting control over an aggregate of 1,286,639 shares
of Pharmacopeia Common Stock, representing approximately 11% of the votes
entitled to be cast at the Pharmacopeia Annual Meeting. Each of the directors
and executive officers of Pharmacopeia has advised Pharmacopeia that he or she
intends to vote or direct the vote of all outstanding shares of Pharmacopeia
Common Stock over which he or she has voting control in favor of the approval
of the Issuance Proposal, the proposed amendments to the Incentive Plan, the
ratification of Ernst & Young LLP and the election of the two nominees to the
Pharmacopeia Board of Directors named herein.

MSI. A Special Meeting (the "MSI Special Meeting") of the stockholders of MSI
will be held at the principal executive offices of MSI located at 9685 Scranton
Road, San Diego, California 92121, on June 12, 1998, at 9:00 a.m., local time.
At the MSI Special Meeting, holders of MSI Common Stock and MSI Preferred Stock
will be asked to consider and vote upon (i) the approval and adoption of the
Merger Agreement and the approval of the Merger (the "Merger Proposal") and
(ii) such other matters as may properly come before the MSI Special Meeting or
any adjournment or postponement thereof.

Only holders of record of MSI Common Stock and MSI Preferred Stock at the
close of business on May 1, 1998 (the "MSI Record Date") will be entitled to
receive notice of and to vote at the MSI Special Meeting or any adjournment or
postponement thereof. As of the MSI Record Date, there were 278 stockholders of
record holding an aggregate of approximately 9,898,110 shares of MSI Common
Stock and one stockholder of record holding 2,222,223 shares of MSI Preferred
Stock. Each share of MSI Common Stock and MSI Preferred Stock entitles the
holder thereof to one vote on any matter that may properly come before the MSI
Special Meeting. The presence in person or by properly executed proxy of
holders of a majority of the issued and outstanding shares of MSI Common Stock
and MSI Preferred Stock is necessary to constitute a quorum at the MSI Special
Meeting. The approval of the Merger Proposal requires the affirmative vote of a
majority of the outstanding shares of MSI Common Stock and MSI Preferred Stock,
voting together as a single class. Pursuant to that certain Shareholders
Agreement, dated as of August 15, 1995, by and among Corning Incorporated
("Corning"), MSI and Certain Shareholders of MSI, Corning and its transferees
are required to vote all of their shares of MSI Common Stock in accordance with
a majority of the MSI Board of Directors on any matter submitted for or
requiring a stockholder vote.

As of the MSI Record Date, the directors and executive officers of MSI owned
or had voting control of over an aggregate of 6,334,237 shares of MSI Common
Stock and MSI Preferred Stock, representing approximately 52% of the votes
entitled to be cast at the MSI Special Meeting. Each of the directors and
executive officers of MSI has advised MSI that he intends to vote or direct the
vote of all outstanding shares of MSI Common Stock and/or MSI Preferred Stock
over which he has voting control in favor of the approval of the Merger
Proposal.

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THE MERGER

General. Pursuant to the Merger Agreement, Merger Subsidiary will be merged
with and into MSI. As a result of the Merger, the separate corporate existence
of Merger Subsidiary will cease and MSI will continue as the Surviving
Corporation. Each then outstanding share of MSI Capital Stock (except for any
such shares held by MSI or any subsidiary of MSI (or held by MSI as treasury
stock) and any such shares held by Pharmacopeia or any subsidiary of
Pharmacopeia) will be converted into the right to receive shares of
Pharmacopeia Common Stock based on the Exchange Ratio, and each outstanding MSI
Option will be converted into an option to purchase Pharmacopeia Common Stock
based on the Exchange Ratio. The terms of the Merger Agreement are more fully
described in "THE MERGER AGREEMENT." The terms of the conversion of shares of
MSI Capital Stock into Pharmacopeia Common Stock and the assumption of MSI
Options by Pharmacopeia are more fully described in "THE MERGER AGREEMENT--
Conversion of Shares of MSI Capital Stock Pursuant to the Merger; Treatment of
Options."

Effective Time. The Merger will become effective at the time and on the date
that a Certificate of Merger is filed with the Secretary of State of the State
of Delaware (the "Effective Time"). It is presently contemplated that the
Effective Time will occur as soon as practicable after the requisite approvals
of the stockholders of Pharmacopeia and MSI are obtained and other conditions
to the Merger set forth in the Merger Agreement are satisfied. See "THE MERGER
AGREEMENT--Conditions to Consummation of the Merger."

Exchange of Stock Certificates. As soon as reasonably practicable after the
Effective Time, instructions with regard to the surrender of MSI stock
certificates, together with a letter of transmittal to be used for this
purpose, will be furnished to MSI stockholders for use in exchanging their MSI
stock certificates for the shares of Pharmacopeia Common Stock and cash for
fractional shares they will be entitled to receive as a result of the Merger.
MSI STOCKHOLDERS SHOULD NOT SURRENDER THEIR STOCK CERTIFICATES FOR EXCHANGE
UNTIL SUCH INSTRUCTIONS AND LETTER OF TRANSMITTAL ARE RECEIVED. See "THE
MERGER--Exchange of Stock Certificates."

Conditions to the Merger. The respective obligations of Pharmacopeia, MSI and
Merger Subsidiary to consummate the Merger are subject to the fulfillment or
waiver (where permissible) of certain conditions set forth in the Merger
Agreement. These conditions include but are not limited to the approval by
Pharmacopeia stockholders of the Issuance Proposal, the approval by holders of
MSI Common Stock and MSI Preferred Stock of the Merger Proposal, the expiration
or termination of the waiting period applicable to the Merger under the HSR
Act, and the approval for quotation on the Nasdaq National Market of the shares
of Pharmacopeia Common Stock to be issued in the Merger. See "THE MERGER
AGREEMENT--Conditions to Consummation of the Merger."

Termination. The Merger Agreement may be terminated at any time prior to the
Effective Time (i) by the mutual written consent of Pharmacopeia and MSI, (ii)
by either Pharmacopeia or MSI if the Merger shall not have been consummated by
July 1, 1998, (iii) by either Pharmacopeia or MSI if a court or other
governmental body shall have issued a final order prohibiting the Merger, (iv)
by either Pharmacopeia or MSI if either such company's stockholders shall not
have approved the transactions contemplated by the Merger at the applicable
Stockholders' Meeting, (v) by either Pharmacopeia or MSI if either of such
entities' Board of Directors withdraws or adversely modifies its approval of
the Merger Agreement or approves another merger or similar transaction, or (vi)
by either Pharmacopeia or MSI, if the other shall have breached any
representation, warranty or covenant set forth in the Merger Agreement and such
breach shall not have been cured within 45 days of such breach. See "THE MERGER
AGREEMENT--Termination; Termination Fees and Expenses."

Termination Fees; Expenses. Subject to certain conditions, if the Merger
Agreement is terminated because of the failure to obtain the necessary
approvals of the stockholders of Pharmacopeia or MSI, then the party whose
stockholders did not give the necessary approval will be required to pay the
other party $1,750,000. If the Merger Agreement is terminated because the Board
of Directors of Pharmacopeia or MSI withdraws or adversely

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modifies its approval of the Merger Agreement or approves another merger or
similar transaction, then the party that withdrew or adversely modified its
approval of the Merger Agreement or approved another merger or similar
transaction will be required to pay the other party $3,000,000. If the Merger
Agreement is terminated because of an uncured breach of a representation,
warranty or covenant, then the breaching party shall pay to the non-breaching
party 120% of the non-breaching party's out-of-pocket legal and accounting
costs and expenses incurred in connection with the Merger Agreement. See "THE
MERGER AGREEMENT--Termination; Termination Fees and Expenses."

RECOMMENDATIONS OF THE BOARDS OF DIRECTORS; REASONS FOR THE MERGER

Pharmacopeia. The Pharmacopeia Board of Directors has concluded by a
unanimous vote of those directors present at the meeting at which the
Pharmacopeia Board of Directors approved the Merger Agreement that the Merger
is fair to and in the best interests of Pharmacopeia and its stockholders and
recommends that Pharmacopeia stockholders vote FOR the Issuance Proposal. The
Pharmacopeia Board of Directors has carefully reviewed and considered the terms
and conditions of the Merger and has consulted with Pharmacopeia's management,
as well as its financial and legal advisors, regarding the Merger. In the
course of this review, the Pharmacopeia Board of Directors analyzed a wide
variety of factors, which included both the potential benefits and risks of the
Merger, including, among other things, (i) the potential to enhance
Pharmacopeia's strategic position by acquiring computational chemistry
expertise and the prospect of developing new capabilities for use by the
combined company and its customers, (ii) the potential synergies that
Pharmacopeia would attempt to realize from the Merger, (iii) the opportunities
to market and cross-sell drug discovery products and services, (iv) the
significant quarterly fluctuations in MSI's operating results, and (v) the
difficulty that analysts and the stock market might have in valuing
Pharmacopeia Common Stock after the consummation of the Merger. The
Pharmacopeia Board of Directors did not reach specific conclusions as to any
factor and did not classify the various factors according to whether they were
favorable, unfavorable or neutral to the Board's conclusions. See "THE MERGER--
Recommendations of the Pharmacopeia Board of Directors; Pharmacopeia's Reasons
for the Merger."

MSI. The MSI Board of Directors considered a wide variety of information and
a number of factors in connection with its evaluation of the Merger and the
Merger Agreement, and determined that the Merger provides an opportunity that
serves the best interests of MSI and its stockholders. The MSI Board of
Directors believes that the Merger may result in a number of benefits to MSI
and its stockholders, including, among other benefits, the following: (i) the
ability for MSI to directly apply its technology in Pharmacopeia's drug
discovery laboratories to further enhance MSI's portfolio of scientific
simulation software, to improve the predictive utility and scientific accuracy
of MSI's software products and to offer more value to MSI's current and
prospective customers, (ii) the integration of Pharmacopeia's proprietary
ECLiPS technology, over 3.8 million compounds and expertise in chemistry and
biology for drug discovery, and MSI's software for analyzing chemical and
biological data as well as MSI's expertise in using informatics tools to
understand chemical interactions and molecular properties, (iii) the
opportunity for MSI to significantly expand the scope of products and services
it can offer to users, particularly in the areas of cheminformatics tools and
information technology services, and (iv) the opportunity for MSI stockholders
to receive Pharmacopeia Common Stock for which there is a public market, in
contrast to the illiquid nature of their present holdings of MSI Capital Stock.

The MSI Board of Directors has concluded unanimously that the Merger is fair
to and in the best interests of MSI and its stockholders and recommends that
MSI stockholders vote FOR the Merger Proposal. See "THE MERGER--Recommendations
of the MSI Board of Directors; MSI's Reasons for the Merger."

OPINIONS OF FINANCIAL ADVISORS

Pharmacopeia. BT Alex. Brown Incorporated ("BT Alex. Brown"), financial
advisor to Pharmacopeia in connection with the Merger, has delivered to the
Board of Directors of Pharmacopeia a written opinion dated

12
<PAGE>

February 4, 1998 to the effect that, as of the date of such opinion and based
upon and subject to certain matters stated therein, the Exchange Ratio was
fair, from a financial point of view, to Pharmacopeia. The full text of the
written opinion of BT Alex. Brown dated February 4, 1998, which sets forth the
assumptions made, matters considered and limitations on the review undertaken,
is attached as Annex 2 to this Joint Proxy Statement/Prospectus and should be
read carefully in its entirety. THE OPINION OF BT ALEX. BROWN IS DIRECTED TO
THE PHARMACOPEIA BOARD OF DIRECTORS, ADDRESSES ONLY THE FAIRNESS OF THE
EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW, AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE
PHARMACOPEIA ANNUAL MEETING. See "THE MERGER--Opinion of Pharmacopeia's
Financial Advisor."

MSI. Goldman, Sachs & Co. ("Goldman Sachs"), financial advisor to MSI in
connection with the Merger, has delivered its written opinion dated February 4,
1998 to the Board of Directors of MSI that, as of the date thereof, the
Exchange Ratio pursuant to the Merger Agreement is fair from a financial point
of view to the holders of MSI Common Stock and MSI Class B Common Stock. The
full text of the written opinion of Goldman Sachs, which sets forth assumptions
made, matters considered and limitations on the review undertaken in connection
with the opinion, is attached hereto as Annex 3 and is incorporated herein by
reference. The opinion of Goldman Sachs referred to herein does not constitute
a recommendation as to how any holder of MSI Common Stock should vote with
respect to such transaction. In addition, Goldman Sachs has not expressed any
opinion as to the prices at which Pharmacopeia Common Stock may trade in the
future. See "THE MERGER--Opinion of MSI's Financial Advisor."

INTERESTS OF CERTAIN PERSONS IN THE MERGER

In considering the recommendation of the Pharmacopeia Board of Directors and
the MSI Board of Directors, stockholders of Pharmacopeia and MSI should be
aware that certain directors of, and members of management of, Pharmacopeia and
MSI may be deemed to have interests in the Merger that are in addition to the
interests of Pharmacopeia and MSI stockholders generally. See "THE MERGER--
Interests of Certain Persons in the Merger."

REGULATORY APPROVALS

Pharmacopeia and MSI are not aware of any governmental or regulatory
requirements relating to the consummation of the Merger, other than compliance
with applicable federal and state securities laws and the HSR Act. On March 16,
1998, Pharmacopeia and an affiliate of MSI received notices of the grant of
early termination of the waiting period under the HSR Act. See "THE MERGER--
Regulatory Approvals."

APPRAISAL RIGHTS

Under Delaware law, holders of MSI Capital Stock who, prior to the MSI
Special Meeting, properly demand appraisal and, if entitled to vote at the MSI
Special Meeting, vote against or abstain from voting with respect to the Merger
Proposal have the right, if the Merger is nonetheless consummated, to require
the Surviving Corporation to purchase their shares for their "fair value." To
exercise such appraisal rights, such stockholders must comply with all
applicable procedural requirements. Stockholders of Pharmacopeia are not
entitled to appraisal rights under Delaware law in connection with the Merger.
See "APPRAISAL RIGHTS" and Annex 4 to this Joint Proxy Statement/Prospectus.

ACCOUNTING TREATMENT

The Merger is intended to be accounted for as a pooling of interests for
financial reporting purposes in accordance with generally accepted accounting
principles ("GAAP"). See "ACCOUNTING TREATMENT OF THE MERGER." It is a
condition to the consummation of the Merger that Ernst & Young LLP deliver a
letter

13
<PAGE>

regarding its concurrence with Pharmacopeia management's conclusion as to the
appropriateness of pooling of interests accounting for the Merger under
Accounting Principles Board Opinion No. 16 if closed and consummated in
accordance with the terms of the Merger Agreement, and that Arthur Andersen LLP
deliver a letter regarding its concurrence with MSI management's conclusion
that MSI could be a combining entity in a transaction accounted for as a
pooling of interests in accordance with GAAP. Although the receipt of these
letters is a condition to the consummation of the Merger that may be waived by
Pharmacopeia and MSI, it is not currently expected that such condition would be
waived if not satisfied. However, if such condition was waived, the
Registration Statement of which this Joint Proxy Statement/Prospectus forms a
part would be amended and proxies would be resolicited. See "THE MERGER
AGREEMENT--Conditions to Consummation of the Merger."

FEDERAL INCOME TAX CONSEQUENCES

The Merger is expected to be a tax-free reorganization for federal income tax
purposes under Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), such that no gain or loss will be recognized by MSI's
stockholders (other than certain stockholders in special circumstances) in
connection with the Merger (except that gain may be recognized with respect to
cash paid in lieu of fractional shares of Pharmacopeia Common Stock). Neither
Pharmacopeia nor MSI has requested an advance ruling from the Internal Revenue
Service as to the tax consequences of the Merger. As contemplated by the Merger
Agreement, each of Pharmacopeia and MSI will receive at or prior to the closing
of the transactions contemplated by the Merger Agreement (the "Closing")
opinions of counsel, which opinions will be based on customary conditions and
qualifications and certain factual representations from Pharmacopeia and MSI,
that, for federal income tax purposes, the Merger will constitute a
reorganization under Section 368 of the Code. Although the receipt of these
opinions is a condition to the consummation of the Merger that may be waived by
Pharmacopeia and MSI, it is not currently expected that such condition would be
waived if not satisfied. However, if such condition was waived, the
Registration Statement of which this Joint Proxy Statement/Prospectus forms a
part would be amended and proxies would be resolicited. MSI stockholders should
consult their own tax advisors as to the tax consequences of the Merger to them
under federal, state, local or any other applicable law. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES."

RISK FACTORS

Certain factors should be considered in evaluating the Merger Proposal and
the Issuance Proposal and the ownership of Pharmacopeia Common Stock to be
issued in the Merger. See "RISK FACTORS."

MARKETS AND MARKET PRICES

The following table sets forth the closing price per share of Pharmacopeia
Common Stock as reported on the Nasdaq National Market on (i) February 4, 1998,
the last trading day preceding public announcement of the Merger, and (ii) May
6, 1998, the last trading day prior to the date of printing of this Joint Proxy
Statement/Prospectus. The equivalent MSI per share price at each specified date
represents the closing price of a share of Pharmacopeia Common Stock on such
date multiplied by the Exchange Ratio. See "THE MERGER AGREEMENT--Conversion of
Shares of MSI Capital Stock Pursuant to the Merger; Treatment of Options."

<TABLE>
<CAPTION>
PHARMACOPEIA EQUIVALENT MSI
CLOSING PRICE AT: COMMON STOCK PER SHARE PRICE
----------------- ------------ ---------------
<S> <C> <C>
February 4, 1998................................... $15.625 $ 8.27
May 6, 1998........................................ $ 20.25 $10.72
</TABLE>

Because the market price of Pharmacopeia Common Stock is subject to
fluctuation and the Exchange Ratio is fixed, the market value of the shares of
Pharmacopeia Common Stock that holders of MSI Capital Stock will receive in the
Merger may increase or decrease prior to the Merger. Stockholders of
Pharmacopeia and MSI are urged to obtain current market quotations for
Pharmacopeia Common Stock.

14
<PAGE>

There has been no public market for the MSI Capital Stock.

COMPARATIVE PER SHARE DATA

The following table presents selected comparative unaudited per share data
for Pharmacopeia Common Stock on an historical and pro forma combined basis and
for MSI Capital Stock on an historical and pro forma equivalent basis giving
effect to the Merger on a pooling of interests accounting basis. For a
description of the pooling of interests accounting treatment of the Merger and
the related effects on the historical financial statements of Pharmacopeia, see
"ACCOUNTING TREATMENT OF THE MERGER." The information presented below should be
read in conjunction with the historical financial statements and notes thereto
of Pharmacopeia and MSI and the Unaudited Pro Forma Combined Condensed
Financial Statements and related notes thereto, included or incorporated by
reference in this Joint Proxy Statement/Prospectus. See "INCORPORATION OF
CERTAIN INFORMATION BY REFERENCE," "INDEX TO MOLECULAR SIMULATIONS INCORPORATED
FINANCIAL STATEMENTS" and "UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS."

This information is not necessarily indicative of the results of future
operations of the combined entity or the actual results that would have
occurred had the Merger been consummated prior to the periods indicated.

<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
PER SHARE OF PHARMACOPEIA COMMON
STOCK:
Book Value:
Historical........................ $ 5.98
Pro forma(1)...................... $ 4.29
Net income (loss):
Historical........................ $ (2.77) $ (0.77) $ (0.58)
Pro forma(1)...................... $ (3.48) $ (0.47) $ (0.10)
PER SHARE OF MSI CAPITAL STOCK:
Book Value(2):
Historical........................ $ 0.92
Pro forma equivalent(3)........... $ 2.27
Net income (loss):
Historical--Basic................. $ (2.28) $ 0.27 $ 0.56
Historical--Diluted............... $ (2.28) $ 0.17 $ 0.35
Pro forma equivalent--Basic(3).... $ (1.84) $ (0.25) $ (0.05)
Pro forma equivalent--Diluted(3).. $ (1.84) $ (0.25) $ (0.05)
</TABLE>
- --------
(1) Based upon an exchange ratio of 0.5292 of a share of Pharmacopeia Common
Stock for each share of MSI Capital Stock.
(2) The MSI historical book value is computed by dividing stockholders' equity
by the number of shares of MSI Common Stock outstanding at the end of each
period. For MSI, all shares of MSI Class B Common Stock and MSI Preferred
Stock are assumed to convert into MSI Common Stock on a one-for-one basis.
(3) The MSI pro forma equivalent per share amounts are calculated by
multiplying the Pharmacopeia combined pro forma per share amounts by the
Exchange Ratio.

DIVIDEND POLICY

Neither Pharmacopeia nor MSI has declared or paid any cash dividends on any
series of its capital stock during any period for which information is provided
in this Joint Proxy Statement/Prospectus.

15
<PAGE>

SELECTED HISTORICAL FINANCIAL DATA OF PHARMACOPEIA, INC.

The following selected historical information is derived from financial
statements of Pharmacopeia which have been audited by Ernst & Young LLP,
independent auditors. This data should be read in conjunction with the
historical financial statements of Pharmacopeia and related notes incorporated
by reference herein. See "AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE."

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 26, 1993
(INCEPTION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------
1993 1994 1995 1996 1997
-------------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Total revenue............ $ $ $ 5,151 $ 14,799 $ 24,523
Operating loss........... (2,134) (8,472) (9,661) (12,058) (10,844)
Net loss................. (2,107) (8,349) (8,956) (8,383) (6,678)
Basic net loss per
share................... (1.24) (3.15) (2.77) (.77) (.58)
Weighted average number
of common stock
outstanding-basic(1).... 1,701 2,648 3,231 10,834 11,454
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities....... $ 1,658 $ 13,490 $ 60,900 $ 81,482 $ 82,621
Total assets................. 2,299 15,512 65,541 91,979 95,687
Notes payable and deferred
revenue, long-term portion.. 78 254 969 3,451 3,987
Accumulated deficit.......... (2,107) (10,456) (19,412) (27,795) (34,473)
Total stockholders' equity... 1,916 10,980 54,334 69,748 70,437
</TABLE>
- --------
(1) Computed on the basis described for basic net loss per share in Note 2 to
Financial Statements included in Pharmacopeia's Form 10-K for the year
ended December 31, 1997 incorporated herein by reference.

16
<PAGE>

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF
MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

The following selected historical financial information of MSI is qualified
in its entirety by the more detailed financial statements and notes thereto
included elsewhere in this Joint Proxy Statement/Prospectus. The statements of
operations data for the years ended December 31, 1995, 1996 and 1997 and the
balance sheet data as of December 31, 1996 and 1997 have been derived from such
financial statements and notes thereto. The statements of operations data for
the years ended December 31, 1993 and 1994, and the balance sheet data as of
December 31, 1993, 1994 and 1995 have been derived from MSI's consolidated
financial statements, which statements have been audited by Arthur Andersen LLP
and are not included in this Joint Proxy Statement/Prospectus. This data should
be read in conjunction with "MSI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the financial statements and
notes thereto appearing elsewhere herein.

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents.... $ 1,609 $ 5,855 $ 10,371 $ 14,509 $ 15,019
Total assets................. 11,080 14,916 34,152 41,265 46,464
Notes payable, deferred
revenue and other
liabilities, long-term
portion..................... 2,137 2,774 3,116 2,982 2,207
Accumulated deficit.......... (19,323) (22,251) (34,131) (31,534) (26,084)
Total stockholders' equity... 3,381 6,812 5,149 7,388 12,259
</TABLE>
- --------
(1) The financial information set forth above excludes financial information
for Biosym Technologies, Inc. ("Biosym") prior to August 16, 1995, the
effective date of MSI's acquisition of Biosym.
(2) The 1995 amount includes a $6.5 million write-off of acquired in-process
research and development, $4.5 million in restructuring costs and a $1.1
million write-off of capitalized software, all in connection with the
acquisition of Biosym.
(3) See Note 2 of Notes to MSI Consolidated Financial Statements for a
description of the computation of the net income (loss) per share and the
number of shares used in the per share calculation.

17
<PAGE>

PHARMACOPEIA, INC.
MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES
SELECTED PRO FORMA COMBINED FINANCIAL DATA
(UNAUDITED)

The following table sets forth selected unaudited pro forma combined
financial data for Pharmacopeia and MSI, for the years ended December 31, 1995,
1996 and 1997 giving effect to the Merger under the pooling of interests method
of accounting assuming a 0.5292 Exchange Ratio and consummation of the Merger
on January 1, 1995 for the pro forma combined condensed statements of
operations. The pro forma combined condensed balance sheet assumes the
consummation of the Merger as of December 31, 1997. See "ACCOUNTING TREATMENT
OF THE MERGER." The selected pro forma combined financial data is derived from
the pro forma combined condensed financial statements included elsewhere herein
and should be read in conjunction therewith. See "UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS." The selected pro forma combined financial data
should be read in conjunction with the financial statements of Pharmacopeia and
the notes thereto incorporated by reference herein, and in conjunction with
"MSI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the financial statements of MSI and notes thereto appearing
elsewhere herein. The selected pro forma combined financial data is not
necessarily indicative of the combined results of operations or the combined
financial position that would have resulted had the Merger been consummated at
the beginning of the applicable periods indicated, nor is it necessarily
indicative of the results of operations in future periods or the future
financial position of the combined entity.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
------------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
PRO FORMA COMBINED STATEMENTS OF
OPERATIONS DATA:
Revenue
Contract......................... $ 5,151 $ 14,799 $ 24,523
Software license, service and
hardware........................ 30,120 47,261 56,674
------------- ------------ ------------
Total revenue.................. 35,271 62,060 81,197
Operating loss..................... (21,300) (8,358) (3,024)
Net loss........................... (20,836) (7,386) (1,728)
Basic net loss per share........... (3.48) (.47) (.10)
Weighted average number of common
stock outstanding-basic........... 5,986 15,878 16,592
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1997
------------------
(IN THOUSANDS)
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities........... $ 97,640
Total assets............................................... 140,051
Notes payable, deferred revenue, and other liabilities,
long-term portion......................................... 6,194
Accumulated deficit........................................ (62,657)
Total stockholders' equity................................. 80,596
</TABLE>

18
<PAGE>

RISK FACTORS

In addition to the other information in this Joint Proxy
Statement/Prospectus, the following factors should be considered carefully (i)
by MSI stockholders in evaluating an investment in the shares of Pharmacopeia
Common Stock offered by this Joint Proxy Statement/Prospectus and (ii) by
Pharmacopeia stockholders in considering the Issuance Proposal.

RISKS COMMON TO BOTH COMPANIES

Dependence on, and Protection of, Patents and Proprietary
Rights. Pharmacopeia's success will depend in large part on its ability, and
the ability of its licensees and its licensors, to obtain patents for its
technologies and the compounds and other products, if any, resulting from the
application of such technologies, defend patents once obtained and maintain
trade secrets, both in the United States and in foreign countries. The
commercial success of Pharmacopeia will also depend upon avoiding the
infringement of patents issued to competitors and upon maintaining the
technology licenses upon which certain of Pharmacopeia's current products are,
or any future products under development might be, based. Pharmacopeia and its
licensors currently have six issued U.S. patents and a number of pending U.S.
and foreign patent applications relating to various aspects of Pharmacopeia's
technology, including its molecular tag sets, certain screening technologies
and its libraries or compounds contained therein. Of particular note,
Pharmacopeia is the exclusive licensee of U.S. patents issued on October 15,
1996 and February 24, 1998 which provide broad protection to Pharmacopeia's
use of encoded combinatorial libraries, and has a number of pending U.S. and
foreign patent applications relating to various aspects of Pharmacopeia's
technology, including its molecular tag sets, certain screening technologies
and its libraries or compounds contained therein. Certain patent applications,
relating to encoded combinatorial libraries, have been filed by others prior
to Pharmacopeia's patent applications. In February of 1997, the European
Patent Office granted to Affymax Technologies N.V. ("Affymax"), a subsidiary
of Glaxo Wellcome Inc., certain patent claims which, if valid, would cover the
synthesis of encoded small molecule libraries of the type developed by
Pharmacopeia. On November 12, 1997, Pharmacopeia filed an Opposition to these
patent claims challenging their validity. If these claims are found valid and
are enforceable, Pharmacopeia's ability to practice its ECLiPS technology in
Europe would be restricted unless Pharmacopeia obtains appropriate licenses
from the owner of such patents. Although Pharmacopeia has business
relationships with a number of European customers, Pharmacopeia does not
currently practice its technology in Europe. On January 13, 1998, a U.S.
patent was issued to Affymax that contains certain claims covering a method of
preparing an encoded library of chemical compounds. In a press release issued
by Affymax on January 13, 1998, Affymax stated that these patent claims
provide it with "a dominant proprietary position in the area of tagged
chemical libraries." Pharmacopeia's scientific staff has reviewed these patent
claims and believes that such claims do not cover the ECLiPS technology. If it
is ultimately determined that these claims are valid and enforceable and that
Pharmacopeia's ECLiPS technology infringes such claims, then Pharmacopeia's
ability to use its ECLiPS technology in the United States may be restricted
unless Pharmacopeia obtains appropriate licenses from the owner of such patent
and Pharmacopeia may be subject to a claim for monetary damages. There can be
no assurance that any licenses from Affymax would be available to Pharmacopeia
or would be available upon terms reasonably acceptable to Pharmacopeia.

Some of Pharmacopeia's competitors have, or are affiliated with companies
having, substantially greater resources than Pharmacopeia, and such
competitors may be able to sustain the costs of complex patent litigation to a
greater degree and for longer periods of time than Pharmacopeia. Uncertainties
resulting from the initiation and continuation of any patent or related
litigation could have a material adverse effect on Pharmacopeia's ability to
compete in the marketplace pending resolution of the disputed matters. In
addition, there can be no assurance that additional patents will issue to
Pharmacopeia or its licensors as a result of their pending applications or
that, if issued, such patents will be sufficiently broad to afford protection
against competitors with similar technology. Moreover, there can be no
assurance that Pharmacopeia or its customers will be able to obtain patent
protection for lead compounds or pharmaceutical products based upon
Pharmacopeia's technology. There can be no assurance that any patents issued
to Pharmacopeia or its collaborative partners, or for which Pharmacopeia has

19
<PAGE>

license rights, will not be challenged, invalidated or circumvented, or that
the rights granted thereunder will provide competitive advantages to
Pharmacopeia. Litigation, which could result in substantial cost to
Pharmacopeia, may be necessary to enforce Pharmacopeia's patent and license
rights or to determine the scope and validity of others' proprietary rights.
If competitors of Pharmacopeia prepare and file patent applications in the
United States that claim technology also claimed by Pharmacopeia, Pharmacopeia
may have to participate in interference proceedings declared by the U.S.
Patent and Trademark Office (the "PTO") to determine the priority of
invention, which could result in substantial cost to Pharmacopeia, even if the
outcome is favorable to Pharmacopeia. An adverse outcome could subject
Pharmacopeia to significant liabilities to third parties and require
Pharmacopeia to license disputed rights from third parties or cease using the
technology, which licenses may not be available, if at all, at reasonable
cost. A number of pharmaceutical and biotechnology companies, and research and
academic institutions have developed technologies, filed patent applications
or received patents on various technologies that may be related to
Pharmacopeia's business. Some of these technologies, applications or patents
may conflict with Pharmacopeia's technologies or patent applications. Such
conflicts could also limit the scope of the patents, if any, that Pharmacopeia
may be able to obtain, or result in the denial of Pharmacopeia's patent
applications.

Pharmacopeia currently has certain licenses from third parties and in the
future may require additional licenses from other parties to develop,
manufacture and market commercially viable products effectively. There can be
no assurance that: (i) such licenses will be obtainable on commercially
reasonable terms, if at all; (ii) the patents underlying such licenses will be
valid and enforceable; or (iii) the proprietary nature of the patented
technology underlying such licenses will remain proprietary. Pharmacopeia
relies substantially on certain technologies that are not patentable or
proprietary and are therefore available to Pharmacopeia's competitors.
Pharmacopeia also relies on certain proprietary trade secrets and know-how, in
part through the use of confidentiality agreements with its employees,
consultants and certain of its contractors. There can be no assurance that (i)
these agreements will not be breached, (ii) Pharmacopeia would have adequate
remedies for any breach, or (iii) Pharmacopeia's trade secrets will not
otherwise become known or be independently developed or discovered by
competitors.

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

There can be no assurance that third parties will not claim infringement by
MSI of their intellectual property rights. From time to time MSI receives
letters from third parties claiming or suggesting that its products may
infringe patents or other intellectual property rights. In particular, MSI has
received letters from Tripos, Inc. ("Tripos") and Immunex Corporation
("Immunex") stating that three of MSI's over 100 product modules may be
relevant to patents held by them. MSI received a letter from Tripos in each of
May 1991, July 1992 and June 1995, concerning MSI's Cerius/2/-MFA product
module, and from Immunex in each of February, July and December 1996, March
1997 and January 1998 concerning MSI's Consensus or Modeler, or both, product
modules. MSI has investigated these matters and believes that they are
immaterial to the operations of MSI.

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There can be no assurance, however, that MSI's products do not infringe upon
the patent or other intellectual property rights of these or other third
parties, that MSI will not be required to seek licenses for or otherwise
acquire rights to technology as a result of claims of infringement or that
these or other companies will not bring infringement suits against MSI. MSI
expects in general that simulation software product developers will
increasingly be subject to infringement claims as the number of products and
competitors in MSI's industry segments grows and the functionality of products
in different industry segments overlaps. Any such claims, with or without
merit, could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
MSI to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to MSI, if
at all. In the event of a successful claim of product infringement against
MSI, the failure or inability of MSI to license or design around the infringed
technology could have a material adverse effect on MSI's business, financial
condition and results of operations. See "INFORMATION CONCERNING MSI--
Intellectual Property and Other Proprietary Rights."

Risks Associated with Combining the Two Companies. The integration of
Pharmacopeia's and MSI's operations will require the dedication of management
resources that will temporarily detract attention from the day-to-day
operations of the combined company. The combination of the two companies will
also require coordination of their research and development and sales and
marketing efforts. The difficulties of combining the two companies may be
increased by the necessity of coordinating geographically separated
organizations, integrating personnel with disparate business backgrounds and
combining two different corporate cultures. The process of combining the two
organizations may cause an interruption of, or a loss of momentum in, the
activities of either or both of the companies' businesses, which could have an
adverse effect on the revenue and operating results of the combined company,
at least in the near term. There can be no assurance that the combined entity
will be able to retain its key technical and management personnel or that the
combined entity will realize any of the anticipated benefits of the Merger.
Failure to effectively accomplish the integration of the two companies'
operations could have an adverse effect on the combined company's results of
operations and financial condition.

Uncertainties Relating to Operations as a Combined Company. Pharmacopeia and
MSI have entered into the Merger Agreement with the expectation that the
Merger will result in beneficial synergies for the combined companies. See
"THE MERGER--Recommendations of the Pharmacopeia Board of Directors;
Pharmacopeia's Reasons for the Merger" and "--Recommendation of the MSI Board
of Directors; MSI's Reasons for the Merger." There can be no assurance that
these synergies will be achieved. Additionally, there can be no assurance that
the results of operations and financial condition of MSI and Pharmacopeia as a
combined company after the Merger will be as strong as the results of such
companies had they continued to operate independently. In particular,
perceived competition between Pharmacopeia and MSI's pharmaceutical and
biotechnology customers may reduce MSI's sales to such customers and adversely
impact its ability to increase sales in the pharmaceutical and biotechnology
industries. Similarly, certain of Pharmacopeia's collaborators and potential
future collaborators may be concerned that MSI's customers might gain access
to confidential aspects of Pharmacopeia's research and development efforts on
behalf of such collaborators. In addition, third parties who currently license
to Pharmacopeia software products similar to MSI's products may be concerned
that MSI might gain access to confidential aspects of such third-party
products. As a result of these and other factors, there can be no assurance
that the anticipated synergies for the combined company will be achieved.

Management of Growth and Retention of Qualified Personnel. The success of
Pharmacopeia's combinatorial chemistry operations will depend on the expansion
and management of its current operations. To be cost effective in its delivery
of services and products, Pharmacopeia must enhance productivity through
further automation of its processes and improvements to its technology
generally. In addition, Pharmacopeia must successfully structure and manage
multiple additional collaborative relationships, including maintaining
confidentiality of the research being provided for multiple customers. There
can be no assurance that Pharmacopeia will be successful in adding technical
personnel as needed to meet the staffing requirements of additional
collaborative relationships. In addition, although MSI is currently investing,
and plans to continue to invest, significant resources to expand its sales
force and to develop additional distribution relationships, MSI

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has at times experienced and continues to experience difficulty in recruiting
and retaining qualified sales personnel and in establishing necessary sales
representative relationships. There can be no assurance that MSI will be
successful in attracting and retaining the necessary personnel. In addition,
there can be no assurance that Pharmacopeia will be successful in its
engineering efforts to further automate its processes or its initiatives to
develop new materials or reactions for solid phase synthesis and therefore
expand the potential range of compounds it can produce. Furthermore, there can
be no assurance that conflicts will not arise between customers as to
proprietary rights to particular compounds in Pharmacopeia's libraries.
Failure to achieve any of these goals or the occurrence of conflicts could
have a material adverse effect on Pharmacopeia's and MSI's business, financial
condition or results of operations.

Competition. Competition in the pharmaceutical and biotechnology industries
is intense. Many organizations are actively attempting to identify and
optimize compounds for potential pharmaceutical development. Pharmacopeia
competes with the research departments of pharmaceutical companies,
biotechnology companies, other combinatorial chemistry companies and research
and academic institutions. Historically, pharmaceutical companies have
maintained close control over their research activities, including the
synthesis, screening and optimization of chemical compounds. Many of these
companies, which represent the greatest potential market for Pharmacopeia's
products and services, are developing combinatorial chemistry and other
methodologies to improve productivity, including major investments in robotics
technology to permit the automated parallel synthesis of compounds. In
addition, Pharmacopeia competes with companies that provide combinatorial
chemistry products and services to third parties using methodologies such as
parallel synthesis, large molecule tags, deconvolution and spatial separation.
Academic institutions, governmental agencies and other research organizations
are also conducting research in areas in which Pharmacopeia is working, either
on their own or through collaborative efforts. Pharmacopeia anticipates that
it will face increased competition in the future as new companies enter the
market and advanced technologies become available.

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

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

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Pharmacopeia's or MSI's technologies or services may have a material adverse
effect on the business, financial condition and results of operations of the
combined company.

Control of the Combined Company by Insiders and Affiliates. Upon completion
of the Merger, Pharmacopeia's executive officers, directors and affiliated
entities, and MSI's executive officers, together will beneficially own
approximately 21.7% of the outstanding shares of Pharmacopeia Common Stock
immediately after the Effective Time. As a result, these stockholders, acting
together, will be able to influence significantly and possibly control most
matters requiring approval by the stockholders of Pharmacopeia, including the
election of directors. Such a concentration of ownership may have the effect
of delaying or preventing a change in control of Pharmacopeia, including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices.

Dependence on Key Employees. Pharmacopeia is highly dependent on the
principal members of its scientific and management staff, including Joseph A.
Mollica, Ph.D., Chairman of the Board, President and Chief Executive Officer;
Lewis J. Shuster, Executive Vice President, Corporate Development and Chief
Financial Officer; Stephen A. Spearman, Ph.D., Executive Vice President of
Operations; John J. Baldwin, Ph.D., Senior Vice President of Chemistry; and
Nolan H. Sigal, M.D., Ph.D., Senior Vice President of Drug Discovery. MSI is
highly dependent on its principal executive officers, including, Michael J.
Savage, President and Chief Executive Officer; Saiid Zarrabian, Chief
Operating Officer; and David B. Hiatt, Senior Vice President and Chief
Financial Officer. The loss of one or more of these individuals could have a
material adverse effect on Pharmacopeia's business, financial condition and
results of operations after the Effective Time. Neither Pharmacopeia nor MSI
maintains key person life insurance on the life of any employee. The combined
companies' future success also will depend in part on the continued service of
key scientific, software, sales, engineering and management personnel and its
ability to identify, hire and retain additional personnel. There is intense
competition for such qualified personnel, and immigration laws may further
restrict the ability to attract or hire qualified personnel. There can be no
assurance that Pharmacopeia or MSI will be able to continue to attract and
retain such personnel necessary for the development of its business after the
Effective Time. Failure to attract and retain key personnel could have a
material adverse effect on either company's business, financial condition and
results of operations after the Effective Time.

Volatility of Stock Price. Pharmacopeia Common Stock trades on the Nasdaq
National Market. The market price of Pharmacopeia Common Stock, like the
shares of many other biotechnology companies, has been and may continue to be
volatile. Broad market and industry fluctuations may adversely affect the
market price of Pharmacopeia Common Stock. Factors such as quarterly
fluctuations in results of operations, the announcement of technological
innovations, the introduction of new products by the combined company or its
competitors and general economic conditions may have a significant impact on
the market price of Pharmacopeia Common Stock. There can be no assurance as to
the effect of the consummation or failure to consummate the Merger on the
market price of Pharmacopeia Common Stock.

Fees and Expenses Payable Upon Termination of the Merger Agreement. Subject
to certain conditions, if the Merger Agreement is terminated because of the
failure to obtain the necessary approvals of the stockholders of Pharmacopeia
or MSI, then the party whose stockholders did not give the necessary approval
will be required to pay the other party $1,750,000. If the Merger Agreement is
terminated because the Board of Directors of Pharmacopeia or MSI withdraws or
adversely modifies its approval of the Merger Agreement or approves another
merger or similar transaction, then the party that withdrew or adversely
modified its approval of the Merger Agreement or approved another merger or
similar transaction will be required to pay the other party $3,000,000. If the
Merger Agreement is terminated because of an uncured breach of a
representation, warranty or covenant, then the breaching party shall pay to
the non-breaching party 120% of the non-breaching party's out-of-pocket legal
and accounting costs and expenses incurred in connection with the Merger
Agreement. See "THE MERGER AGREEMENT--Termination; Termination Fees and
Expenses."

RISKS RELATED TO PHARMACOPEIA

History of Operating Losses; Uncertainty of Future Profitability. For the
years ended December 31, 1995, 1996 and 1997, Pharmacopeia had net losses of
approximately $8,956,000, $8,383,000 and $6,678,000, respectively. As of
December 31, 1997, Pharmacopeia had an accumulated deficit of approximately
$34,473,000. Expansion of Pharmacopeia's operations and enhancements to its
technology may result in significant expenses

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over the next few years that may not be offset by significant revenues.
Pharmacopeia expects that any revenues for the foreseeable future and
Pharmacopeia's ability to achieve profitability will be dependent upon the
ability of Pharmacopeia to enter into additional collaborative arrangements
with customers. To date, all revenues received by Pharmacopeia have been from
upfront fees, research and development funding paid pursuant to collaborative
and licensing agreements with third parties, and certain milestone payments
made by such third parties pursuant to such agreements. Pharmacopeia has not
yet received any revenues from royalties or license fees from the discovery,
development or sale of a commercial drug by a customer, and no such revenues
are expected for several years, if at all. An element of Pharmacopeia's
commercialization strategy is the potential development and licensing to
others of lead compounds or drug development candidates identified by
Pharmacopeia at Pharmacopeia's expense, for potential pharmaceutical
development. To date, one such license has been entered into, but there can be
no assurance that additional licenses will be entered into on acceptable terms
in the future, if at all. Pharmacopeia is unable to predict when, or if, it
will become profitable. Pharmacopeia expects that its losses will fluctuate
from quarter to quarter and that such variations may be substantial.

Uncertain Business; Limited Market for Products and Services. Pharmacopeia's
strategy is to use combinatorial chemistry for the purpose of rapidly
identifying, optimizing and obtaining proprietary rights to as many lead
compounds and drug development candidates as possible. Pharmacopeia's ability
to achieve profitability in the near term depends on its ability to enter into
additional collaborative and licensing agreements with third parties and to
maintain the agreements it currently has in place. The pricing and nature of
Pharmacopeia's combinatorial libraries are such that there may only be a
limited number of companies that are potential customers for such libraries.
Pharmacopeia's ability to succeed is also dependent upon the acceptance by
potential customers of combinatorial chemistry and analysis of compounds
provided by Pharmacopeia as an effective tool in new drug discovery.
Historically, pharmaceutical companies have conducted lead compound
identification and optimization within their own research departments, due to
the highly proprietary nature of the activities being conducted, the central
importance of these activities to their drug discovery and development
efforts, and the desire to obtain maximum patent and other proprietary
protection on the results of their internal programs. In order to achieve its
business objectives, Pharmacopeia must convince these companies that
Pharmacopeia's technology and expertise justify the outsourcing of these
programs to Pharmacopeia. Although Pharmacopeia has entered into license and
collaboration agreements with major pharmaceutical and biotechnology
companies, there can be no assurance that Pharmacopeia will be able to
continue to attract customers on acceptable terms for its products and
services or develop a sustainable profitable business.

Dependence on Collaborators. Pharmacopeia's strategy for the development and
commercialization of its products and services depends upon the formation of
collaborations and licensing arrangements with third parties, principally
pharmaceutical companies. To date, Pharmacopeia has entered into eight such
arrangements. There can be no assurance that Pharmacopeia will be able to
establish additional collaborative or licensing arrangements, that any such
arrangements or licenses will be on terms favorable to Pharmacopeia, or that
current or future collaborative or licensing arrangements will ultimately be
successful. Further, Pharmacopeia's recognition of revenues from collaborative
arrangements is affected by the timing of efforts expended by Pharmacopeia and
the timing of lead compound identification and optimization. Pharmacopeia's
products and services will only result in commercialized pharmaceutical
products generating milestone payments and royalties upon significant
preclinical and clinical development, requisite regulatory approvals, the
establishment of manufacturing capabilities and successful marketing.
Pharmacopeia does not currently intend to perform any of these activities,
other than in some instances preclinical work. Therefore, Pharmacopeia will be
dependent upon the expertise and dedication of sufficient resources by third
parties to develop and commercialize products based on library compounds
produced and lead compounds discovered by Pharmacopeia. Should a collaborative
partner fail to develop or commercialize a compound or product to which it has
rights from Pharmacopeia, Pharmacopeia may not receive any future milestone
payments or royalties associated with such compound or product. Pharmacopeia's
contractual arrangements with its customers do not obligate the customers to
develop or commercialize lead compounds discovered by Pharmacopeia. In
addition, there can be no assurance that any such development or
commercialization would be successful. The compound basis for drugs developed
by a customer may be a derivative or optimized version of the lead compound
provided to the customer by Pharmacopeia. While Pharmacopeia's existing
collaborative agreements provide that Pharmacopeia will receive milestone
payments and royalties with respect to products developed from certain
derivative compounds, there can be no assurance that disputes will not arise
over the application of payment provisions to such products. There can be

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no assurance that current or future collaborative partners will not pursue
alternative technologies, or develop alternative products either on their own
or in collaboration with others, including Pharmacopeia's competitors, as a
means for developing treatments for the diseases targeted by collaborative
arrangements with Pharmacopeia.

Costs and Risks Associated with Government Regulation. Regulation by
governmental entities in the United States and other countries will be a
significant factor in the production and marketing of any pharmaceutical
products that may be developed by a customer of Pharmacopeia or, in the event
Pharmacopeia decides to develop a drug beyond the preclinical phase, by
Pharmacopeia. The nature and the extent to which such regulation may apply to
Pharmacopeia's customers will vary depending on the nature of any such
pharmaceutical products. Virtually all pharmaceutical products developed by
Pharmacopeia's customers will require regulatory approval by governmental
agencies prior to commercialization. In particular, human pharmaceutical
therapeutic products are subject to rigorous preclinical and clinical testing
and other approval procedures by the U.S. Food and Drug Administration (the
"FDA") and by foreign regulatory authorities. Various federal and, in some
cases, state statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and marketing of such
pharmaceutical products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations are time consuming and require the expenditure of substantial
resources. Generally, in order to gain FDA approval, a company first must
conduct preclinical studies in the laboratory and in animal models to gain
preliminary information on a compound's efficacy and to identify any safety
problems. The results of these studies are submitted as a part of an
Investigational New Drug application ("IND") that the FDA must review before
human clinical trials of an investigational drug can start. In order to
commercialize any products, Pharmacopeia or its customer will be required to
sponsor and file an IND and will be responsible for initiating and overseeing
the clinical studies to demonstrate the safety and efficacy that are necessary
to obtain FDA approval of any such products. Clinical trials are normally done
in three phases and generally take two to five years, but may take longer, to
complete. After completion of clinical trials of a new product, FDA and
foreign regulatory authority marketing approval must be obtained. If the
product is classified as a new drug, Pharmacopeia or its customer will be
required to file a New Drug Application ("NDA") and receive approval before
commercial marketing of the drug. The testing and approval processes require
substantial time and effort and there can be no assurance that any approval
will be granted on a timely basis, if at all. NDAs submitted to the FDA can
take, on average, two to five years to obtain approval. If questions arise
during the FDA review process, approval can take more than five years. Even if
FDA regulatory clearances are obtained, a marketed product is subject to
continual review, and later discovery of previously unknown problems or
failure to comply with the applicable regulatory requirements may result in
restrictions on the marketing of a product or withdrawal of the product from
the market as well as possible civil or criminal sanctions. For marketing
outside the United States, Pharmacopeia will also be subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for pharmaceutical products. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country.

Dependence on Capital; Uncertainty of Additional Funding. Pharmacopeia's
research programs under collaborative agreements with third parties will
expire over the next three years unless they are renewed or extended. There
can be no assurance that such research programs will be renewed or extended,
that any such renewals or extensions will be on terms and conditions similar
to those currently in place, or that Pharmacopeia will enter into similar
collaborative agreements with third parties. If such research programs are not
renewed or extended and Pharmacopeia does not enter into similar collaborative
agreements with third parties, Pharmacopeia may need to seek additional
capital. Pharmacopeia may also need to seek additional capital if it invests
in new technologies, attempts to develop and bring its own drugs to market, or
engages in other mergers or similar extraordinary transactions. If
Pharmacopeia determines that it must raise additional capital, such capital
could be raised through public or private financings involving debt or equity.
There can be no assurance that additional capital could be raised on favorable
terms, or at all. If adequate funds are not available, Pharmacopeia may be
required to curtail operations significantly or to obtain funds through
entering into arrangements with collaborative partners or others that may
require Pharmacopeia to relinquish rights to certain of its technologies,
product candidates, products or potential markets that Pharmacopeia would not
otherwise relinquish. Although MSI's operations may provide Pharmacopeia with
additional financial resources if the Merger is completed, there can be no
assurance that MSI's operations will be profitable or that any such profits
would be sufficient to support the capital requirements of the combined
company.

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Uncertainty of Pharmaceutical Pricing and Health Care Reform. Pharmacopeia
expects that all of its revenues from its combinatorial chemistry business in
the foreseeable future will be derived from products and services provided to
the pharmaceutical and biotechnology industries. Accordingly, Pharmacopeia's
success in the foreseeable future is directly dependent upon the success of
the companies within those industries and their continued demand for
Pharmacopeia's products and services. The levels of revenues and profitability
of pharmaceutical companies may be affected by the continuing efforts of
governmental and third party payors to contain or reduce the costs of health
care through various means and the initiatives of third party payors with
respect to the availability of reimbursement. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject
to governmental control. In the United States, there have been, and
Pharmacopeia expects that there will continue to be, a number of federal and
state proposals to implement similar governmental control. It is uncertain
what legislative proposals may be adopted or what actions federal, state or
private payors for health care goods and services may take in response to any
health care reform proposals or legislation. To the extent that such proposals
or reforms have a material adverse effect on the business, financial condition
and profitability of pharmaceutical companies that are actual or prospective
collaborators for Pharmacopeia's products, Pharmacopeia's business, financial
condition and results of operations could be adversely affected.

Potential Liability Regarding Hazardous Materials. The research and
development processes of Pharmacopeia involve the controlled use of hazardous
materials. Pharmacopeia is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and certain waste products. Although Pharmacopeia believes that
its activities currently comply with the standards prescribed by such laws and
regulations, the risk of accidental contamination or injury from these
materials cannot be eliminated. In the event of such an accident, Pharmacopeia
could be held liable for any damages that result and any such liability could
exceed the resources of Pharmacopeia. In addition, there can be no assurance
that Pharmacopeia will not be required to incur significant costs to comply
with environmental laws and regulations in the future.

Anti-Takeover Effect of Certain Charter and By-Law Provisions and Delaware
Law. Pharmacopeia's Restated Certificate of Incorporation (the "Pharmacopeia
Certificate") authorizes the Pharmacopeia Board of Directors to issue, without
stockholder approval, 2,000,000 shares of Preferred Stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of Pharmacopeia Common Stock. The
issuance of Preferred Stock or of rights to purchase Preferred Stock could be
used to discourage an unsolicited acquisition proposal. In addition, the
possible issuance of Preferred Stock could discourage a proxy contest, make
more difficult the acquisition of a substantial block of Pharmacopeia Common
Stock or limit the price that investors might be willing to pay in the future
for shares of Pharmacopeia Common Stock. The Pharmacopeia Certificate provides
for staggered terms for the members of the Pharmacopeia Board of Directors. A
staggered Board of Directors and certain provisions of Pharmacopeia's by-laws
and of Delaware law applicable to Pharmacopeia could delay or make more
difficult a merger, tender offer or proxy contest involving Pharmacopeia.
Further, Pharmacopeia's stock option plans generally provide for the
acceleration of vesting of options granted under such plans in the event of
certain transactions which result in a change of control of Pharmacopeia. In
addition, Pharmacopeia is subject to Section 203 of the Delaware General
Corporation Law (the "DGCL") which, subject to certain exceptions, restricts
certain transactions and business combinations between a corporation and a
stockholder owning 15% or more of the corporation's outstanding voting stock
(an "interested stockholder") for a period of three years from the date the
stockholder becomes an interested stockholder. These provisions may have the
effect of delaying or preventing a change of control of Pharmacopeia without
action by the stockholders and, therefore, could adversely affect the price of
Pharmacopeia Common Stock.

Uncertain Value of Merger Consideration. The stock price of Pharmacopeia
Common Stock at the Effective Time may vary from the prices as of the date of
execution of the Merger Agreement, the date hereof, and the date of the
respective stockholders' meetings. Because the consideration to be paid per
share of MSI Capital Stock is a fixed number of shares of Pharmacopeia Common
Stock, the value of the shares of Pharmacopeia Common Stock that each MSI
stockholder will be entitled to receive in the Merger may increase or decrease
prior to and following the Merger.

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Absence of Dividends. Pharmacopeia has not paid cash dividends since
inception. It is currently anticipated that Pharmacopeia will retain all
earnings for use in expanding and supporting its operations. Pharmacopeia does
not anticipate paying any cash dividends in the foreseeable future.

RISKS RELATED TO MSI

History of Losses; No Assurance of Continued Profitability. MSI incurred a
net loss in each of its three fiscal years prior to 1996. As of December 31,
1997, MSI's accumulated deficit was $26.1 million. MSI's net losses increased
substantially in 1995 compared to 1994 primarily as a result of approximately
$12.2 million in charges associated with MSI's acquisition of Biosym
Technologies, Inc. ("Biosym"). Much of MSI's revenue growth in 1995 and 1996
was the result of the acquisition of Biosym. In addition, MSI's revenue and
profitability were adversely affected in 1996 by a strategic shift to annual
software licenses from long-term (ten years or perpetual) licenses
traditionally sold by MSI. Compared to long-term licenses, annual licenses
generate lower revenue in the initial year of the license but will generate
incremental revenue each time the license is renewed. For these and other
reasons, there can be no assurance that MSI's revenue will grow or be
sustained in future periods or that MSI will be profitable in any future
period. See "--Need to Achieve Greater Market Penetration," "--Increasing
Dependence on License Renewals" and "MSI MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

Fluctuations in Future Operating Results; Seasonality; Lengthy Sales
Cycles. MSI's operating results have fluctuated significantly because of
seasonal and other factors, and MSI expects that future operating results will
be subject to similar fluctuations. A significant portion of MSI's total
revenue has been derived from relatively large orders and from service and
maintenance arrangements. The timing of such orders has caused and will
continue to cause material fluctuations in MSI's operating results,
particularly on a quarterly basis. MSI's operating results may fluctuate
significantly from quarter to quarter or on an annual basis as a result of a
number of other factors, including but not limited to: the size and timing of
customer orders; changes in MSI's customer and user bases; changes in license
renewal rates; changes in pricing terms and billing methods, including changes
associated with MSI's Web-based products and services under development;
changes in GAAP regarding revenue recognition; the mix of MSI's commercial,
governmental and academic customers; the market success of MSI's services
offerings; the timely development, introduction and marketing of new products
and product enhancements; market acceptance of MSI's products, particularly
recently introduced Web-based products and Web-based products under
development; deferrals of customer orders in anticipation of new products or
product enhancements; MSI's ability to control cost, including the need for,
and degree of use of, third-party contractors and the hiring of new employees;
political instability in, or trade embargoes with respect to, foreign markets;
changes in MSI's management team; acquisitions of technologies or other
companies; and fluctuating economic conditions. Consequently, there can be no
assurance that MSI will be able to accurately predict the levels of future
operating results. MSI believes that as a result of these and other factors,
period-to-period comparisons of its historical results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance.

MSI has typically earned a significant portion of its quarterly revenue late
in the quarter. MSI in the past has recognized its highest revenue in the
fourth quarter of a year followed by lower revenue in the first quarter of the
succeeding year. In addition, MSI's sales to Teijin Molecular Simulations
Incorporated ("TMSI"), MSI's joint venture with Teijin Limited ("Teijin"), in
the past have been higher in MSI's first quarter, in part because the fiscal
year of most Japanese companies ends on March 31, and have declined sharply in
the second quarter. Furthermore, MSI's operating expenses have generally
increased beginning in its second quarter due to implementation of annual wage
increases and increased hiring. The decline in Japanese sales combined with
increased operating expenses has caused MSI's results of operations
historically to be lowest in the second quarter. MSI also has experienced
quarterly variability in service and other revenue. Finally, MSI has
experienced decreased European sales in its third quarter. Consistent with
these seasonal trends, MSI expects that its revenues and results of operations
will be lower in the first quarter of 1998 as compared to the fourth quarter
of 1997, and that its results of operations will decrease in the second
quarter of 1998 as compared to the first quarter of 1998. The failure to
achieve expected revenue during any individual quarter will have a material
adverse effect on MSI's financial condition and results of operations, and the
adverse effect may be magnified

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by MSI's inability to adjust spending in a timely manner to compensate for any
revenue shortfall. See "--Risks Associated with International Operations."

The sales cycles for MSI's products can be lengthy and are subject to a
number of significant risks over which MSI has little or no control. The sales
cycles for MSI's products typically last six months and can exceed 12 months.
In addition, purchases of MSI's products generally involve significant
commitments of capital, and delays frequently occur due to the authorization
procedures for substantial capital expenditures within large organizations.
Because MSI generally ships orders as received and as a result typically has
little or no backlog, any significant delay in an anticipated order would
likely cause material fluctuations to MSI's operating results. See "MSI
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and "INFORMATION CONCERNING MSI--Sales and Marketing."

Need to Achieve Greater Market Penetration. The ability of MSI to increase
revenue from the license of its products is dependent upon increased market
acceptance of MSI's software products and services. MSI's products are used
primarily by simulation specialists. MSI's strategy is to expand usage of its
products and services by marketing and distributing its software, in part
through its Web-based products, to experimentalists. If MSI cannot expand its
customer base to include experimentalists, or if MSI otherwise cannot
successfully market and sell its Web-based products and related services, MSI
may not be able to increase its revenue, or its revenue may decline. In
general, increased market acceptance and greater market penetration of MSI's
products depend upon several factors, including the overall product
performance, ease of implementation and use, accuracy of simulation, breadth
and integration of product offerings and the extent to which users achieve the
intended research and development benefits from their use of MSI's products
and services. There can be no assurance that MSI's products and services will
achieve increased market acceptance or penetration in MSI's target industries
or other industries. Failure to increase market acceptance or penetration
would restrict substantially the future growth of MSI and would have a
material adverse effect on MSI's business, financial condition and results of
operations. See "INFORMATION CONCERNING MSI--Strategy."

Increasing Dependence on License Renewals; Risk of Non-Renewals. MSI derives
a significant portion of its total revenue from the renewal of license,
service, maintenance and consortia agreements with existing customers. MSI is
pursuing a shift in the mix of new customer agreements away from long-term
licenses toward annual, renewable licenses. As a result, MSI's total revenue
in the future will be increasingly dependent on the renewal of annual
licenses. MSI's ability to secure renewals may be adversely affected by
ownership or management changes within customer organizations, including
acquisitions of customers by other companies; MSI's inability to deliver
consistent, high-quality and timely services or product enhancements; customer
budget constraints; the introduction of competing products by third parties;
political or economic instability; and other factors, many of which may be
beyond the control of MSI. There can be no assurance that MSI will be able to
generate and maintain sufficient license renewals, particularly given MSI's
shift from long-term to annual licenses, and failure to do so would have a
material adverse effect on MSI's business, financial condition and results of
operations. See "MSI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."

Dependence on Technologies Licensed from or Developed by Third
Parties. Certain of MSI's technologies have been acquired or licensed from
third parties, or have been developed in connection with one of MSI's
consortia. Changes in certain third-party license agreements and
relationships, or termination thereof, could materially affect MSI's ability
to continue to develop and market its current products or new products. From
time to time, MSI experiences disruptions in its relationships with third
parties from whom MSI obtains technology. As a result of these disruptions,
MSI has on occasion experienced delays in distribution of products and product
enhancements and has otherwise had difficulties developing, distributing or
licensing, in a timely manner, third-party products based on such technology.
There can be no assurance that MSI will be able to successfully acquire or
develop, alone or as part of consortia, new technologies. Furthermore, there
can be no assurance that such technologies, if acquired, can be successfully
integrated and commercialized by MSI. Inability to license, maintain, upgrade
or integrate new technologies could have a material adverse effect on MSI's
business, financial condition and results of operations. There also can be no
assurance that there will be no disruptions in MSI's relationships with third
parties from whom MSI obtains technology, or that any

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disruptions that do arise will be resolved in a timely and cost-effective
manner, if at all. Any such disruptions could have a material adverse effect
on MSI's business, financial condition and results of operations.

Concentration of Revenue from Certain Industries; Risk of Decline in Such
Industries. MSI derives a substantial portion of its total revenue from sales
of products and services to companies in the pharmaceutical, biotechnology and
chemical industries, all of which can be highly cyclical. Accordingly, MSI's
future success is dependent upon the continued demand for simulation software
by companies in those industries. MSI believes its customers' cost containment
measures have led to delays and reductions in certain research and
development, capital and operating expenditures by many of such companies in
the past, and such delays or reductions could recur in the future. In
addition, certain of MSI's customers in these industries are subject to
regulatory and economic changes, and such changes could also lead to delays or
reductions in research and development and capital expenditures. MSI
experienced a decline in revenue in 1993 and essentially flat revenue in 1994,
due in part to the reluctance of the pharmaceutical and biotechnology
industries to make research and development investments following the
announcement of President Clinton's health care initiative as well as the
worldwide recession in the chemical industry during this period. Any such
delays, reductions or fluctuations could have a material adverse effect on
MSI's business, financial condition and results of operations. There can be no
assurance that MSI's products or product enhancements targeting other
industries, if ever introduced, will reduce MSI's risk of industry
concentration. See "MSI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."

Risks Associated with International Operations. During 1997, approximately
49% of MSI's total revenue was derived from customers outside the United
States. Approximately 33% of MSI's revenue was derived from operations in
Europe and approximately 16% was derived from export sales to the Asia/Pacific
region, primarily from sales through TMSI. MSI anticipates that international
revenue will continue to account for a significant percentage of revenue in
the future. In particular, MSI expects to continue to generate substantial
revenue from sales by its European subsidiaries and TMSI. MSI's international
operations are subject to risks inherent in the conduct of international
business, including unexpected changes in regulatory requirements, longer
payment cycles, exchange rate fluctuations, export license requirements,
tariffs and other barriers, political and economic instability, limited
intellectual property protection, difficulties in collecting trade
receivables, difficulties in managing distributors or representatives,
difficulties in staffing and managing foreign subsidiary or joint venture
operations, and potentially adverse tax consequences. Certain East Asian
countries are currently experiencing severe economic turmoil, represented by
depressed business conditions and volatility in local currencies. Such
conditions may adversely impact MSI's financial results as a result of
customers altering their spending plans and by subjecting MSI to greater
foreign exchange exposure. There can be no assurance that MSI will be able to
sustain or increase international revenue from licenses or from service or
maintenance arrangements, and there can be no assurance that any of the
foregoing factors will not have a material adverse effect on MSI's
international operations, and therefore its business, financial condition and
results of operations. MSI's direct international sales generally are
denominated in local currencies. Fluctuations in the value of currencies in
which MSI conducts business relative to the United States dollar result in
currency transaction gains and losses, and the impact on MSI of future
exchange rate fluctuations cannot be accurately predicted. There can be no
assurance that future fluctuations in currency exchange rates will not have a
material adverse impact on revenue from international sales, and thus MSI's
business, financial condition and results of operations. MSI currently engages
in currency exchange rate hedging transactions in an attempt to mitigate the
impact of adverse exchange rate fluctuations. There can be no assurance that
any currency hedging policies implemented by MSI will be successful, or that
they will not increase the negative impact of exchange rate fluctuations. See
"--Fluctuations in Future Operating Results; Seasonality; Lengthy Sales
Cycles" and "MSI Management's Discussion and Analysis of Financial Condition
and Results of Operations."

Dependence upon Product Development; Rapid Technological Change. The market
in which MSI competes is subject to rapid technological change, frequent
product introductions, changes in customer demand and evolving industry
standards. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable. It will also be important for MSI to address the increasingly
sophisticated needs of its customers by supporting existing and emerging

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hardware, software, database and networking platforms, including Web-based
technology. Substantially all of MSI's current products operate in the UNIX
operating system. In the event that another operating system, such as Windows
NT, were to achieve broad acceptance in the simulation software industry, MSI
would be required to port its products to such an operating system which would
be costly and time consuming and could have a material adverse effect on MSI's
business, financial condition and results of operations. There can be no
assurance that MSI will be successful in developing and marketing enhancements
that respond to technological change, evolving industry standards or customer
product and service requirements; that MSI will not experience difficulties
that could delay or prevent the successful development, introduction and sale
of such enhancements or services; or that such enhancements or services will
adequately meet the requirements of the marketplace and achieve market
acceptance. From time to time, MSI experiences delays in the release dates of
enhancements to certain of its products. If release dates of any significant
new products or product enhancements are delayed or if such products or
enhancements fail to achieve market acceptance, MSI's business, financial
condition and results of operations could be materially adversely affected. In
addition, the introduction or announcement of new product offerings or
enhancements or services by MSI or MSI's competitors may cause customers to
defer or forego purchases of current versions of MSI's products or services,
which could have a material adverse effect on MSI's business, financial
condition and results of operations. See "INFORMATION CONCERNING MSI--Product
Development."

Dependence on Distributors. MSI is dependent upon TMSI (and its
subdistributors) as its sole distributor in the Asia/Pacific region and is
dependent in part upon distributors for its European sales. MSI believes that
its success in penetrating markets for its products depends in large part on
its ability to maintain these relationships and to cultivate additional
distribution relationships. There can be no assurance that any distributor
will not discontinue its relationship with MSI or form competing arrangements
with MSI's competitors. Further, relationships with distributors may create
channel conflicts with MSI's own direct sales force. In addition, MSI's
distributors other than TMSI generally offer other products and are involved
in other ventures, and they may give higher priority to such other activities.
The loss of, or a significant reduction in revenue from, the distributors
through which MSI sells its products could have a material adverse effect on
MSI's business, financial condition and results of operations. See "--Risks
Associated with International Operations."

Product Liability; Product Defects. MSI's sales and license agreements with
its customers typically contain provisions designed to limit MSI's exposure to
potential product liability claims. It is possible, however, that the
limitation of liability provisions contained in MSI's agreements may not be
effective as a result of existing or future federal, state or local laws or
ordinances or unfavorable judicial decisions. The sale and support of MSI's
simulation software may entail the risk of product liability claims, which are
likely to be substantial in light of the applications in which MSI's products
are used. MSI maintains insurance against claims associated with the use of
its products, but there can be no assurance that its insurance coverage would
adequately cover any claim asserted against MSI. A successful product
liability claim brought against MSI in excess of its insurance coverage or
outside the scope of such coverage could have a material adverse effect upon
MSI's business, financial condition and results of operations.

Software and other products as complex as those offered by MSI may contain
errors or failures, especially when first introduced or when new versions are
released. Also, new products or enhancements may contain undetected errors or
performance problems that, despite testing, are discovered only after a
product has been installed and used by customers. Such errors or performance
problems may cause delays in product introductions and shipments or require
design modifications that could materially and adversely affect MSI's
competitive position and operating results. There can be no assurance that
errors will not be found in new products or releases after commencement of
commercial shipments, resulting in loss of revenue or delay in market
acceptance, diversion of development resources, damage to MSI's reputation or
increased service and warranty costs, any of which could have a material
adverse effect upon MSI's business, financial condition and results of
operations. See "INFORMATION CONCERNING MSI--Product Development."

Year 2000. MSI has conducted a review of the software products that it
markets commercially and the computer programs that it uses internally to
identify the systems that could be affected by the "Year 2000"

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issue. The Year 2000 problem is the result of computer programs being written
using two-digits rather than four to define the applicable year. Any program
that has time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculation. MSI presently believes that the Year 2000 problem will not
pose significant operational problems for MSI's current software products that
it markets commercially or the computer programs that it currently uses
internally, and that MSI will not incur significant costs as a result of the
Year 2000 problem. However, it is possible that future software marketed or
used by MSI will suffer from a Year 2000 problem. In addition, it is possible
that operating system software or other third party programs with which MSI's
software products function could be affected by the Year 2000 problem and
adversely affect actual or perceived performance of MSI's software products.
In addition, Year 2000 problems of MSI's customers could affect the demand for
MSI's products. Any such Year 2000 problems could have a material adverse
effect upon MSI's business, financial condition and results of operation.

THE STOCKHOLDER MEETINGS

INTRODUCTION

This Joint Proxy Statement/Prospectus is being furnished to the stockholders
of Pharmacopeia and MSI in connection with the Merger and for the purposes set
forth below. The Merger will be effected on the terms and conditions described
elsewhere in this Joint Proxy Statement/Prospectus pursuant to the Merger
Agreement, a copy of which is attached hereto as Annex 1. See "THE MERGER" and
"THE MERGER AGREEMENT."

This Joint Proxy Statement/Prospectus and the accompanying forms of proxy
will first be mailed to stockholders of Pharmacopeia and MSI on or about May
13, 1998, 1998.

THE MATTERS TO BE CONSIDERED AT THE STOCKHOLDER MEETINGS ARE OF GREAT
IMPORTANCE. STOCKHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE
INFORMATION PRESENTED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, AND TO
COMPLETE, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE
PRE-PAID ENVELOPE.

MSI STOCKHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR
PROXIES.

PHARMACOPEIA ANNUAL MEETING

This Joint Proxy Statement/Prospectus is being furnished to holders of
record of Pharmacopeia Common Stock in connection with the solicitation of
proxies by the Pharmacopeia Board of Directors (i) for use at the Pharmacopeia
Annual Meeting to be held on June 12, 1998 at 9:00 a.m., local time, at The
Forrestal at Princeton, 100 College Road East, Princeton, New Jersey, and at
any meeting held upon adjournment or postponement thereof and (ii) in
connection with each of the proposals set forth below.

At the Pharmacopeia Annual Meeting, holders of Pharmacopeia Common Stock
will be asked to consider and vote upon (i) the Issuance Proposal, (ii) a
proposal to elect two directors to the Board of Directors for a term of three
years, (iii) a proposal to amend the Incentive Plan to increase the number of
shares of Pharmacopeia Common Stock authorized for issuance thereunder from
1,750,000 to 2,250,000 shares, (iv) a proposal to amend the Incentive Plan to
increase the number of shares of Pharmacopeia Common Stock authorized for
issuance thereunder to 2,750,000 shares, effective upon consummation of the
Merger, (v) the ratification of Ernst & Young LLP as Pharmacopeia's
independent auditors for the fiscal year ending December 31, 1998 and (vi)
such other business as may properly come before the Pharmacopeia Annual
Meeting or any adjournment thereof.

Proposal One--Issuance Proposal. The Issuance Proposal is being submitted to
the stockholders of Pharmacopeia for approval in accordance with the By-Laws
of the NASD. Among other things, such By-Laws generally require that
Pharmacopeia's stockholders approve an acquisition of the stock of another
company in exchange for Pharmacopeia Common Stock if the number of shares of
Pharmacopeia Common Stock to be issued is or will be equal to or in excess of
20% of the number of shares of Pharmacopeia Common Stock outstanding

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before the issuance of Pharmacopeia Common Stock in such transaction. Because
the number of shares of Pharmacopeia Common Stock to be issued pursuant to the
Merger Agreement would exceed 20% of the number of shares of Pharmacopeia
Common Stock currently outstanding, the Issuance Proposal is being submitted
to Pharmacopeia stockholders for approval.

The approval of the Issuance Proposal is a condition to the consummation of
the Merger.

THE PHARMACOPEIA BOARD OF DIRECTORS HAS CONCLUDED BY A UNANIMOUS VOTE OF
THOSE DIRECTORS PRESENT AT THE MEETING AT WHICH THE PHARMACOPEIA BOARD OF
DIRECTORS APPROVED THE MERGER AGREEMENT THAT THE MERGER IS FAIR TO AND IN THE
BEST INTERESTS OF PHARMACOPEIA AND ITS STOCKHOLDERS, HAS APPROVED THE ISSUANCE
PROPOSAL AND RECOMMENDS THAT THE STOCKHOLDERS OF PHARMACOPEIA VOTE FOR THE
ISSUANCE PROPOSAL. SEE "THE MERGER--Background" and "--Recommendations of the
Pharmacopeia Board of Directors; Pharmacopeia's Reasons for the Merger".

At the Effective Time, each share of MSI Capital Stock then outstanding will
be converted into the right to receive shares of Pharmacopeia Common Stock
based on the Exchange Ratio. Based upon the 13,367,215 shares of MSI Capital
Stock outstanding on the MSI Record Date, without making any adjustment for
fractional share interests and assuming no exercise of MSI Options outstanding
as of the MSI Record Date, Pharmacopeia will issue 7,073,930 shares of
Pharmacopeia Common Stock at the Effective Time in connection with the Merger.
Furthermore, assuming that the number of shares of Pharmacopeia Common Stock
issued and outstanding on the Pharmacopeia Record Date is equal to the number
of shares of Pharmacopeia Common Stock issued and outstanding immediately
prior to the consummation of the Merger, such 7,073,930 shares of Pharmacopeia
Common Stock issued to MSI stockholders in connection with the Merger will
constitute approximately 37.5% of the issued and outstanding shares of
Pharmacopeia Common Stock.

Proposal Two--Election of Directors. The Pharmacopeia Board of Directors is
divided into three classes, with the term of office of one class expiring each
year. Paul A. Bartlett and Charles A. Sanders have been nominated for election
as directors at the Pharmacopeia Annual Meeting, each to serve for a term of
three years. The persons named as proxy holders in the accompanying proxy card
have indicated that they intend to vote for the election of such nominees. See
"ELECTION OF PHARMACOPEIA DIRECTORS--Nominees for Election at the Pharmacopeia
Annual Meeting."

Unless otherwise indicated, the proxy holders will vote the proxies received
by them for Pharmacopeia's nominees named hereinafter. If any of the nominees
of Pharmacopeia is unable or declines to serve as a director at the time of
the Pharmacopeia Annual Meeting, the proxies will be voted for any nominee who
is designated by the present Board of Directors to fill the vacancy. It is not
expected that any of the nominees will be unable or will decline to serve as a
director.

THE PHARMACOPEIA BOARD OF DIRECTORS RECOMMENDS THAT THE PHARMACOPEIA
STOCKHOLDERS VOTE FOR THE NOMINEES SET FORTH HEREIN.

Proposal Three--Increase Shares Authorized Under 1994 Incentive Stock Plan
to 2,250,000. The Pharmacopeia Board of Directors has approved an amendment to
the Incentive Plan that would increase the total number of shares of
Pharmacopeia Common Stock authorized thereunder from 1,750,000 shares to
2,250,000 shares. The Pharmacopeia Board of Directors believes that the
proposed increase in the number of shares authorized for issuance under the
Incentive Plan is in the best interests of Pharmacopeia. The Pharmacopeia
Board of Directors believes that the increase will provide an adequate reserve
of shares for issuance under the Incentive Plan, which is necessary to enable
Pharmacopeia to compete successfully with other companies to attract and
retain valuable employees. This proposal would increase the number of shares
of Pharmacopeia Common Stock authorized for issuance under the Incentive Plan
by 500,000 shares (representing approximately

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4% of the shares of Pharmacopeia Common Stock outstanding on the Pharmacopeia
Record Date), while proposal number four set forth below would increase the
number of shares of Pharmacopeia Common Stock authorized for issuance under
the Incentive Plan even further. The reason for having two proposals regarding
the Incentive Plan is that Pharmacopeia cannot be certain that the Merger will
be approved and consummated. Therefore, Pharmacopeia cannot be certain how
many employees it will have or how many shares of Pharmacopeia Common Stock
should be authorized for issuance under the Incentive Plan. Pharmacopeia is
seeking authority under proposal number three for an increase in the number of
shares authorized for issuance under the Incentive Plan that would be
sufficient if Pharmacopeia does not acquire MSI. Under proposal number four,
which would only take effect upon consummation of the Merger, Pharmacopeia is
seeking authority for an additional increase in the number of shares
authorized for issuance under the Incentive Plan that the Pharmacopeia Board
of Directors believes would be necessary if the Merger is consummated. See
"PROPOSAL TO AMEND THE 1994 INCENTIVE STOCK PLAN TO INCREASE THE NUMBER OF
SHARES AUTHORIZED FOR ISSUANCE THEREUNDER TO 2,250,000 SHARES."

THE PHARMACOPEIA BOARD OF DIRECTORS RECOMMENDS THAT THE PHARMACOPEIA
STOCKHOLDERS VOTE FOR AN INCREASE IN THE NUMBER OF SHARES AUTHORIZED FOR
ISSUANCE UNDER THE INCENTIVE PLAN TO 2,250,000 SHARES.

Proposal Four--Increase Shares Authorized Under 1994 Incentive Stock Plan to
2,750,000. The Pharmacopeia Board of Directors has approved an amendment to
the Incentive Plan that would increase the total number of shares of
Pharmacopeia Common Stock authorized thereunder to 2,750,000 effective upon
consummation of the Merger. This increase over the number of shares sought for
authorization pursuant to proposal number three above is necessary because, if
the Merger is consummated, the number of Pharmacopeia employees will increase.
This proposed increase in the total number of shares of Pharmacopeia Common
Stock available for issuance under the Incentive Plan, combined with the
increase sought under the preceding proposal, would equal approximately 8% of
the total number of outstanding shares of Pharmacopeia Common Stock on the
Pharmacopeia Record Date and 5% of the total number of outstanding shares of
Pharmacopeia Common Stock immediately after the Effective Time (assuming that
the number of outstanding shares of Pharmacopeia Common Stock does not change
between the Pharmacopeia Record Date and the Effective Time, and that all
shares of Pharmacopeia Common Stock registered under the Registration
Statement of which this Joint Proxy Statement/Prospectus forms a part are
issued at the Effective Time). See "PROPOSAL TO AMEND THE 1994 INCENTIVE STOCK
PLAN TO INCREASE THE NUMBER OF SHARES AUTHORIZED FOR ISSUANCE THEREUNDER TO
2,750,000 SHARES."

THE PHARMACOPEIA BOARD OF DIRECTORS RECOMMENDS THAT THE PHARMACOPEIA
STOCKHOLDERS VOTE FOR AN INCREASE IN THE NUMBER OF SHARES AUTHORIZED FOR
ISSUANCE UNDER THE INCENTIVE PLAN TO 2,750,000 SHARES, EFFECTIVE UPON
CONSUMMATION OF THE MERGER.

Proposal Five--Ratification of Appointment of Independent
Auditors. Pharmacopeia's management has selected Ernst & Young LLP ("Ernst &
Young"), independent auditors, to audit the books, records and accounts of
Pharmacopeia for the current fiscal year ending December 31, 1998.

A representative of Ernst & Young is expected to be available at the
Pharmacopeia Annual Meeting to make a statement if such representative desires
to do so and to respond to appropriate questions.

THE PHARMACOPEIA BOARD OF DIRECTORS RECOMMENDS THAT PHARMACOPEIA
STOCKHOLDERS VOTE FOR APPROVAL AND RATIFICATION OF SUCH SELECTION. In the
event of a negative vote on such ratification, the Pharmacopeia Board of
Directors will reconsider its selection.

Record Date and Outstanding Shares. The Pharmacopeia Board of Directors has
fixed the close of business on April 13, 1998 (the "Pharmacopeia Record Date")
as the record date for the determination of stockholders entitled to notice of
and to vote at the Pharmacopeia Annual Meeting or any adjournment or

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postponement thereof. At the close of business on the Pharmacopeia Record
Date, there were outstanding and entitled to vote 11,811,079 shares of
Pharmacopeia Common Stock held of record by approximately 219 holders.
Quorum; Voting Rights. Each holder of record of Pharmacopeia Common Stock on
the Pharmacopeia Record Date is entitled to cast one vote per share in person
or by proxy on any matter that may properly come before the Pharmacopeia
Annual Meeting. A majority of the issued and outstanding shares of
Pharmacopeia Common Stock entitled to vote at the Pharmacopeia Annual Meeting
must be represented at the Pharmacopeia Annual Meeting, in person or by proxy,
to constitute a quorum for the transaction of business. The affirmative vote
of the holders of a majority of the shares of Pharmacopeia Common Stock
present in person or represented by proxy is required to approve and adopt the
proposed amendments to the Incentive Plan, and to ratify the appointment of
Ernst & Young LLP. The election of the two nominees to the Pharmacopeia Board
of Directors named herein will be determined by a plurality of the votes cast.
The approval of the Issuance Proposal will be decided by a majority of the
votes cast.
As of the Pharmacopeia Record Date, the directors and executive officers of
Pharmacopeia owned or had voting control over an aggregate of 1,286,639 shares
of Pharmacopeia Common Stock, representing approximately 11% of the votes
entitled to be cast at the Pharmacopeia Annual Meeting. Each of the directors
and executive officers of Pharmacopeia has advised Pharmacopeia that he or she
intends to vote or direct the vote of all the outstanding shares of
Pharmacopeia Common Stock over which he or she has voting control in favor of
the approval of the Issuance Proposal, the approval of the proposed amendments
to the Incentive Plan, the ratification of the appointment of Ernst & Young
and the election of the two nominees to the Pharmacopeia Board of Directors
named herein.

Proxies; Required Vote. All proxies in the enclosed form that are properly
executed and returned to Pharmacopeia will be voted at the Pharmacopeia Annual
Meeting or any adjournments or postponements thereof, in accordance with any
instructions thereon, or, if no instructions are made, will be voted FOR
approval of the Issuance Proposal, FOR the approval of the proposed amendments
to the Incentive Plan, FOR the ratification of the appointment of Ernst &
Young and FOR the election of the two nominees to the Pharmacopeia Board of
Directors named herein. Stockholders are urged to mark the boxes on the proxy
to indicate how their shares are to be voted. Any Pharmacopeia stockholder may
revoke a proxy at any time before it is voted by submitting a later dated
proxy, by appearing in person at the Pharmacopeia Annual Meeting and voting
thereat, or by delivering a written notice to the Secretary of Pharmacopeia
stating that the proxy is revoked. If a stockholder is not the registered
holder of his or her shares, such stockholder must obtain appropriate
documentation from the registered holder in order to be able to vote the
shares in person.

If an executed proxy is returned by a broker holding shares of Pharmacopeia
Common Stock in street name and indicates that the broker does not have
discretionary authority as to certain shares to vote on a certain matter (a
"broker non-vote"), such shares will be counted for purposes of determining
whether there is a quorum but will not be considered as present and entitled
to vote with respect to that matter. If an executed proxy is returned by a
stockholder and the stockholder has abstained from voting on a matter listed
in the proxy, such shares will be counted for purposes of determining the
presence or absence of a quorum and for purposes of determining the aggregate
voting power and number of shares represented at the Pharmacopeia Annual
Meeting. Accordingly, because the election of Pharmacopeia directors will be
determined by a plurality of the votes cast, broker non-votes and abstentions
will have no effect on such election. However, because the Issuance Proposal
requires the approval of a majority of the votes cast and because the proposed
amendments to the Incentive Plan and the ratification of Ernst & Young LLP
require the approval of the holders of a majority of the shares of
Pharmacopeia Common Stock present in person or represented by proxy at the
Pharmacopeia Annual Meeting, abstentions will have the same effect as a vote
against such proposals and broker non-votes will have no effect on the outcome
of such proposals.

The Pharmacopeia Board of Directors does not know of any matters other than
those set forth herein which may come before the Pharmacopeia Annual Meeting.
If any other matters are properly presented at the

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Pharmacopeia Annual Meeting for action, including, among other things,
consideration of a motion to adjourn the Pharmacopeia Annual Meeting to
another place and/or time (including, without limitation, for the purpose of
soliciting additional proxies), the persons named in the applicable form of
proxy and acting thereunder will have the discretion to vote in accordance
with their best judgment on such matters, unless such authorization is
withheld.

Solicitation of Proxies; Expenses. The expense of the solicitation of the
stockholders of Pharmacopeia will be paid by Pharmacopeia. In addition to the
use of the mails, proxies may be solicited by directors, officers and regular
employees of Pharmacopeia by telephone, telegram or otherwise. Such directors,
officers and employees will not be additionally compensated for such
solicitation but may be reimbursed for out-of-pocket expenses incurred in
connection therewith. Pharmacopeia may also request brokerage firms, nominees,
custodians and fiduciaries to forward proxy materials to beneficial owners of
shares of Pharmacopeia Common Stock held of record by them and will provide
reimbursement for their reasonable expenses in so doing. Pharmacopeia has
retained D.F. King & Co., Inc. to assist in the solicitation of proxies in
exchange for a $4,500 fee plus the reimbursement of certain expenses.

MSI SPECIAL MEETING

At the MSI Special Meeting, the holders of MSI Common Stock and MSI
Preferred Stock (collectively, "MSI Voting Stock") will consider and vote upon
(i) the approval and adoption of the Merger Agreement and the approval of the
Merger (the "Merger Proposal") and (ii) such other matters as may properly
come before the MSI Special Meeting or any adjournments or postponements
thereof.

THE MSI BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
THE MERGER AND UNANIMOUSLY RECOMMENDS THAT MSI STOCKHOLDERS VOTE FOR APPROVAL
OF THE MERGER PROPOSAL. SEE "THE MERGER--Background" and "--Recommendations of
the MSI Board of Directors; MSI's Reasons for the Merger."

Record Date and Outstanding Shares. Holders of record of MSI Voting Stock at
the close of business on May 1, 1998 (the "MSI Record Date") are entitled to
notice of, and to vote at, the MSI Special Meeting. As of the MSI Record Date,
there were 278 stockholders of record holding an aggregate of approximately
9,898,110 shares of MSI Common Stock and one stockholder of record holding
2,222,223 shares of MSI Preferred Stock. The MSI Preferred Stock is
convertible into MSI Common Stock on a one-for-one basis. D.E. Shaw Investment
Group, LP holds all 2,222,223 shares of MSI Preferred Stock outstanding,
representing, as of the MSI Record Date, approximately 18.3% of the votes
entitled to be cast at the MSI Special Meeting. In addition, there is one
stockholder of record, Corning Incorporated, holding 1,246,882 shares of MSI
Class B Common Stock, which is non-voting stock. While the MSI Class B Common
Stock is convertible into MSI Common Stock on a one-for-one basis subject to
certain conditions, the MSI Class B Common Stock has not been converted into
MSI Common Stock. Accordingly, the holder of the MSI Class B Common Stock will
not have any voting rights at the MSI Special Meeting with respect to the MSI
Class B Common Stock. See "MSI PRINCIPAL STOCKHOLDERS." Except for the
stockholders identified herein under "MSI PRINCIPAL STOCKHOLDERS," as of the
MSI Record Date, to the knowledge of MSI, no other person beneficially owns
more than 5% of the outstanding MSI Capital Stock.

As of the MSI Record Date, the directors and executive officers of MSI owned
or had voting control over an aggregate of 6,334,237 shares of MSI Common
Stock and MSI Preferred Stock, representing approximately 52% of the votes
entitled to be cast at the MSI Special Meeting. Each of the directors and
executive officers of MSI has advised MSI that he intends to vote or direct
the vote of all outstanding shares of MSI Common Stock and/or MSI Preferred
Stock over which he has voting control in favor of the approval of the Merger
Proposal.

Quorum; Abstentions. The presence in person or by properly executed proxy of
holders of a majority of the issued and outstanding shares of MSI Voting Stock
is necessary to constitute a quorum at the MSI Special Meeting. Votes cast by
proxy or in person at the MSI Special Meeting will be tabulated by the
election inspectors

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appointed for the meeting who will determine whether or not a quorum is
present. The election inspectors will treat abstentions as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum and as voted against the approval of the matters being voted upon. If a
broker indicates that it does not have discretionary authority as to certain
shares to vote on a particular matter, those shares will be considered as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum but not be considered as present and entitled to vote
with respect to that matter.

Required Vote. Each share of MSI Common Stock and MSI Preferred Stock
entitles the holder thereof to one vote on any matter that may properly come
before the MSI Special Meeting. The approval of the Merger Proposal requires
the affirmative vote of a majority of the outstanding shares of MSI Common
Stock and MSI Preferred Stock, voting together as a single class. Pursuant to
that certain Shareholders Agreement, dated as of August 15, 1995, by and among
Corning, MSI and Certain Shareholders of MSI, Corning and its transferees are
required to vote all of their shares of MSI Common Stock in accordance with a
majority of the MSI Board of Directors on any matter submitted for or
requiring a stockholder vote. As of the MSI Record Date, Corning and its
transferees owned or had voting control over an aggregate of 5,997,501 shares
of MSI Common Stock, representing approximately 49.5% of the votes entitled to
be cast at the MSI Special Meeting. See "THE MERGER--Interests of Certain
Persons in the Merger." The holders of record on the MSI Record Date of shares
of MSI Voting Stock are entitled to one vote per share of MSI Voting Stock on
each matter submitted to a vote at the MSI Special Meeting.

Voting Rights; Proxies. As of the MSI Record Date, there were 12,120,333
shares of MSI Voting Stock issued and outstanding, each of which entitles the
holder thereof to one vote. All shares of MSI Voting Stock represented by
properly executed proxies received at or prior to the MSI Special Meeting that
have not been revoked will be voted at the MSI Special Meeting in accordance
with the instructions contained therein. If no instructions are indicated,
such shares of MSI Voting Stock will be voted in favor of the Merger Proposal.
MSI does not know of any matters other than as described in the accompanying
Notice of MSI Special Meeting that are to come before the MSI Special Meeting.
If any other matter or matters are properly presented for action at the MSI
Special Meeting, including, among other things, consideration of a motion to
adjourn the MSI Special Meeting to another time and/or place (including
without limitation for the purpose of soliciting additional proxies), the
proxy holders will have the discretion to vote on such matters in accordance
with their best judgment, unless such authorization is withheld by a
stockholder. If a holder of MSI Capital Stock desires to limit the ability of
the proxy holders to vote to adjourn the MSI Special Meeting, the stockholder
must give instructions to such effect when returning such stockholder's proxy
card. The proxy holders have no present intention to vote to adjourn the MSI
Special Meeting, but would consider doing so, among other times, in the event
that there was not a quorum present at the MSI Special Meeting or if
adjournment would otherwise facilitate voting at the MSI Special Meeting. A
stockholder receiving a proxy pursuant to this proxy solicitation may revoke a
proxy (i) by submitting at any time prior to the vote on the approval of the
Merger Proposal a later dated proxy with respect to the same shares, (ii) by
delivering written notice of revocation to the Secretary of MSI at any time
prior to such vote or (iii) by attending the MSI Special Meeting and voting in
person. Mere attendance at the MSI Special Meeting will not in and of itself
revoke a proxy. If an MSI Stockholder is not the registered direct holder of
his or her shares, such stockholder must obtain appropriate documentation from
the registered holder in order to be able to vote the shares in person.

Solicitation of Proxies; Expenses. All expenses related to MSI's
solicitation of proxies, including the cost of preparing and mailing this
Joint Proxy Statement/Prospectus to the holders of MSI Voting Stock will be
borne by MSI. In addition to solicitation by mail, directors, officers and
employees of MSI may solicit proxies by telephone, telegram or otherwise. Such
directors, officers and employees of MSI will not be additionally compensated
for such solicitation but may be reimbursed for out-of-pocket expenses
incurred in connection therewith. Brokerage firms, fiduciaries and other
custodians who forward soliciting material to the beneficial owners of shares
of MSI Voting Stock held of record by them will be reimbursed for their
reasonable expenses incurred in forwarding such material.

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THE MERGER

The descriptions of the terms and conditions of the Merger and any related
documents included in this Joint Proxy Statement/Prospectus are qualified in
their entirety by references to the Annexes hereto and such related documents.

The Merger Agreement, a copy of which is attached to this Joint Proxy
Statement/Prospectus as Annex 1 and incorporated herein by reference, provides
for the merger of Merger Subsidiary with and into MSI. The Merger Agreement
also sets forth certain representations, warranties, agreements and conditions
in connection with the Merger. See "THE MERGER AGREEMENT."

As a result of the Merger, the separate corporate existence of Merger
Subsidiary will cease and MSI will continue as the Surviving Corporation. At
the Effective Time, each share of MSI Capital Stock then outstanding will be
converted into the right to receive shares of Pharmacopeia Common Stock based
on the Exchange Ratio. Based upon the 13,367,215 shares of MSI Capital Stock
outstanding on the MSI Record Date, without making any adjustment for
fractional share interests and assuming no exercise of MSI Options outstanding
as of the MSI Record Date, Pharmacopeia will issue 7,073,930 shares of
Pharmacopeia Common Stock at the Effective Time in connection with the Merger.
Furthermore, assuming that the number of shares of Pharmacopeia Common Stock
issued and outstanding on the Pharmacopeia Record Date is equal to the number
of shares of Pharmacopeia Common Stock issued and outstanding immediately
prior to the consummation of the Merger, such 7,073,930 shares of Pharmacopeia
Common Stock issued to MSI stockholders in connection with the Merger will
constitute approximately 37.5% of the issued and outstanding shares of
Pharmacopeia Common Stock.

BACKGROUND

From time to time, Pharmacopeia has evaluated potential acquisition
candidates in the drug discovery and combinatorial chemistry industries, as
well as companies that provide associated products and services.

In February 1997, MSI filed a registration statement for an initial public
offering of its Common Stock. In March 1997, the investment banks that
intended to market the initial public offering informed MSI that, at that time
and as a result of market conditions, the initial public offering was unlikely
to be successfully marketed at a valuation MSI considered appropriate.
Thereafter, the MSI Board of Directors determined to consider other strategic
alternatives for the realization of liquidity by the stockholders of MSI. In
considering such other strategic alternatives (including the Merger), the MSI
Board of Directors continued to consider the resumption of MSI's initial
public offering.

In July 1997, the MSI Board of Directors ratified the execution of an
engagement letter between MSI and Goldman Sachs pursuant to which MSI engaged
Goldman Sachs to serve as MSI's financial advisor in connection with a
potential strategic transaction by MSI, including a potential sale of MSI to a
third party.

Between July 1997 and late November 1997, representatives of Goldman Sachs
(on behalf of MSI) as well as MSI management contacted a number of third
parties with respect to a potential strategic transaction with, or acquisition
of, MSI. Preliminary discussions were held with approximately ten entities,
including Pharmacopeia and another public biotechnology company that
ultimately submitted a bid to acquire MSI (the "Alternate Bidder").

During the week of September 8, 1997, Dr. Mollica contacted Mr. Savage to
explore the possibility of entering into a business combination.

On September 19, 1997, Dr. Mollica and Mr. Savage met at Newark
International Airport to further explore the possibility of entering into a
business combination.

On September 24, 1997, Pharmacopeia executed a Confidentiality Agreement
with MSI pertaining to certain confidential material to be made available by
MSI to Pharmacopeia in connection with Pharmacopeia's evaluation of MSI.
Shortly thereafter, such material was delivered to Pharmacopeia.

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On October 10, 1997, Goldman Sachs, on behalf of MSI, sent a letter to Dr.
Mollica and representatives of the Alternate Bidder and other potential
bidders setting forth certain procedures to be followed in connection with any
submission of a bid for the acquisition of MSI.

On October 13, 1997, Dr. Mollica; Dr. Stephen Spearman, Executive Vice
President of Operations of Pharmacopeia; Dr. John Baldwin, Senior Vice
President of Chemistry of Pharmacopeia; Mr. Lewis J. Shuster, Executive Vice
President and Chief Financial Officer of Pharmacopeia; and Pharmacopeia's
legal and financial advisors met at MSI's offices with Mr. Savage; Mr. Saiid
Zarrabian, Chief Operating Officer of MSI; Mr. David B. Hiatt, Senior Vice
President and Chief Financial Officer of MSI; and MSI's legal and financial
advisors. At this meeting, MSI's management team made a presentation regarding
MSI's business.

On October 20, 1997, Dr. Mollica, Mr. Shuster, and representatives of BT
Alex. Brown met with Mr. Savage, Mr. Zarrabian, Mr. Hiatt and representatives
of Goldman Sachs at MSI's offices in San Diego, California. At this meeting, a
general discussion was held regarding MSI's business.

On October 22, 1997, Pharmacopeia submitted to MSI a preliminary, non-
binding indication of interest to acquire MSI and MSI received a preliminary,
non-binding proposal to acquire MSI from the Alternate Bidder.

At the October 29, 1997 regular meeting of the MSI Board of Directors, the
MSI Board of Directors discussed the status of the discussions related to the
potential transaction with Pharmacopeia and other potential acquisition
transactions for MSI, including with the Alternate Bidder.

On October 30, 1997, a regularly scheduled meeting of the Pharmacopeia Board
of Directors was held. At this meeting, Pharmacopeia's management, together
with Pharmacopeia's legal and financial advisors, informed the Board of the
status of the discussions with MSI. The Board authorized management to conduct
a due diligence review of MSI for the purpose of determining whether it would
be advisable to submit a definitive bid for the acquisition of MSI.

On October 31, 1997, Dr. Mollica and Mr. Shuster met with Pharmacopeia's
legal and financial advisors to discuss the due diligence to be conducted in
respect of MSI during the following week.

On November 4 and November 5, 1997, Mr. Shuster, together with
representatives of Pharmacopeia's accountants and legal and financial
advisors, conducted due diligence with respect to MSI at the San Diego offices
of MSI's legal counsel. On such dates, senior management of MSI made
presentations to the Pharmacopeia representatives.

On November 7, 1997, certain members of MSI's Board of Directors and Mr.
Zarrabian met with representatives of Pharmacopeia at Pharmacopeia's
facilities in South Brunswick, New Jersey. At this meeting, Dr. Mollica and
Mr. Shuster made presentations regarding Pharmacopeia, and general discussions
were held regarding Pharmacopeia's business and technologies.

On November 11, 1997, the MSI Board of Directors held a special meeting to
discuss the status of the possible transaction with Pharmacopeia and other
potential acquisition transactions for MSI, including with the Alternate
Bidder.

On November 12, 1997, representatives of Goldman Sachs, on behalf of MSI,
sent a letter to Dr. Mollica and representatives of the Alternate Bidder
inviting Pharmacopeia and the Alternate Bidder to submit a final proposal for
a possible acquisition of MSI. Also on November 12, 1997, MSI's legal counsel
forwarded to Pharmacopeia, the Alternate Bidder and their respective advisors
a draft merger agreement which Pharmacopeia and the Alternate Bidder were to
comment upon and submit as part of their respective bids.

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On November 14, 1997, Dr. Mollica and Mr. Shuster met with representatives
of Pharmacopeia's legal and financial advisors to discuss the formulation of
Pharmacopeia's bid, certain revisions to the draft merger agreement and the
results of the due diligence conducted to date.

On November 14, 1997, MSI executed a Confidentiality Agreement with
Pharmacopeia pertaining to certain proprietary information to be furnished by
Pharmacopeia to MSI. On November 17 and November 18, 1997, representatives of
MSI and MSI's legal and financial advisors conducted due diligence with
respect to Pharmacopeia at Pharmacopeia's offices and facilities and at the
offices of Pharmacopeia's legal advisors. Mr. Shuster and other
representatives of Pharmacopeia made presentations to the MSI representatives
regarding Pharmacopeia. Also on these dates, Mr. Zarrabian and other members
of MSI's management met with Mr. Shuster, Dr. Peter Gund, Pharmacopeia's
Senior Director of Information Systems, and other members of Pharmacopeia's
management to continue Pharmacopeia's due diligence investigation of MSI and
to explore potential synergies between the two companies.

On November 17, 1997, the MSI Board of Directors held a special meeting to
discuss the status of the possible transaction with Pharmacopeia and other
potential acquisition transactions for MSI.

On November 20, 1997, Dr. Mollica and Mr. Shuster met with Pharmacopeia's
legal and financial advisors to review the status of Pharmacopeia's
discussions with MSI. At this meeting, it was decided to recommend to the
Pharmacopeia Board of Directors that Pharmacopeia submit a bid (the "Bid") to
acquire all of the outstanding MSI Capital Stock and MSI Options for 6,500,000
shares of Pharmacopeia Common Stock in a transaction to be accounted for as a
pooling of interests.

On November 24, 1997, MSI received a bid from the Alternate Bidder.

On November 25, 1997, the Pharmacopeia Board of Directors held a special
meeting to consider the proposed acquisition of MSI. At this meeting, the
Pharmacopeia Board of Directors discussed with management and Pharmacopeia's
legal and financial advisors the proposed Bid and the terms of the proposed
merger agreement between Pharmacopeia and MSI. The value of the 6,500,000
shares of Pharmacopeia Common Stock offered pursuant to the Bid, based on the
$18.88 closing stock price of Pharmacopeia Common Stock on November 25, 1997,
was approximately $123,000,000. The Pharmacopeia Board of Directors
unanimously approved and authorized the submission of the Bid. The Bid was
submitted to MSI later that day.

On November 25 and 26, 1997, Messrs. Savage, Zarrabian, Hiatt and Thomas M.
Carney, MSI's Vice President, Corporate Development and General Counsel, and
representatives of MSI's financial advisor discussed the Bid and the Alternate
Bidder's bid. On November 25, 1997 and December 1 and 3, 1997, the MSI Board
of Directors held special meetings to discuss the Bid, the Alternate Bidder's
bid and other potential acquisition transactions for MSI. At the December 3,
1997 special meeting, the MSI Board of Directors authorized MSI management to
pursue a transaction with the Alternate Bidder due to the MSI Board of
Directors' belief that a transaction with the Alternate Bidder could result in
greater value to the MSI stockholders. Pharmacopeia was subsequently informed
by representatives of MSI that MSI had decided to pursue an opportunity with
the Alternate Bidder. MSI and the Alternate Bidder continued negotiations
between December 3, 1997 and January 7, 1998.

On January 5, 1998, Dr. Mollica and Mr. Savage spoke regarding MSI's
positive fourth quarter results.

On January 6, 1998, Dr. Mollica, Mr. Shuster and Pharmacopeia's legal and
financial advisors discussed MSI's positive fourth quarter results and the
potential benefits of a transaction between Pharmacopeia and MSI. Later that
day, Dr. Mollica called Mr. Savage to explore the terms upon which MSI might
be willing to reenter into negotiations with Pharmacopeia. Dr. Mollica and Mr.
Savage discussed a proposal under which

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Pharmacopeia would acquire all the outstanding MSI Capital Stock, and assume
all outstanding MSI Options, for approximately 8,700,000 shares of
Pharmacopeia Common Stock (the "Offered Shares"). The Exchange Ratio was
determined by dividing the number of Offered Shares by the aggregate number of
shares of MSI Capital Stock outstanding and issuable upon exercise of
outstanding MSI Options. This increase over the 6,500,000 shares of
Pharmacopeia Common Stock offered pursuant to the Bid reflected several
factors, including but not limited to (i) MSI's positive results for the
fourth quarter of 1997, (ii) the decline in Pharmacopeia's stock price between
the time of the Bid and January 6, 1998, and (iii) Pharmacopeia's belief that
other parties had offered to acquire MSI on terms more favorable than those
contained in the Bid. Based on the $15.38 closing stock price of Pharmacopeia
Common Stock on January 6, 1998, the Offered Shares had an aggregate value of
approximately $134,000,000.

On January 7 and January 8, 1998, the MSI Board of Directors held special
meetings to discuss the status of MSI's possible transaction with the
Alternate Bidder and the renewal of discussions with Pharmacopeia. At the
January 7, 1998 special meeting, the MSI Board of Directors authorized Mr.
Savage to pursue further discussions with Pharmacopeia. At the January 8, 1998
special meeting, the MSI Board of Directors determined to terminate
negotiations with the Alternate Bidder. At such time, the value of the
Alternate Bidder's bid was somewhat higher than the aggregate value of the
Offered Shares. Nevertheless, the MSI Board of Directors determined to
terminate discussions with the Alternate Bidder because after five weeks of
negotiations, MSI and the Alternate Bidder had not reached agreement on all of
the terms of a transaction. In addition, the Alternate Bidder had requested
postponement of continued discussions with respect to the transaction for
several months. The MSI Board of Directors believed that there was substantial
uncertainty as to whether or not MSI would reach a definitive agreement with
the Alternate Bidder, and therefore MSI decided to commence discussions with
Pharmacopeia rather than continue discussions with the Alternate Bidder at a
later date. At the January 8, 1998 special meeting, the MSI Board of Directors
authorized the officers of MSI to enter into a standstill agreement with
Pharmacopeia providing for a period of exclusive negotiations between the
parties.

On January 9, 1998, Pharmacopeia and MSI executed a Standstill Agreement
providing for a period of exclusive negotiations between the parties. Also on
January 9, 1998, Pharmacopeia submitted to MSI a proposal (the "Proposal") for
the transaction. The principal terms of the Proposal were identical to the
terms of the Merger. Under such terms, upon consummation of the Merger, a
maximum of approximately 8,700,000 shares of Pharmacopeia Common Stock will be
issuable for all the outstanding MSI Capital Stock and MSI Options. Based on
the $15.75 closing stock price of Pharmacopeia Common Stock on January 9,
1998, the Offered Shares had an aggregate value of approximately $137,000,000.

On January 12 and January 13, 1998, Mr. Shuster, together with
Pharmacopeia's legal and financial advisors, met at the San Diego offices of
MSI's legal counsel with MSI's senior management and financial and legal
advisors. At these meetings, the parties updated their respective due
diligence investigations and commenced their negotiation of the terms of the
proposed transaction.

On January 16, 1998, the MSI Board of Directors held a special meeting to
consider the proposed transaction with Pharmacopeia. At this meeting, the MSI
Board of Directors discussed with MSI's management and MSI's legal counsel the
terms of a proposed merger agreement between the parties. Goldman Sachs
reviewed with the MSI Board of Directors the financial terms of the Merger.
MSI's management and legal and financial advisors discussed with the MSI Board
of Directors a variety of diligence issues with respect to the transaction.
This discussion included the fact that a U.S. patent had been issued to
Affymax on January 13, 1998 that contained certain claims covering a method of
preparing an encoded library of chemical compounds. Because this patent had
been issued only three days before the Board's previously scheduled meeting,
MSI management had been unable to obtain all the documents and information
necessary to analyze the patent's implications for Pharmacopeia. The MSI Board
of Directors and MSI management determined that MSI needed to conduct further
due diligence prior to execution of the proposed merger agreement. The MSI
Board of Directors then unanimously approved the proposed merger and the
proposed merger agreement, provided that such approval would expire
immediately prior to the opening of the Nasdaq National Market on January 20,
1998 if the patent issues discussed at the meeting had not been satisfactorily
resolved by such time.

On January 16, 1998, the Board of Directors of Pharmacopeia met to consider
and vote upon the proposed acquisition of MSI by Pharmacopeia. At this
meeting, the Pharmacopeia Board of Directors discussed with Pharmacopeia's
legal counsel the terms of the proposed merger agreement between the parties
and the issuance

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of the Affymax patent on January 13, 1998. During the course of this meeting,
the Pharmacopeia Board of Directors was informed that MSI might wish to
further investigate this patent issue. BT Alex. Brown reviewed with the
Pharmacopeia Board of Directors the financial terms of the proposed
transaction and informed the Board of Directors that, subject to resolution of
the remaining issues and other customary matters, BT Alex. Brown would be
prepared to render an opinion to the Pharmacopeia Board of Directors to the
effect that the Exchange Ratio was fair, from a financial point of view, to
Pharmacopeia. The Pharmacopeia Board of Directors then approved the proposed
merger and merger agreement by a unanimous vote of those directors present,
provided that such approval would expire at midnight on January 18, 1997, if
the evaluation of the remaining patent issues had not been completed and the
proposed Merger Agreement had not been executed by such time. Based on the
$15.63 closing stock price of Pharmacopeia Common Stock on January 16, 1998,
the Offered Shares had an aggregate value of approximately $136,000,000.

On January 17, 1998, Pharmacopeia and MSI's management and legal advisors
held a conference call to discuss the Affymax patent issues. The parties
determined that additional time, beyond that permitted by the Pharmacopeia and
MSI Boards of Directors' conditional approvals of the Merger Agreement, would
be required to gather the necessary information.

On January 22, 1998, Pharmacopeia and MSI executed a Standstill Agreement to
lengthen the period of exclusive negotiations called for by the parties'
original Standstill Agreement.

On January 29, 1998, Mr. Savage contacted Dr. Mollica to inform him that MSI
had completed its due diligence and was prepared to recommend the proposed
transaction to the MSI Board of Directors.

On February 4, 1998, the MSI Board of Directors held a special meeting to
consider and vote upon the Merger and Merger Agreement. At this meeting, the
MSI Board of Directors was updated as to the satisfactory completion of MSI's
due diligence. Goldman Sachs reviewed its financial analysis of the Merger and
delivered to the MSI Board of Directors an oral opinion, subsequently
confirmed in writing, to the effect that, as of such date and based upon and
subject to certain matters stated in such opinion, the Exchange Ratio is fair,
from a financial point of view, to the holders of MSI Common Stock and MSI
Class B Common Stock. See "--Opinion of MSI's Financial Advisor." The MSI
Board of Directors approved the Merger and the Merger Agreement at this
meeting.

On February 4, 1998, the Pharmacopeia Board of Directors held a meeting to
approve the Merger and the Merger Agreement. At this meeting, the Board of
Directors was updated as to the events that had occurred since the previous
meeting on January 16, 1998. BT Alex. Brown then reviewed the financial
analyses that it had performed in connection with its evaluation of the
Exchange Ratio and delivered to Pharmacopeia's Board of Directors an oral
opinion, subsequently confirmed in writing, to the effect that, as of such
date and based upon and subject to certain matters stated in such opinion, the
Exchange Ratio was fair, from a financial point of view, to Pharmacopeia. See
"--Opinion of Pharmacopeia's Financial Advisor." Based on the $15.63 closing
stock price of Pharmacopeia Common Stock on February 4, 1998, the Offered
Shares had an aggregate value of approximately $136,000,000. The Pharmacopeia
Board of Directors approved the Merger and the Merger Agreement at this
meeting.

The parties to the Merger Agreement executed the Merger Agreement on
February 4, 1998.

RECOMMENDATIONS OF THE PHARMACOPEIA BOARD OF DIRECTORS; PHARMACOPEIA'S REASONS
FOR THE MERGER

The Pharmacopeia Board of Directors has carefully reviewed and considered
the terms and conditions of the Merger. The Pharmacopeia Board of Directors
has concluded that the Merger is fair to and in the best interests of
Pharmacopeia and its stockholders. Accordingly, the Pharmacopeia Board of
Directors has approved, by a unanimous vote of those directors present at the
meeting at which the Pharmacopeia Board of Directors approved the Merger
Agreement, the Issuance Proposal, and recommends that the stockholders of
Pharmacopeia vote FOR the approval and adoption of the Issuance Proposal. In
reaching its determination, the Pharmacopeia

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Board of Directors consulted with Pharmacopeia's management, as well as its
financial and legal advisors, and considered a number of factors including but
not limited to the following:

. The historical and prospective business of Pharmacopeia, and the ability
to enhance Pharmacopeia's strategic position by acquiring computational
chemistry expertise.

. The prospect of more tightly integrating computational, combinatorial
and experimental chemistry so as to validate existing design tools and
to develop new capabilities for use by the combined company and its
customers.

. The immediate steps that Pharmacopeia could take to attempt to realize
the potential synergies in the Merger, including (i) providing selected
MSI scientists with access to Pharmacopeia's structure-activity database
and bioassay information that these MSI scientists could use to develop
new software tools to guide drug discovery and (ii) using MSI's
expertise to develop and market selected software written by
Pharmacopeia. To help accomplish these goals, Pharmacopeia plans to
establish a Center for Informatics and Drug Design that would be staffed
by personnel from both Pharmacopeia and MSI. This Center would have at
its disposal all information possessed by both companies, except for
certain confidential information developed in connection with
collaboration or other agreements entered into with third parties.

. Other types of synergies that Pharmacopeia would attempt to realize,
including exploring the establishment of a Center for Materials Science
that would use MSI's expertise to apply Pharmacopeia's existing
technologies to the materials science area, and by seeking other methods
of exploiting MSI's expertise in the materials science area.

. Opportunities for the two companies to cross-sell drug discovery
products and services, including by using Pharmacopeia's existing
collaboration agreements with other companies to help MSI penetrate the
experimentalist market within those organizations. In addition, MSI's
global sales and marketing organization could help Pharmacopeia's
efforts to market its current and potential future drug discovery
products and services.

. Pursuing a balanced financial strategy by striving for near-term profits
from MSI's operations while continuing to lay the foundation for long-
term profits from royalties and drug discovery milestones achieved by
Pharmacopeia.

. The expected treatment of the Merger as a tax-free reorganization for
federal income tax purposes, and the expected ability to account for the
Merger as a pooling of interests.

. The terms of the Merger Agreement, including the Exchange Ratio, the
parties' representations and covenants, and the conditions to their
respective obligations. In particular, the Pharmacopeia Board of
Directors focused on the Exchange Ratio as a method of fixing the
consideration to be paid to MSI stockholders. Pharmacopeia's stock price
has been volatile, and the Pharmacopeia Board of Directors believed that
Pharmacopeia's stock price could continue to vary from day to day for
reasons unrelated to the fundamental value of Pharmacopeia. Therefore,
rather than offering MSI stockholders a number of shares of Pharmacopeia
Common Stock with a certain value, the Pharmacopeia Board of Directors
found it advisable to set a fixed Exchange Ratio.

. The recommendation of the Merger by Pharmacopeia's senior management.

. The oral opinion (subsequently confirmed by delivery of a written
opinion dated February 4, 1998) of BT Alex. Brown to the Pharmacopeia
Board of Directors to the effect that, as of the date of such opinion
and based upon and subject to certain matters stated therein, the
Exchange Ratio was fair, from a financial point of view, to
Pharmacopeia. See "--Opinion of Pharmacopeia's Financial Advisor".

The Pharmacopeia Board of Directors also discussed certain risks of the
transaction, including but not limited to the following:

. The significant fluctuations in MSI's operating results caused by
seasonal and other factors, and the difficulty that this would create in
managing cash flow and otherwise managing the operations of the

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combined company. In particular, the Pharmacopeia Board of Directors
considered MSI's tendency to earn a significant portion of its quarterly
revenue late in the quarter, and the quarterly variations in revenues
caused by MSI's success or failure in signing significant new contracts
each quarter.

. The risk that MSI might be unsuccessful in expanding its customer base to
include experimentalists, which could lead to a decline in MSI's revenues
after MSI had expended significant resources to market and distribute
such software.

. The difficulty that analysts, and the stock market in general, would have
in valuing Pharmacopeia Common Stock after the consummation of the
Merger. The Pharmacopeia Board of Directors believes that software
companies such as MSI are generally valued based on a multiple of recent
earnings and a projected near term growth rate for such earnings.
Pharmacopeia's value, however, lies in earnings from future
collaborations, outlicensing, milestone achievements and royalty
payments, including potentially large royalty payments from undiscovered
and/or unproven drugs that would not be available for sale for many
years.

The foregoing discussion of the information and factors considered by the
Pharmacopeia Board of Directors is not intended to be exhaustive, but is
believed to include all of the material factors considered by the Pharmacopeia
Board of Directors. In making its determination, the Pharmacopeia Board of
Directors did not find it practicable to and did not quantify or otherwise
assign relative weights to the specific factors considered in reaching its
determination. The Pharmacopeia Board of Directors did not reach specific
conclusions as to any factor and did not classify the various factors according
to whether they were favorable, unfavorable or neutral to the Board's
conclusions. In addition, individual members of the Pharmacopeia Board of
Directors may have given different weights to different factors.

THE PHARMACOPEIA BOARD OF DIRECTORS HAS UNANIMOUSLY CONCLUDED THAT THE MERGER
IS FAIR TO AND IN THE BEST INTERESTS OF PHARMACOPEIA AND ITS STOCKHOLDERS AND
RECOMMENDS THAT PHARMACOPEIA STOCKHOLDERS VOTE FOR THE ISSUANCE PROPOSAL.

RECOMMENDATIONS OF THE MSI BOARD OF DIRECTORS; MSI'S REASONS FOR THE MERGER

The MSI Board of Directors considered a wide variety of information and a
number of factors in connection with its evaluation of the Merger and the
Merger Agreement. The MSI Board of Directors believes that the Merger may
result in a number of benefits to MSI and its stockholders, including the
following:

. Complementary Businesses. MSI believes that the ability to directly
apply its technology in Pharmacopeia's drug discovery laboratories will
enable MSI to further enhance its portfolio of scientific simulation
software. In particular, MSI believes that access to the large amount of
chemical and biological data generated by Pharmacopeia will enable MSI
to improve the predictive utility and scientific accuracy of its
software products. By enhancing its products, MSI would be able to offer
more value to its current and prospective customers. In addition, MSI
expects that full application of its products in Pharmacopeia's drug
discovery activities will improve Pharmacopeia's ability to achieve
further success on behalf of its customers and within its internal
programs.

. Broadened Technology Platform and Product Offerings. The Merger brings
together Pharmacopeia's proprietary ECLiPS technology, over 3.8 million
compounds and expertise in chemistry and biology for drug discovery,
with MSI's software for analyzing chemical and biological data as well
as MSI's expertise in using informatics tools to understand chemical
interactions and molecular properties. MSI believes that this
integration of laboratory experimentation, chemical and biological
information, and software for molecular simulation and analysis can
become a powerful technology platform for improving the speed and
efficiency of drug discovery. The Merger is also expected to provide MSI
with the opportunity to significantly expand the scope of products and
services it can offer to users, particularly in the areas of
cheminformatics tools and information technology services.

. Stockholder Benefits. The Merger provides MSI stockholders with
Pharmacopeia Common Stock for which there is a public market, in
contrast to the illiquid nature of their present holdings of MSI Capital
Stock.

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The MSI Board of Directors considered a wide variety of information and a
number of factors in connection with its evaluation of the Merger and the
Merger Agreement, and determined that the proposed Merger provides an
opportunity that serves the best interests of MSI and its stockholders. In
particular, the MSI Board of Directors considered, among other things: (i) the
likelihood of realizing superior benefits through alternative business
strategies, including an initial public offering; (ii) information concerning
MSI's and Pharmacopeia's respective businesses, historical financial
performances, operations and products; (iii) an analysis of the relative value
that MSI might contribute to the future business and prospects of the combined
company; (iv) the compatibility of the management and business of MSI with
those of Pharmacopeia; (v) a presentation by Goldman Sachs with respect to the
Merger, including the opinion of Goldman Sachs, dated February 4, 1998, that,
as of such date, the Exchange Ratio was fair, from a financial point of view,
to the holders of MSI Common Stock and MSI Class B Common Stock; (vi) the
effect of the Merger on MSI, MSI's employees and MSI's customers; and (vii)
reports from management and legal advisors on specific terms of the relevant
agreements and other matters.

The MSI Board of Directors believes that the Merger is in the best interests
of MSI and its stockholders, notwithstanding the following potentially
negative factors: (i) the potential disruption of MSI's business that might
result from employee uncertainty and lack of focus following announcement of
the Merger in connection with integrating the operations of MSI and
Pharmacopeia; (ii) the possibility that the Merger might not be consummated;
(iii) the effects of the public announcement of the Merger on MSI's sales and
operating results, its ability to attract and retain key management, sales,
marketing and technical personnel and the progress of certain of its
development projects; (iv) the risk that the announcement of the Merger could
result in decisions by customers to defer purchases of products of MSI; (v)
the risks associated with potential volatility in the market price of
Pharmacopeia Common Stock; and (vi) the risk that the other benefits sought to
be achieved by the Merger will not be achieved.

In view of the complexity and variety of factors considered by the MSI Board
of Directors in connection with its evaluation of the Merger Agreement and the
proposed Merger, the MSI Board of Directors did not find it practicable to and
did not quantify or otherwise assign relative weights to the specific factors
considered in reaching this determination. After taking into consideration all
of the factors set forth above, the MSI Board of Directors determined that the
Merger was in the best interests of MSI and its stockholders and that MSI
should proceed with the Merger at this time.

OPINION OF PHARMACOPEIA'S FINANCIAL ADVISOR

Pharmacopeia engaged BT Alex. Brown to act as its exclusive financial
advisor in connection with the Merger. On February 4, 1998, at a meeting of
the Pharmacopeia Board of Directors held to evaluate the proposed Merger, BT
Alex. Brown rendered to the Pharmacopeia Board an oral opinion (which opinion
was subsequently confirmed by delivery of a written opinion dated February 4,
1998) to the effect that, as of such date and based upon and subject to
certain matters stated in such opinion, the Exchange Ratio was fair from a
financial point of view to Pharmacopeia. No limitations were imposed by the
Board of Directors of Pharmacopeia upon BT Alex. Brown with respect to the
investigations made or the procedures followed by it in rendering its opinion.

The full text of the written opinion of BT Alex. Brown dated February 4,
1998, which sets forth the assumptions made, matters considered and
limitations of the review undertaken, is attached as Annex 2 to this Joint
Proxy Statement/Prospectus and is incorporated herein by reference. BT ALEX.
BROWN'S OPINION IS DIRECTED TO THE BOARD OF DIRECTORS OF PHARMACOPEIA,
ADDRESSES ONLY THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF
VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW
SUCH STOCKHOLDER SHOULD VOTE AT THE PHARMACOPEIA ANNUAL MEETING. The summary
of the opinion of BT Alex. Brown in this Joint Proxy Statement/Prospectus is
qualified in its entirety by reference to the full text of such opinion.

In connection with its opinion, BT Alex. Brown reviewed certain publicly
available financial information and other information concerning Pharmacopeia,
certain available financial information and other information concerning MSI
and certain internal analyses and other information furnished to BT Alex.
Brown by

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Pharmacopeia and MSI. BT Alex. Brown also held discussions with members of the
senior management of Pharmacopeia and MSI regarding the business and prospects
of Pharmacopeia and MSI and the joint prospects of a combined company. In
addition, BT Alex. Brown (i) reviewed the reported prices and trading activity
for Pharmacopeia Common Stock, (ii) compared certain financial and stock
market information for Pharmacopeia and certain financial information for MSI
with similar information for certain publicly traded companies, (iii) reviewed
the financial terms of certain recent business combinations which BT Alex.
Brown deemed comparable in whole or in part, (iv) reviewed the terms of the
Merger Agreement, and (v) performed such other studies and analyses and
considered such other factors as BT Alex. Brown deemed appropriate.

As described in its opinion, BT Alex. Brown assumed and relied upon, without
independent verification, the accuracy, completeness and fairness of the
information furnished to or otherwise reviewed by or discussed with BT Alex.
Brown for purposes of its opinion. With respect to the information relating to
the prospects of Pharmacopeia, MSI and the combined company, BT Alex. Brown
assumed that such information reflected the best currently available judgments
and estimates of the management of Pharmacopeia and MSI as to the likely
future financial performance of their respective companies and of the combined
company. BT Alex. Brown did not make nor was it provided with an independent
evaluation or appraisal of the assets or liabilities of Pharmacopeia or MSI.
BT Alex. Brown's opinion does not constitute an opinion as to the price at
which the Pharmacopeia Common Stock will actually trade at any time. BT Alex.
Brown assumed, with the consent of the Pharmacopeia Board of Directors, that
the Merger would qualify for pooling-of-interests accounting treatment. BT
Alex. Brown's opinion was based on market, economic and other conditions as
they existed and could be evaluated as of the date of its opinion. Although BT
Alex. Brown evaluated the Exchange Ratio from a financial point of view, the
type and amount of consideration payable in the Merger was determined through
negotiation between Pharmacopeia and MSI.

The following is a summary of the material analyses and factors considered
by BT Alex. Brown in connection with its opinion to the Pharmacopeia Board of
Directors dated February 4, 1998:

Analysis of Selected Public Companies. BT Alex. Brown compared certain
financial and stock market information for the following selected publicly
held companies in the pharmaceutical and biotechnology industry, consisting
of: (i) contract research organizations: ClinTrials Research, Inc.; Covance,
Inc.; PAREXEL International Corporation; Pharmaceutical Product Development,
Inc.; and Quintiles Transnational Corp. (the "CRO Companies"); (ii) biotech
software companies: ArQule, Inc.; Aurora Biosciences Corp.; InCyte
Pharmaceuticals, Inc.; Oxford Molecular Group plc; and Tripos, Inc. (the
"Biotech Software Companies"); and (iii) health care information technology
companies: Cerner Corporation; HCIA, Inc.; HBO & Company; Shared Medical
Systems Corporation; and Transition Systems, Inc. (the "HIT Companies" and,
together with the CRO Companies and Biotech Software Companies, the "Selected
Companies"). BT Alex. Brown calculated equity market values as a multiple of,
among other things, latest available 12 months and estimated calendar years
1998 and 1999 net income, and adjusted market values (equity market value,
plus debt, less cash and equivalents) as a multiple of revenues, earnings
before interest, taxes, depreciation and amortization ("EBITDA") and earnings
before interest and taxes ("EBIT") for the latest available 12 months of
reported financial information. All multiples were based on closing stock
prices on January 30, 1998. Net income estimates for the Selected Companies
were based on estimates of selected investment banking firms and net income
estimates for MSI were based on internal estimates of the management of MSI.
This analysis indicated overall mean multiples for the Selected Companies of
latest available 12 months and estimated calendar 1998 and 1999 net income of
38.9x, 32.6x and 22.6x, respectively, and latest available 12 months revenues,
EBITDA and EBIT of 5.5x, 17.4x and 25.7x, respectively. Based on the closing
price of Pharmacopeia Common Stock on January 30, 1998, the Exchange Ratio
equated to implied multiples for MSI of latest available 12 months and
estimated calendar 1998 and 1999 net income of 22.2x, 16.0x and 11.3x,
respectively, and latest available 12 months revenues, EBITDA and EBIT of
2.2x, 10.5x and 13.7x, respectively.

Analysis of Recent Mergers and Acquisitions. BT Alex. Brown reviewed the
purchase price and implied transaction multiples in the following selected
merger and acquisition transactions announced or effected in the
pharmaceutical and biotechnology industry, consisting of (acquiror/target):
(i) contract research organization

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transactions: Quintiles Transnational Corp./Innovex, Ltd.; Quintiles
Transnational Corp./BRI International, Inc.; and Pharmaceutical Product
Development, Inc./Applied Bioscience International, Inc. (the "CRO
Transactions"); (ii) healthcare information technology transactions: HBO &
Co./HPR, Inc.; IDX Systems Corporation/PHAMIS, Inc.; HBO & Co./Enterprise
Systems, Inc.; HBO & Co./AMISYS Managed Care Systems, Inc.; The Thomson
Corporation/The MEDSTAT Group, Inc.; and HBO & Co./Serving Software, Inc. (the
"HIT Transactions"); and (iii) software transactions: Avant!
Corporation/Technology Modeling Associates, Inc.; Reed Elsevier plc/MDL
Information Systems, Inc.; Autodesk, Inc./Softdesk, Inc.; and Synopsys,
Inc./Logic Modeling Corp. (the "Software Transactions" and, together with the
CRO Transactions and the HIT Transactions, the "Selected Transactions"). All
multiples were based on publicly available information at the time of
announcement of such transaction. This analysis indicated a range of (i)
implied equity market value multiples for the Selected Transactions of latest
available 12 months and one-year forward net income of 23.4x to 184.5x (with a
mean of 69.8x) and 21.0x to 44.9x (with a mean of 32.8x) and (ii) implied
adjusted market value multiples for the Selected Transactions of latest
available 12 months revenues, EBITDA and EBIT of 1.9x to 9.4x (with a mean of
4.2x), 15.3x to 42.6x (with a mean of 25.2x) and 19.1x to 75.2x (with a mean
of 40.6x), respectively. Based on the closing price of Pharmacopeia Common
Stock on January 30, 1998, the Exchange Ratio equated to implied multiples for
MSI of latest available 12 months and one-year forward net income, and latest
available 12 months revenues, EBITDA and EBIT of 22.2x, 15.5x, 2.2x, 10.5x and
13.7x, respectively.

Discounted Cash Flow Analyses. BT Alex. Brown performed separate discounted
cash flow analyses of Pharmacopeia and MSI to estimate the present value of
the stand-alone, unlevered, after-tax free cash flows that each of
Pharmacopeia and MSI could generate over fiscal years 1998 through 2002 (in
the case of Pharmacopeia) and fiscal years 1998 through 2000 (in the case of
MSI). The stand-alone discounted cash flow analyses of Pharmacopeia and MSI
were determined by (i) adding (x) the present value of the projected free cash
flows of Pharmacopeia over fiscal years 1998 through 2002 and of MSI over
fiscal years 1998 through 2000 and (y) the present value of the estimated
terminal values of Pharmacopeia in fiscal year 2002 and of MSI in fiscal year
2000 and (ii) subtracting the current net debt of Pharmacopeia and MSI. The
range of estimated terminal values for each of Pharmacopeia and MSI was
calculated by applying terminal value multiples ranging from 15.0x to 20.0x to
the projected fiscal year 2002 EBITDA of Pharmacopeia and the projected fiscal
year 2000 EBITDA of MSI, respectively. The cash flows and terminal values of
each of Pharmacopeia and MSI were discounted to present value using discount
rates ranging from 20% to 30%. This analysis yielded an equity reference range
for Pharmacopeia Common Stock of approximately $16.74 to $26.86 per share, as
compared to the market value for Pharmacopeia of $16.63 per share based on a
closing stock price of Pharmacopeia Common Stock on January 30, 1998, and an
equity reference range for MSI of approximately $224.9 million to $360.5
million as compared to the equity value implied by the Exchange Ratio of
approximately $141.1 million based on the closing stock price of Pharmacopeia
Common Stock on January 30, 1998.

Contribution Analysis. BT Alex. Brown analyzed the relative contributions of
Pharmacopeia and MSI to the estimated revenues, EBITDA and pre-tax income of
the pro forma combined company for calendar years 1999 and 2000, and compared
such contributions to the pro forma ownership of the current holders of
Pharmacopeia Common Stock in the pro forma combined company. This analysis
indicated that (i) in calendar year 1999, Pharmacopeia would contribute
approximately 32.3% of the revenues, 10.3% of the EBITDA, and 1.1% of the pre-
tax income of the pro forma combined company; and (ii) in calendar year 2000,
Pharmacopeia would contribute approximately 31.3% of the revenues, 22.6% of
the EBITDA, and 18.0% of the pre-tax income of the pro forma combined company.
Based on the Exchange Ratio, current holders of Pharmacopeia Common Stock
would own approximately 58.8% of the pro forma combined company upon
consummation of the Merger.

Pro Forma Merger Analysis. BT Alex. Brown analyzed the pro forma effects of
the Merger on the earnings per share (the "EPS") of Pharmacopeia in calendar
years 1997 through 2000 by comparing the EPS of Pharmacopeia on a stand-alone
basis relative to the EPS of Pharmacopeia after consummation of the Merger and
before giving effect to potential synergies and other cost savings anticipated
by the management of Pharmacopeia and MSI to result from the Merger. For
purposes of such analysis, BT Alex. Brown focused primarily on the EPS of
Pharmacopeia in calendar year 2000 given Pharmacopeia's negative or minimal
projected earnings in calendar years 1997 through 1999. This analysis
indicated that the Merger could be accretive to Pharmacopeia's

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EPS in calendar year 2000. The actual operating or financial results achieved
by the pro forma combined company may vary from projected results and
variations may be material as a result of business and operational risks, the
timing and amount of synergies, the costs associated with achieving such
synergies and other factors.

Other Analyses. In rendering its opinion, BT Alex. Brown also reviewed and
considered, among other things: (i) historical and projected financial data
for Pharmacopeia and MSI, (ii) historical market prices and trading volumes
for Pharmacopeia Common Stock, and (iii) selected analysts' reports on
Pharmacopeia, including EPS estimates of such analysts for Pharmacopeia.

The summary set forth above does not purport to be a complete description of
the opinion of BT Alex. Brown to the Pharmacopeia Board of Directors or the
financial analyses performed and factors considered by BT Alex. Brown in
connection with its opinion. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to summary description. BT Alex. Brown believes
that its analyses and the summary set forth above must be considered as a
whole and that selecting portions of its analyses, without considering all
analyses, or selecting portions of the above summary, without considering all
factors and analyses, could create a misleading or incomplete view of the
processes underlying such analyses and opinion. In performing its analyses, BT
Alex. Brown made numerous assumptions with respect to industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of Pharmacopeia and MSI. No company,
transaction or business used in such analyses as a comparison is identical to
Pharmacopeia, MSI or the proposed Merger, nor is an evaluation of the results
of such analyses entirely mathematical; rather, such analyses involve complex
considerations and judgments concerning financial and operating
characteristics and other factors that could affect the acquisition, public
trading or other values of the companies, business segments or transactions
being analyzed. The estimates contained in such analyses and the ranges of
valuations resulting from any particular analysis are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than those suggested by such analyses. In addition, analyses
relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold. Accordingly, such analyses and estimates are inherently subject
to substantial uncertainty. BT Alex. Brown's opinion and financial analyses
were only one of many factors considered by the Pharmacopeia Board of
Directors in its evaluation of the proposed Merger and should not be viewed as
determinative of the views of the Board of Directors or management of
Pharmacopeia with respect to the Exchange Ratio or the Merger.

BT Alex. Brown is an internationally recognized investment banking firm and,
as a customary part of its investment banking business, is engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, private placements and valuations for
estate, corporate and other purposes. Pharmacopeia selected BT Alex. Brown to
serve as its exclusive financial advisor based on BT Alex. Brown's reputation,
expertise and familiarity with Pharmacopeia and its business. BT Alex. Brown
previously has provided investment banking services to Pharmacopeia unrelated
to the proposed Merger, for which services BT Alex. Brown has received
customary compensation. BT Alex. Brown maintains a market in Pharmacopeia
Common Stock and regularly publishes research reports regarding the
pharmaceutical and biotechnology industry and the businesses and securities of
Pharmacopeia and other publicly owned companies in such industry. In the
ordinary course of business, BT Alex. Brown may actively trade the securities
of Pharmacopeia for its own account and the accounts of customers and,
accordingly, may at any time hold a long or short position in securities of
Pharmacopeia.

Pursuant to the terms of BT Alex. Brown's engagement, Pharmacopeia has
agreed to pay BT Alex. Brown, upon consummation of the Merger, an aggregate
financial advisory fee of $1,650,000. In addition, Pharmacopeia has agreed to
reimburse BT Alex. Brown for its reasonable out-of-pocket expenses, including
reasonable fees and disbursements of counsel, and to indemnify BT Alex. Brown
and certain related parties against certain liabilities, including certain
liabilities under the federal securities laws, relating to, or arising out of,
its engagement.

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OPINION OF MSI'S FINANCIAL ADVISOR

On February 4, 1998, Goldman Sachs delivered its oral opinion to the Board
of Directors of MSI that as of the date of such opinion, the Exchange Ratio
pursuant to the Merger Agreement is fair from a financial point of view to the
holders of MSI Common Stock and MSI Class B Common Stock. Goldman Sachs
subsequently confirmed its earlier oral opinion by delivery of its written
opinion dated February 4, 1998.

THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS DATED AS OF FEBRUARY
4, 1998, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED HERETO AS
ANNEX 3 TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE.

In connection with its opinion, Goldman Sachs reviewed, among other things,
(i) the Merger Agreement; (ii) the Registration Statement on Form S-1, dated
February 10, 1997, of MSI with respect to its previously proposed initial
public offering; (iii) audited financial statements of MSI for the three years
ended December 31, 1996; (iv) unaudited financial statements of MSI for the
year ended December 31, 1997; and (v) certain internal financial analyses and
forecasts for MSI prepared by its management. Goldman Sachs also reviewed (i)
the Registration Statement on Form S-1, dated December 5, 1995, of
Pharmacopeia with respect to an initial public offering of Pharmacopeia Common
Stock; (ii) Annual Reports to Stockholders and Annual Reports on Form 10-K of
Pharmacopeia for the years ended December 31, 1995 and 1996; (iii) certain
interim reports to stockholders and Quarterly Reports on Form 10-Q of
Pharmacopeia; (iv) certain other communications from Pharmacopeia to its
stockholders; and (v) certain internal financial analyses and forecasts for
Pharmacopeia prepared by its management and certain financial analyses and
forecasts for Pharmacopeia reviewed by Goldman Sachs with the respective
managements of Pharmacopeia and MSI (the "Forecasts"). Goldman Sachs also held
discussions with members of the senior management of MSI and Pharmacopeia
regarding the strategic rationale for, and the potential benefits of, the
transaction contemplated by the Merger Agreement and the past and current
business operations, financial condition and future prospects of their
respective companies. In addition, Goldman Sachs reviewed the reported price
and trading activity for Pharmacopeia Common Stock, compared certain financial
information for MSI and Pharmacopeia with similar information for certain
other companies the securities of which are publicly traded, compared certain
stock market information for Pharmacopeia with similar information for certain
other companies the securities of which are publicly traded, reviewed the
financial terms of certain recent business combinations in the software and
biotechnology industries specifically and in other industries generally and
performed such other studies and analyses as it considered appropriate.

Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and assumed such accuracy and
completeness for purposes of rendering its opinion. Goldman Sachs also assumed
with the consent of MSI that the transaction contemplated by the Merger
Agreement would be accounted for as a pooling-of-interests under generally
accepted accounting principles. Goldman Sachs confirmed that the MSI Board of
Directors was aware that Pharmacopeia has a limited operating history with a
record of operating losses and that there is no assurance of future
profitability due, in part, among other factors, to its dependence on patents
and proprietary rights, competition, the risk of obsolescence of its
technology, its dependence upon collaborators and key employees, and the need
for future capital and the uncertainty of funding therefor. Notwithstanding
the various risks and uncertainties inherent in achieving the Forecasts
because of the nature of Pharmacopeia's business and lack of demonstrated
profitability, for purposes of its opinion, Goldman Sachs assumed that the
Forecasts were reasonably prepared on a basis reflecting the best currently
available judgments and estimates of Pharmacopeia and MSI and that it was the
best currently available judgment of MSI that the Forecasts will be realized
in the amounts and at the times contemplated thereby. Goldman Sachs did not
make an independent evaluation or appraisal of the assets and liabilities of
MSI or Pharmacopeia or any of MSI's subsidiaries and Goldman Sachs has not
been furnished with any such evaluation or appraisal.

Goldman Sachs' advisory services and opinion were provided for the
information and assistance of the MSI Board of Directors in connection with
its consideration of the transaction contemplated by the Merger Agreement, and
such opinion does not constitute a recommendation as to how any holder of MSI
Common Stock

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should vote with respect to such transaction. In addition, Goldman Sachs did
not express any opinion as to the prices at which Pharmacopeia Common Stock
may trade in the future.

The following is a summary of certain of the financial analyses used by
Goldman Sachs in connection with providing its opinion to the MSI Board of
Directors dated as of February 4, 1998.

(i) Selected Companies Analysis. Goldman Sachs reviewed and compared
certain financial information relating to MSI to corresponding financial
information, ratios and public market multiples for (i) Aspen Technology
Inc., MDL Information Systems Inc. (utilizing the share price prior to the
announcement of the acquisition by Reed Elsevier PLC on March 24, 1997 and
fully taxed price/earning multiples), Oxford Molecular Group (utilizing
information converted to U.S. dollars) and Tripos Inc. (together, the
"Modeling Software Companies"); (ii) Arqule Inc., CombiChem Inc. (utilizing
a stock price which reflected the middle of CombiChem's proposed IPO filing
range, which IPO has subsequently been indefinitely postponed, and latest
twelve months financial information), Pharmacopeia and Trega Biosciences
Inc. (together, the "Combinatorial Chemistry Companies") and (iii) Axys
Pharmaceuticals Inc. (utilizing pro forma information for the merger of
Arris Pharmaceutical Corp. ("Arris") and Sequana Therapeutics Inc.
("Sequana") and assuming 14.7 million shares of Arris issued for Sequana),
Cadus Pharmaceutical Corporation, Microcide Pharmaceuticals Inc. and Onyx
Pharmaceuticals Inc. (together the "Drug Discovery Companies" and together
with the Modeling Software Companies and the Combinatorial Chemistry
Companies, the "Selected Companies"). The Selected Companies were chosen
because they are publicly-traded companies with operations that for
purposes of analysis may be considered similar to MSI and Pharmacopeia.
Goldman Sachs calculated and compared various financial multiples and
ratios. The multiples of MSI were calculated using an implied price of
$8.73 per share of MSI Capital Stock, derived from the closing price of
Pharmacopeia Common Stock on the Nasdaq National Market on February 3, 1998
multiplied by the Exchange Ratio. The multiples and ratios for MSI were
based on information provided by MSI's management and the multiples for
each of the Selected Companies were based on the most recent publicly
available information and the most recent earnings estimates available from
Institutional Brokers Estimates System ("IBES"). This analysis indicated,
among other things, that the price/earnings ("P/E") ratios using estimated
1997 earnings for (i) the Modeling Software Companies ranged from a low of
13.0x to a high of 37.1x (with a mean of 26.1x and a median of 27.2x),
compared to 22.1x for MSI; (ii) the Combinatorial Chemistry Companies were
not meaningful (due to a lack of earnings); and (iii) the Drug Discovery
Companies were not meaningful (due to a lack of earnings). The P/E ratios
using estimated 1998 earnings for (i) the Modeling Software Companies
ranged from a low of 9.3x to a high of 25.5x (with a mean of 15.1x and a
median of 12.8x), compared to 16.2x for MSI; (ii) the Combinatorial
Chemistry Companies were not meaningful (due to a lack of earnings); and
(iii) the Drug Discovery Companies were not meaningful (due to a lack of
earnings). The P/E ratios using estimated 1999 earnings for (i) the
Modeling Software Companies ranged from a low of 7.5x to a high of 20.1x
(with a mean of 12.4x and a median of 9.7x), compared to 11.6x for MSI;
(ii) the Combinatorial Chemistry Companies were not meaningful (due to a
lack of earnings); and (iii) the Drug Discovery Companies were not
meaningful (due to a lack of earnings).

With respect to the Selected Companies, Goldman Sachs also considered
levered equity market capitalization as a multiple of latest quarter data
("LQD") annualized revenues. Goldman Sachs' analysis indicated that
multiples of annualized LQD revenues for (i) the Modeling Software
Companies ranged from a low of 0.9x to a high of 15.2x (with a mean of 5.4x
and a median of 2.7x); (ii) the Combinatorial Chemistry Companies ranged
from a low of 7.2x to a high of 24.3x (with a mean of 14.0x and a median of
12.2x); and (iii) the Drug Discovery Companies ranged from a low of 5.3x to
a high of 9.0x (with a mean of 6.7x and a median of 6.3x); as compared to
2.0x for MSI.

(ii) Net Present Value of Future Market Value Analysis. Goldman Sachs
performed a net present value of future market value analysis using
projections provided by MSI's management. Goldman Sachs calculated MSI's
net present values of future market value in the year 2000 based on MSI's
estimated year 2001 net income as set forth in the projections provided by
MSI's management (which was derived from estimated year 2000 net income and
an assumed 20% growth rate) with multiples ranging from 14.0x to

49
<PAGE>

18.0x and discounting these value to present value using discount rates
ranging from 20.0% to 35.0%. Such analyses indicated implied values of MSI
that ranged from $97 million to $178 million.

(iii) Discounted Cash Flow Analysis of MSI. Goldman Sachs performed a
discounted cash flow analysis using the projections provided by MSI's
management. Goldman Sachs calculated a net present value of free cash flows
for the years 1998 through 2001 using discount rates ranging from 20% to
25% and calculated terminal values in 2001 using estimated 2001 unlevered
net income and multiples ranging from 16.0x to 20.0x less net debt as set
forth in the projections provided by MSI's management. Such analysis
indicated implied equity values of MSI ranging from $148 million to $200
million. Goldman Sachs also performed a sensitivity analysis to the
discounted cash flow analysis based on discussions with MSI management and
reflecting inherent growth rates (with no acquisitions) and steady margin
improvement. Using similar methodology as set forth above, Goldman Sachs
calculated implied equity values of MSI in the sensitivity case that ranged
from $119 million to $158 million.

(iv) Discounted Cash Flow Analysis of Pharmacopeia. Goldman Sachs
performed a discounted cash flow analysis using the Forecasts. Goldman
Sachs calculated a net present value of after-tax earnings before interest
of Pharmacopeia for estimated years 1998-2015 using discount rates ranging
from 20% to 30%. Goldman Sachs also calculated terminal values for
Pharmacopeia using the Forecasts, which included estimated year 2015 net
income and multiples ranging from 15.0x to 30.0x and discount rates ranging
from 20% to 30%. Such analysis indicated implied per share values for
Pharmacopeia that ranged from $16.42 to $68.97.

(v) Contribution Analysis. Goldman Sachs reviewed certain historical and
estimated future operating and financial information (including, among
other things, revenues, EBIT, net income, book value) for MSI, Pharmacopeia
and the combined entity resulting from the Merger (without taking into
account any potential synergies as a result of, and any transaction costs
related to, the Merger) based on the Forecasts and the projections provided
by MSI's management. For estimated years 2001 through 2002 with respect to
MSI, Goldman Sachs used 20% growth rates over the preceding years, and with
respect to Pharmacopeia, Goldman Sachs used the estimates set forth in an
equity research report prepared by BT Alex. Brown dated December 2, 1997.
Goldman Sachs analyzed the relative income statement contributions of MSI
and Pharmacopeia to the combined entity on a pro forma basis before taking
into account any of the possible benefits that may be realized or possible
expenses resulting from the Merger. This analysis indicated that MSI would
contribute in estimated years 1997, 1998, 1999, 2000, 2001 and 2002 (a)
69.8%, 68.3%, 66.0%, 67.0%, 69.4% and 69.8%, respectively, to combined
revenues, (b) 100.0%, 100.0%, 100.0%, 89.2%, 61.3% and 54.3%, respectively,
to combined EBIT and (c) 100.0%, 100.0%, 98.1%, 72.5%, 46.3% and 42.8%,
respectively, to combined net income.

The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying Goldman Sachs' opinion. In arriving at its fairness
determination, Goldman Sachs considered the results of all such analyses. No
company or transaction used in the above analyses as a comparison is directly
comparable to MSI or Pharmacopeia or the contemplated transaction. The
analyses were prepared for purposes of Goldman Sachs' providing its opinion to
the MSI Board of Directors as to whether the Exchange Ratio pursuant to the
Merger Agreement is fair from a financial point of view to the holders of MSI
Common Stock and MSI Class B Common Stock and do not purport to be appraisals
or necessarily reflect the prices at which businesses or securities actually
may be sold. Analyses based upon forecasts of future results are not
necessarily indicative of actual future results, which may be significantly
more or less favorable than suggested by such analyses. The analyses are
inherently subject to uncertainty, being based upon numerous factors or events
beyond the control of the parties or their respective advisors. As described
above, Goldman Sachs' opinion to the Board of Directors of MSI was one of many
factors taken into consideration by the MSI Board of Directors in making its
determination to approve the Merger and the Merger Agreement. The foregoing
summary does not purport to be a complete description of the analysis
performed by Goldman Sachs and is qualified by reference to the written
opinion of Goldman Sachs set forth in Annex 3 hereto.

50
<PAGE>

Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
and valuations for estate, corporate and other purposes. MSI selected Goldman
Sachs as its financial advisor because it is a nationally recognized
investment banking firm that has substantial experience in transactions
similar to the Merger. In addition, Goldman Sachs has provided certain
investment banking services to Corning, the largest stockholder of MSI, from
time to time, including having acted as its financial advisor in connection
with its spinoff of Quest Diagnostics in January 1997 and acting as its
financial advisor in connection with the pending divestiture of its consumer
products business, and may provide investment banking services to Corning in
the future.

Pursuant to a letter agreement dated June 17, 1997 (the "Engagement
Letter"), MSI engaged Goldman Sachs to act as its financial advisor in
connection with the possible sale of all or a portion of MSI. Pursuant to the
terms of the Engagement Letter, MSI has agreed to pay Goldman Sachs upon
consummation of the Merger a transaction fee equal to 1.25% of the first
$150,000,000 in aggregate consideration, as defined in the Engagement Letter,
and 3.00% of the aggregate consideration in excess of $150,000,000. Based on
the closing price of Pharmacopeia Common Stock on May 5, 1998, the transaction
fee would equal approximately $2,700,000. MSI has agreed to reimburse Goldman
Sachs for its reasonable out-of-pocket expenses, including attorney's fees,
and to indemnify Goldman Sachs against certain liabilities, including certain
liabilities under the federal securities laws. Any reimbursement of such out-
of-pocket expenses shall be credited against the aforementioned transaction
fee.

INTERESTS OF CERTAIN PERSONS IN THE MERGER

In considering the recommendation of the MSI Board of Directors,
stockholders of MSI should be aware that certain members of management and the
MSI Board of Directors may be deemed to have interests in the Merger that are
in addition to the interests of Pharmacopeia and MSI stockholders generally.

Officers and Directors of MSI. Certain members of MSI management may be
deemed to have certain interests in the Merger. The MSI Board of Directors was
aware of these interests and considered them, among other matters, in
approving the Merger Agreement and the transactions contemplated thereby.
Certain MSI officers are entitled to receive the benefits under employment
agreements entered into between MSI and such officers. See "MSI MANAGEMENT."
The existing employment agreements between MSI and each of Messrs. Savage,
Zarrabian, Hiatt and Carney provide that the unvested stock options granted to
such individuals to acquire 138,148, 75,216, 46,389, and 21,542 shares of MSI
Common Stock, respectively (calculated as of January 31, 1998), become
immediately exercisable if, at any time within a period commencing two months
before and ending twelve months after the Effective Time, the employment of
such individual is terminated or otherwise materially modified, as described
in the employment agreements. In addition, pursuant to the existing employment
agreements, each of such individuals may be entitled to severance payments in
the event his target compensation is reduced by more than 10% of his 1996
target compensation. The Merger Agreement provides that at the Effective Time,
Michael Savage, the President and Chief Executive of Officer of MSI, and one
other director of MSI, will be appointed to the Pharmacopeia Board of
Directors. It is currently anticipated that C. Peter W. Booth will be the
additional MSI director appointed to the Pharmacopeia Board of Directors.

Stock Options. Dr. Paul Bartlett, a director of Pharmacopeia, holds MSI
Options to purchase 16,349 shares of MSI Common Stock. Dr. Bartlett, who was
appointed to the Pharmacopeia Board of Directors on January 29, 1998, did not
participate in the meeting of the Pharmacopeia Board of Directors on February
4, 1998, at which the Pharmacopeia Board of Directors approved the
transactions contemplated by the Merger Agreement.

Indemnification. The Merger Agreement provides for certain indemnification
of directors and officers of MSI and Pharmacopeia. In addition, pursuant to
the Merger Agreement, Pharmacopeia has agreed to maintain directors' and
officers' liability insurance for the directors and officers of MSI and
Pharmacopeia. See "THE MERGER AGREEMENT--Indemnification; Directors' and
Officers' Insurance."

51
<PAGE>

EXCHANGE OF STOCK CERTIFICATES

As soon as practicable after the Effective Time, American Stock Transfer and
Trust Company (the "Exchange Agent") shall mail to each holder of certificates
formerly representing MSI Capital Stock a transmittal letter and instructions
to be used in effecting the surrender of such certificates in exchange for (i)
a certificate representing the number of shares of Pharmacopeia Common Stock
that such holder has the right to receive pursuant to the Merger and (ii) cash
for fractional shares of Pharmacopeia Common Stock to which such holder would
otherwise be entitled. MSI STOCKHOLDERS ARE REQUESTED NOT TO SURRENDER THEIR
MSI STOCK CERTIFICATES FOR EXCHANGE UNTIL SUCH TRANSMITTAL LETTER AND
INSTRUCTIONS ARE RECEIVED BY THEM. After the Effective Time and until
surrendered as provided above, such certificates shall be deemed to represent
only the right to receive certificates representing the number of shares of
Pharmacopeia Common Stock into which the shares of MSI Capital Stock formerly
represented by such MSI stock certificates were converted in the Merger and a
cash payment in lieu of any fractional shares.

MANAGEMENT AFTER THE MERGER

At the Effective Time, Michael J. Savage, the President and Chief Executive
Officer of MSI, and one other director of MSI, will be appointed to the Board
of Directors of Pharmacopeia. It is currently anticipated that C. Peter W.
Booth will be the additional MSI director appointed to the Pharmacopeia Board
of Directors. It is currently expected that the executive officers of MSI will
continue to serve after the Effective Time as the executive officers of the
Surviving Corporation.

NASDAQ NATIONAL MARKET

Prior to the Effective time, Pharmacopeia will file an application for the
quotation on the Nasdaq National Market of the shares of Pharmacopeia Common
Stock to be issued in connection with the Merger. The approval of such
application is a condition to the consummation of the Merger. See "THE MERGER
AGREEMENT--Conditions to Consummation of the Merger".

REGULATORY APPROVALS

Pharmacopeia and MSI are not aware of any governmental or regulatory
requirements relating to consummation of the Merger, other than compliance
with the HSR Act. On March 16, 1998, Pharmacopeia and an affiliate of MSI
received notices of the grant of early termination of the waiting period under
the HSR Act.

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<PAGE>

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

The following unaudited pro forma combined condensed financial statements
give effect to the Merger under the pooling of interests accounting basis. The
pro forma combined condensed financial statements are derived from and should
be read in conjunction with the respective historical financial statements and
the notes thereto of Pharmacopeia and MSI, which are incorporated by reference
herein (in the case of Pharmacopeia) or included in this Joint Proxy
Statement/Prospectus (in the case of MSI). The pro forma combined condensed
balance sheet combines Pharmacopeia's December 31, 1997 audited balance sheet
with MSI's December 31, 1997 audited balance sheet as if the Merger occurred
as of December 31, 1997. The pro forma combined condensed statements of
operations combine Pharmacopeia's historical condensed statements of
operations for the fiscal years ended December 31, 1995, 1996 and 1997 with
the corresponding MSI historical condensed statements of operations for the
fiscal years ended December 31, 1995, 1996 and 1997, respectively, and assume
that the Merger was consummated on January 1, 1995. The unaudited pro forma
combined financial statements presented herein are not necessarily indicative
of the combined results of operations or the combined financial position that
would have resulted had the Merger been consummated at the beginning of the
applicable periods indicated, nor are they necessarily indicative of the
results of operations in future periods or the future financial position of
the combined entity.

53
<PAGE>

PHARMACOPEIA, INC. AND MOLECULAR SIMULATIONS INCORPORATED

UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET

DECEMBER 31, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
MERGER PRO FORMA
PRO FORMA PHARMACOPEIA
PHARMACOPEIA MSI ADJUSTMENTS(3) AND MSI MERGER
------------ -------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............ $ 9,590 $ 15,019 $ $ 24,609
Marketable securities... 60,166 60,166
Trade receivables, net
of allowance for doubt-
ful accounts of $466... 19,424 19,424
Deferred tax asset...... 2,100 (2,100)(4)
Prepaid expenses and
other current assets... 1,890 2,781 4,671
-------- -------- ------- --------
Total current assets.. 71,646 39,324 (2,100) 108,870
-------- -------- ------- --------
Non-current investments in
marketable securities.... 12,865 12,865
Property and equipment,
net...................... 10,874 2,267 13,141
Software development
costs, net of accumulated
amortization of $5,813... 3,437 3,437
Investment in joint
venture.................. 1,013 1,013
Other assets.............. 302 423 725
-------- -------- ------- --------
$ 95,687 $ 46,464 $(2,100) $140,051
======== ======== ======= ========
LIABILITIES AND
STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable........ $ 1,756 $ 2,476 $ 4,232
Accrued liabilities..... 2,726 15,568 18,294
Notes payable, current
portion................ 690 700 1,390
Deferred revenue,
current portion........ 16,091 13,254 29,345
-------- -------- ------- --------
Total current
liabilities.......... 21,263 31,998 53,261
-------- -------- ------- --------
Notes payable, long-term
portion.................. 712 700 1,412
Other long-term
liabilities.............. 440 440
Deferred revenue, long
term..................... 3,275 1,067 4,342
Commitments
Stockholders equity:
Preferred stock......... 22 (22)(1)
Common stock............ 1 11 (11)(1) 1
Additional paid in
capital................ 104,909 39,498 33 (1) 144,440
Accumulated deficit..... (34,473) (26,084) (2,100)(4) (62,657)
Cumulative translation
adjustment............. (1,188) (1,188)
-------- -------- ------- --------
Total stockholders
equity............... 70,437 12,259 (2,100) 80,596
-------- -------- ------- --------
$ 95,687 $ 46,464 $(2,100) $140,051
======== ======== ======= ========
</TABLE>

See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.

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<PAGE>

PHARMACOPEIA, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA
PHARMACOPEIA
HISTORICAL HISTORICAL AND MSI
PHARMACOPEIA MSI MERGER
------------ ---------- ------------
<S> <C> <C> <C>
Revenue:
Contract............................. $ 5,151 $ $ 5,151
Software license, service and
hardware............................ 30,120 30,120
------- -------- --------
Total revenue.................... 5,151 30,120 35,271
Operating Expenses:
Research and development
Collaborative...................... 5,563 5,563
Proprietary........................ 5,468 7,603 13,071
Software licenses and hardware....... 6,609 6,609
Sales, general and administrative.... 3,781 15,386 19,167
Acquisition related charges.......... 12,161 12,161
------- -------- --------
Total operating expenses......... 14,812 41,759 56,571
------- -------- --------
Operating loss......................... (9,661) (11,639) (21,300)
Interest and other income, net......... 705 319 1,024
------- -------- --------
Loss before provision for income
taxes................................. (8,956) (11,320) (20,276)
Provision for income taxes............. 560 560
------- -------- --------
Net loss............................... $(8,956) $(11,880) $(20,836)
======= ======== ========
Basic net loss per share............... $ (2.77) $ (2.28) $ (3.48)(2)
======= ======== ========
Weighted average number of common stock
outstanding--basic.................... 3,231 5,206 5,986
</TABLE>

See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.

55
<PAGE>

PHARMACOPEIA, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA
MERGER PHARMACOPEIA
HISTORICAL HISTORICAL PRO FORMA AND MSI
PHARMACOPEIA MSI ADJUSTMENTS(3) MERGER
------------ ---------- -------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Contract................ $ 14,799 $ $ $14,799
Software license,
service and hardware... 47,261 47,261
-------- ------- ------- -------
Total revenue....... 14,799 47,261 62,060
Operating expenses:
Research and development
Collaborative......... 13,129 13,129
Proprietary........... 8,111 12,834 20,945
Software license and
hardware............... 7,759 7,759
Sales, general and
administrative......... 5,617 22,968 28,585
-------- ------- ------- -------
Total operating
expenses........... 26,857 43,561 70,418
-------- ------- ------- -------
Operating income (loss)... (12,058) 3,700 (8,358)
Interest and other income,
net...................... 3,675 368 4,043
-------- ------- ------- -------
Income (loss) before
provision for income
taxes.................... (8,383) 4,068 (4,315)
Provision for income
taxes.................... 1,471 1,600 (4) 3,071
-------- ------- ------- -------
Net income (loss)......... $ (8,383) $ 2,597 $(1,600) $(7,386)
======== ======= ======= =======
Basic net income (loss)
per share................ $ (.77) $ .27 $ (.47)(2)
Diluted net income (loss)
per share................ $ (.77) $ .17 $ (.47)(2)
Weighted average number of
common stock,
outstanding--basic....... 10,834 9,531 15,878
Weighted average number of
common stock, and common
stock equivalents
outstanding--diluted..... 10,834 15,160 15,878
</TABLE>

See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.

56
<PAGE>

PHARMACOPEIA, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA
MERGER PHARMACOPEIA
HISTORICAL HISTORICAL PRO FORMA AND MSI
PHARMACOPEIA MSI ADJUSTMENTS(3) MERGER
------------ ---------- -------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Contract revenue........ $ 24,523 $ $ $24,523
Software license,
service and hardware... 56,674 56,674
-------- ------- ----- -------
Total revenue....... 24,523 56,674 81,197
Operating expenses:
Research and development
Collaborative......... 16,931 16,931
Proprietary........... 12,588 12,663 25,251
Software license and
hardware............... 10,232 10,232
Sales, general and
administrative......... 5,848 25,959 31,807
-------- ------- ----- -------
Total operating
expenses........... 35,367 48,854 84,221
-------- ------- ----- -------
Operating income (loss)... (10,844) 7,820 (3,024)
Interest and other income,
net...................... 4,166 126 4,292
-------- ------- ----- -------
Income (loss) before
provision for income
taxes.................... (6,678) 7,946 1,268
Provision for income
taxes.................... 2,496 500 (4) 2,996
-------- ------- ----- -------
Net income (loss)......... $ (6,678) $ 5,450 $(500) $(1,728)
======== ======= ===== =======
Basic net income (loss)
per share................ $ (.58) $ .56 $ (.10)(2)
Diluted net income per
share.................... $ (.58) $ .35 $ (.10)(2)
Weighted average number of
common stock
outstanding--basic....... 11,454 9,709 16,592
Weighted average number of
common stock, and common
stock equivalents
outstanding--diluted..... 11,454 15,567 16,592
</TABLE>

See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.

57
<PAGE>

NOTES TO UNAUDITED PRO FORMA COMBINED

CONDENSED FINANCIAL STATEMENTS

(1) The Merger will be accounted for as a pooling of interests, and
accordingly, the related pro forma adjustments herein reflect, where
applicable, an Exchange Ratio of 0.5292 of a share of Pharmacopeia Common
Stock for each outstanding share of MSI Common Stock, each outstanding
share of MSI Class B Common Stock and each outstanding share of MSI
Preferred Stock. The Exchange Ratio is subject to possible adjustment
under certain circumstances.

As a result, information was adjusted for the Merger by the (i) addition of
7,017,583 shares of Pharmacopeia Common Stock, (ii) elimination of
9,791,633 shares of MSI Common Stock, elimination of 1,246,882 shares of
MSI Class B Common Stock, and elimination of 2,222,223 shares of MSI
Preferred Stock, and (iii) recording of approximately $33,000 as an
increase to additional paid in capital at December 31, 1997.

(2) Pro forma loss per share data has been computed based on the combined
historical net loss applicable to common stockholders of Pharmacopeia
using the historical weighted average shares outstanding of Pharmacopeia
Common Stock and the weighted average outstanding shares of MSI, adjusted
to equivalent shares of Pharmacopeia Common Stock.

(3) The unaudited pro forma combined condensed financial statements do not
include any material expenses related to the Merger, which are currently
estimated to be $5,100,000 and are expected to be incurred in the first
half of 1998.

(4) Reflects the reversal of a reduction to a valuation allowance for deferred
tax assets during 1996 and 1997 of $1,600,000 and $500,000, respectively,
which would not be expected to be realized given the combined tax position
of the merged entity.

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<PAGE>

THE MERGER AGREEMENT

The following is a summary of the material provisions of the Merger
Agreement, a copy of which is attached to this Joint Proxy
Statement/Prospectus as Annex 1 and incorporated herein by reference.
Capitalized terms which are not otherwise defined in this summary have the
meanings set forth in the Merger Agreement. The following description of the
Merger Agreement is qualified in its entirety by reference to the complete
text of the Merger Agreement.

EFFECTIVE TIME

If the Merger is approved by the requisite vote of MSI stockholders and the
issuance of Pharmacopeia Common Stock is approved by the requisite vote of
Pharmacopeia's stockholders, the Merger will become effective upon the
satisfaction of various conditions and upon the filing of a Certificate of
Merger with the Secretary of State of the State of Delaware.

CONVERSION OF SHARES OF MSI CAPITAL STOCK PURSUANT TO THE MERGER; TREATMENT OF
OPTIONS

At the Effective Time, (i) Merger Subsidiary shall be merged with and into
MSI and the separate existence of Merger Subsidiary shall cease and MSI shall
continue as the Surviving Corporation, (ii) each share of common stock of
Merger Subsidiary then outstanding shall be converted into one share of common
stock of the Surviving Corporation, and (iii) each share of MSI Capital Stock
issued and outstanding immediately prior to the Effective Time (other than
shares of MSI Capital Stock then held by MSI or any subsidiary of MSI, or held
in MSI's treasury, or then held by Pharmacopeia, Merger Subsidiary or any
other subsidiary of Pharmacopeia) shall be converted into the right to receive
shares of Pharmacopeia Common Stock based on the Exchange Ratio; provided,
however, that the Exchange Ratio shall be subject to equitable adjustment in
the event of any stock split, stock dividend, reverse stock split,
reclassification, recapitalization or other like change in respect of MSI
Capital Stock or Pharmacopeia Common Stock occurring after the date of the
Merger Agreement and prior to the Effective Time.

At the Effective Time, all rights with respect to MSI Common Stock in
connection with MSI Options then outstanding shall be converted into and
become rights with respect to Pharmacopeia Common Stock, and each such option
shall be assumed by Pharmacopeia and continue to have, and be subject to, the
same terms and conditions, including any restriction on the exercise of any
such option, except that (i) each such option assumed by Pharmacopeia may be
exercisable solely for shares of Pharmacopeia Common Stock; (ii) the number of
shares of Pharmacopeia Common Stock subject to each such option shall be equal
to the number of shares of MSI Common Stock subject to such option immediately
prior to the Effective Time multiplied by the Exchange Ratio and rounded down
to the nearest whole share; and (iii) the exercise price per share under each
such option shall equal the exercise price immediately prior to the Effective
Time divided by the Exchange Ratio and rounding up to the nearest hundredth of
a cent. After the Effective Time, Pharmacopeia will deliver to each holder of
such outstanding options a notice describing the assumption of such option by
Pharmacopeia and Pharmacopeia will file with the Commission a Registration
Statement on Form S-8 relating to the shares of Pharmacopeia Common Stock
issuable with respect to the assumed MSI Options.

REPRESENTATIONS AND WARRANTIES

The Merger Agreement contains various representations and warranties of the
parties thereto. The Merger Agreement includes representations and warranties
by MSI, as to, among other things, (i) its corporate organization, standing
and power; (ii) its capitalization; (iii) the accuracy of MSI's financial
statements and the absence of undisclosed liabilities; (iv) the absence of
certain changes with respect to its business or financial condition since the
date of certain financial statements delivered to Pharmacopeia; (v) the
validity of MSI's title to, and certain other matters relating to, the assets
purported to be owned by MSI that are material to its business; (vi)
intellectual property matters; (vii) material contracts and agreements and the
absence of any material breaches or violations thereof; (viii) compliance with
legal requirements and the maintenance of necessary

59
<PAGE>

governmental authorizations to conduct its business; (ix) tax matters; (x)
employee benefit plans; (xi) compliance with environmental laws; (xii)
insurance matters; (xiii) transactions with certain parties related to MSI;
(xiv) the absence of pending or threatened litigation; (xv) MSI's corporate
power and authority to enter into, and the enforceability against MSI of, the
Merger Agreement, (xvi) the approval of the Merger Agreement by the MSI Board
of Directors and such Board of Director's recommendation that the MSI
stockholders approve the Merger Agreement; (xvii) the vote of MSI stockholders
necessary to adopt and approve the Merger Agreement, the Merger and the
transactions contemplated by the Merger Agreement; (xviii) the Merger
Agreement's non-contravention of laws, agreements and governmental permits;
(xix) the fees of financial advisors employed by MSI; and (xx) employee-
related information and agreements.

The Merger Agreement also includes representations and warranties by
Pharmacopeia and Merger Subsidiary as to, among other things, (i) their
corporate organization, standing and power; (ii) Pharmacopeia's
capitalization; (iii) the accuracy of Pharmacopeia's financial statements and
information contained in certain filings of Pharmacopeia with the Commission
and the absence of undisclosed liabilities; (iv) the absence of certain
changes with respect to Pharmacopeia's business or financial condition since
the date of certain financial statements delivered to MSI; (v) intellectual
property matters; (vi) material contracts and agreements and the absence of
any material breaches or violations thereof; (vii) compliance with legal
requirements and the maintenance of necessary governmental authorizations to
conduct Pharmacopeia's business; (viii) employee benefit plans; (ix)
compliance with environmental laws; (x) insurance matters; (xi) the absence of
pending or threatened litigation; (xii) the corporate power and due
authorization for, and enforceability of, the Merger Agreement, with respect
to Pharmacopeia and Merger Subsidiary; (xiii) the approval of the Merger
Agreement by the Pharmacopeia Board of Directors and such Board of Director's
recommendation that the Pharmacopeia stockholders approve the issuance of
Pharmacopeia Common Stock in connection therewith; (xiv) the vote of
Pharmacopeia stockholders necessary to approve the issuance of Pharmacopeia
Common Stock in connection with the Merger Agreement; (xv) the Merger
Agreement's non-contravention of laws, agreements and governmental permits;
(xvi) the fees of financial advisors employed by Pharmacopeia or Merger
Subsidiary; and (xvii) the valid issuance of Pharmacopeia Common Stock
pursuant to the Merger.

CONDUCT OF BUSINESS PENDING THE MERGER

Conduct of MSI's Business Prior to the Effective Time. Pursuant to the
Merger Agreement, MSI has agreed that, prior to the Effective Time, it shall
(i) provide Pharmacopeia with reasonable access to its officers, directors,
employees, agents, personnel and assets and to all existing books, records and
other relevant documents and information; (ii) use reasonable efforts to
conduct its business in the ordinary course and in material compliance with
legal requirements and contractual requirements; and (iii) use reasonable
efforts to preserve intact its current business organization, to keep
available the services of its current officers and employees and to maintain
its relations and goodwill with all individuals and entities with which it has
a business relationship.

In addition, MSI has agreed that, prior to the Effective Time, it shall not
do any of the following without the written consent of Pharmacopeia: (i)
declare or pay any dividend or make any other distribution in respect of any
shares of capital stock or repurchase or redeem any shares of capital stock or
other securities; (ii) sell, issue or grant (A) any capital stock, (B) any
options, warrants or any right to acquire shares of its capital stock, or (C)
any instrument convertible into or exchangeable for any capital stock or other
security (excluding specified transactions involving certain shares and
options); (iii) amend its certificate of incorporation or bylaws or become a
party to any merger, consolidation, recapitalization or similar transaction;
(iv) enter into any Acquired Corporation Contract outside the ordinary course
of business, or amend or prematurely terminate any Acquired Corporation
Contract outside the ordinary course of business; (v) lend money to any person
(except for certain specified loans to employees), incur or guarantee any
indebtedness (except for routine borrowings in the ordinary course of
business) or guarantee any obligations of a third party; (vi) establish, adopt
or amend any employee benefit plan, pay any bonus or similar payment (except
pursuant to existing contracts or plans) to, or increase by more than 6% the
compensation payable to, employees, officers or directors; (vii) change its
accounting methods or practices; (viii) make any material tax election; (ix)
settle any legal proceeding involving payments in excess

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of $50,000 or involving any material asset; (x) hire any employee or
consultant where the total annual compensation would reasonably be expected to
exceed $125,000; (xi) acquire any equity interest in, or substantial portion
of the assets of, another entity, or acquire any asset outside the ordinary
course of business; (xii) sell, lease or encumber any of its assets outside
the ordinary course of business; (xiii) make any capital contribution to, or
investment in, a third party; (xiv) approve or propose any stockholder rights
plan that would affect the consummation of the transactions contemplated by
the Merger Agreement; (xv) take any action to cause certain insurance policies
to be cancelled or terminated; (xvi) acquire or agree to acquire by merger,
consolidation, or asset or equity purchase any business, entity, or division
thereof; (xvii) terminate or amend any employment agreement with an executive
officer or terminate the employment of any executive officer (excluding
terminations for cause); or (xviii) agree or commit to do any of the
foregoing.

Conduct of Pharmacopeia's Business Prior to the Effective Time. Pursuant to
the Merger Agreement, Pharmacopeia has agreed that, prior to the Effective
Time, it shall (i) provide MSI with reasonable access to its officers,
directors, employees, agents, personnel and assets and to all existing books,
records and other relevant documents and information; (ii) consult with MSI in
advance of the sale, issuance or grant of shares of Pharmacopeia Common Stock
(excluding certain stock options) that, when aggregated with other issuances
since the date of the Merger Agreement, exceed 1,000,000 shares of
Pharmacopeia Common Stock; (iii) use reasonable efforts to conduct its
business in the ordinary course and in material compliance with legal
requirements and contractual requirements; and (iv) use reasonable efforts to
preserve intact its current business organization, to keep available the
services of its current officers and employees and to maintain its relations
and goodwill with all individuals and entities with which it has a business
relationship.

In addition, Pharmacopeia has agreed that, prior to the Effective Time, it
shall not do any of the following without the written consent of MSI: (i)
declare or pay any dividend or make any other distribution in respect of any
shares of capital stock or repurchase or redeem any shares of capital stock or
other securities; (ii) sell, issue or grant shares of Pharmacopeia Common
Stock or securities or rights exercisable for or convertible into shares of
Pharmacopeia Common Stock, (excluding certain stock options) that, when
aggregated with all issuances since the date of the Merger Agreement, exceed
2,500,000 shares of Pharmacopeia Common Stock; (iii) materially amend its
certificate of incorporation or bylaws; (iv) change its accounting methods or
practices; (v) expend more than $15,000,000 in a single transaction or more
than an aggregate of $25,000,000 in a series of transactions, in connection
with any capital contribution to, investment in or acquisition of all or a
portion of the equity or assets of any entity; (vi) approve or propose any
stockholder rights plan that would affect the consummation of the transactions
contemplated by the Merger Agreement; or (vii) agree or commit to do any of
the foregoing.

No Solicitation of Takeover Proposals. Pursuant to the Merger Agreement, MSI
has agreed that it shall not, nor shall any of its officers, directors,
employees, agents or representatives, directly or indirectly (i) solicit,
initiate or encourage the making, submission or announcement of any Company
Acquisition Proposal (which generally is defined to include any proposal for a
transaction or series of transactions contemplating any merger, consolidation,
tender offer, exchange offer or similar transaction involving MSI in which any
person would acquire more than 50% of the outstanding securities of any class
of voting securities of MSI or in which MSI would issue more than 50% of the
outstanding securities of any class of its voting securities, or contemplating
the sale, lease, license or transfer of more than 50% of MSI's assets); (ii)
furnish any nonpublic information in connection with a Company Acquisition
Proposal; (iii) negotiate or engage in discussions with respect to a Company
Acquisition Proposal; (iv) approve or recommend any Company Acquisition
Proposal; or (v) enter into a letter of intent or other contract relating to a
Company Acquisition Proposal; provided, however, that MSI may (i) prior to the
vote of MSI's stockholders to approve the Merger Agreement, engage in
discussions or negotiation with and supply information to a third party who,
without any involvement of MSI or its officers, employees, directors, agents
or representatives after the date of the Merger Agreement, directly or
indirectly, seeks to initiate negotiations or discussions if and to the extent
that (A) the third party has presented a Company Acquisition Proposal that is
financially superior to the terms of the Merger and has demonstrated that
financing for such Company Acquisition Proposal is reasonably likely to be
obtained and (B) MSI's Board of Directors has concluded in good faith that
failing to take such action would result in a substantial likelihood of
liability for

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breach of fiduciary duties and (C) prior to entering into such discussions or
negotiations, or furnishing such information, MSI promptly notifies
Pharmacopeia of its intent to do so and MSI obtains an executed
confidentiality agreement from the third party on terms not more favorable to
such person as those contained in the confidentiality agreement entered into
by Pharmacopeia with respect to confidential information supplied by MSI to
Pharmacopeia and (ii) accept a Company Acquisition Proposal from a third
party, provided that MSI first terminates the Merger Agreement. Unless
otherwise restricted by agreements entered into prior to the date of the
Merger Agreement, MSI must notify Pharmacopeia of any inquiries, offers or
proposals relating to a Company Acquisition Proposal received after the date
of the Merger Agreement, including the terms thereof, within 24 hours of
receipt thereof and must keep Pharmacopeia informed of the status and
additional details of any such inquiries, offers or proposals. In addition, as
of the date of the Merger Agreement, MSI agreed to cease and terminate any
then existing negotiations or discussions concerning a Company Acquisition
Proposal.

Pursuant to the Merger Agreement, Pharmacopeia has agreed that it shall not,
nor shall any of its officers, directors, employees, agents or
representatives, directly or indirectly (i) solicit, initiate or encourage the
making, submission or announcement of any Parent Acquisition Proposal (which
generally is defined to include any proposal for a transaction or series of
transactions contemplating any merger, consolidation, tender offer, exchange
offer or similar transaction involving Pharmacopeia in which any person would
acquire more than 50% of the outstanding securities of any class of voting
securities of Pharmacopeia or in which Pharmacopeia would issue more than 50%
of the outstanding securities of any class of its voting securities, or
contemplating the sale, lease, license or transfer of more than 50% of
Pharmacopeia's assets); (ii) furnish any nonpublic information in connection
with a Parent Acquisition Proposal; (iii) negotiate or engage in discussions
with respect to a Parent Acquisition Proposal; (iv) approve or recommend any
Parent Acquisition Proposal; or (v) enter into a letter of intent or other
contract relating to a Parent Acquisition Proposal; provided, however, that
Pharmacopeia may take such actions if (A) Pharmacopeia's Board of Directors
has concluded in good faith that failing to take such action would result in a
substantial likelihood of liability for breach of fiduciary duties and (B)
prior to entering into such discussions or negotiations, or furnishing such
information, Pharmacopeia promptly notifies MSI of its intent to do so and
Pharmacopeia obtains an executed confidentiality agreement from the third
party on terms not more favorable to such person as those contained in the
confidentiality agreement entered into by MSI with respect to confidential
information supplied by Pharmacopeia to MSI. Unless otherwise restricted by
agreements entered into prior to the date of the Merger Agreement,
Pharmacopeia must notify MSI of any inquiries, offers or proposals relating to
a Parent Acquisition Proposal received after the date of the Merger Agreement,
including the terms thereof, within 24 hours of receipt thereof and must keep
MSI informed of the status and additional details of any such inquiries,
offers or proposals. In addition, as of the date of the Merger Agreement,
Pharmacopeia agreed to cease and terminate any then existing negotiations or
discussions concerning a Parent Acquisition Proposal.

Mutual Covenants. Pursuant to the Merger Agreement, MSI and Pharmacopeia
have agreed to (i) use all reasonable efforts to cause the Registration
Statement of which this Joint Proxy Statement/Prospectus forms a part to be
declared effective as promptly as practicable after its filing; (ii) cause the
Joint Proxy Statement/Prospectus to be mailed to Pharmacopeia's stockholders,
in the case of Pharmacopeia, and to MSI's stockholders, in the case of MSI;
(iii) notify the other party of any comments received from the Commission or
of any request for any amendment or supplement to this Joint Proxy
Statement/Prospectus or the Registration Statement of which this Joint Proxy
Statement/Prospectus forms a part or for any other information; (iv) promptly
inform the other party of any information that should be disclosed in an
amendment or supplement to this Joint Proxy Statement/Prospectus or the
Registration Statement of which this Joint Proxy Statement/Prospectus forms a
part and to cooperate with the other in filing such amendment or supplement
with the Commission; (v) take all action necessary to call and hold their
respective stockholder meetings to consider and vote upon, in the case of MSI,
the Merger Proposal and, in the case of Pharmacopeia, the Issuance Proposal,
and that the Board of Directors of each company shall, subject to its
fiduciary duties, recommend that its stockholders approve the applicable; (vi)
coordinate the timing of their respective stockholder meetings and use their
best efforts to hold such meetings on the same day and within forty-five (45)
days after the Registration Statement of which this Joint Proxy
Statement/Prospectus forms a part is declared effective; (vii) use all

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reasonable efforts to file all notices, reports and documentation required by
law to be filed with respect to the Merger and any other transaction
contemplated by the Merger Agreement; (viii) to respond as promptly as
practicable to inquiries and requests from the Federal Trade Commission or the
Department of Justice for additional documentation or from any state attorney
general or other governmental body in connection with antitrust or related
matters; (ix) to provide prompt notice to the other party of any material
legal proceeding with respect to the Merger or any other transaction
contemplated by the Merger Agreement and to keep the other party informed of
the status of such legal proceeding; (x) not to take any action that would
adversely affect the ability of Pharmacopeia to account for the Merger as a
pooling of interests and to use commercially reasonable efforts to ensure that
none of their respective affiliates takes any action that could adversely
affect Pharmacopeia's ability to do so; (xi) use all commercially reasonable
efforts to cause the Merger to qualify as a tax free reorganization under
Section 368(a)(1) of the Internal Revenue Code of 1986, as amended; (xii) make
all filings and give all notices that may be required in connection with the
Merger and other transactions contemplated by the Merger Agreement and use
reasonable efforts to obtain any and all consents required to be obtained in
connection with the Merger or other transactions contemplated by the Merger
Agreement; (xiii) not issue, or permit the issuance of, any press release or
publicly disseminate any material relating to the Merger or other transactions
relating to the Merger Agreement unless (A) the other party has approved such
press release or material or (B) the issuance of such press release or the
dissemination of such material is required or advisable under applicable law;
and (xiv) deliver to counsel appropriate tax representation letters.

Other Covenants. Pursuant to the Merger Agreement, Pharmacopeia has agreed
to (i) use reasonable efforts to obtain all necessary regulatory approvals
under state securities laws; (ii) waive any pre-existing condition limitation
contained in Pharmacopeia's employee benefit plans under which an employee of
the Surviving Corporation would be otherwise eligible to receive benefits;
(iii) use reasonable efforts to cause the shares of Pharmacopeia Common Stock
to be issued pursuant to the Merger to be approved for quotation on the Nasdaq
National Market; and (iv) use reasonable efforts to cause each of its
affiliates to deliver an affiliate letter relating to pooling of interests
requirements. MSI has agreed to (i) use reasonable efforts to cause each of
its affiliates to deliver an affiliate agreement relating to pooling of
interests and certain securities law requirements; (ii) use reasonable efforts
to deliver prior to the Effective Time the resignation of each director of
MSI; (iii) deliver to Pharmacopeia and the Internal Revenue Service certain
materials required by United States Treasury Regulations.

INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE

From the Effective Time and for the six years thereafter, (i) Pharmacopeia
shall, and shall cause the Surviving Corporation to, fulfill and honor in all
respects the rights of present and former directors, officers and employees of
MSI and Pharmacopeia to be indemnified and held harmless as set forth in the
certificate of incorporation, bylaws and indemnity agreements of Pharmacopeia
and MSI in effect as of the date of the Merger Agreement, with respect to acts
and omissions occurring prior to the Effective Time, and (ii) Pharmacopeia
shall, and shall cause the Surviving Corporation to, indemnify the directors
and officers of Pharmacopeia and the Surviving Corporation to the fullest
extent permitted by their respective certificates of incorporation and by-laws
and by applicable law.

For six years after the Effective Time, Pharmacopeia shall cause to be
maintained the current policies of the directors' and officers' liability
insurance maintained by Pharmacopeia and MSI for persons covered as of the
date of the Merger Agreement by directors' and officers' liability insurance
policies with respect to actions and omissions occurring prior to the
Effective Time; provided, that policies with third party insurers of similar
or better A.M. Best rating of at least the same coverage containing terms and
conditions that are not less advantageous to the insured may be substituted
therefor. In no event, however, shall Pharmacopeia be required to maintain
such insurance coverage for a yearly amount exceeding 150% of the annual
premiums as of the date of the Merger Agreement; provided that if the annual
premiums for such coverage exceed such amount, Pharmacopeia shall obtain
policies with the best coverage available for a cost not exceeding such
amount.

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CONDITIONS TO CONSUMMATION OF THE MERGER

General. The respective obligations of MSI, Pharmacopeia and Merger
Subsidiary to effect the Merger and the other transactions contemplated by the
Merger Agreement are subject to the satisfaction at or prior to the Closing of
the following conditions:

(i) the Registration Statement of which this Joint Proxy
Statement/Prospectus forms a part shall have become effective in accordance
with the Securities Act of 1933, as amended, and no stop order shall have
been issued by the Commission with respect thereto;

(ii) the Merger Proposal and the Issuance Proposal shall have been
approved;

(iii) the shares of Pharmacopeia Common Stock to be issued in the Merger
shall have been approved for quotation on the Nasdaq National Market;

(iv) the waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated; and

(v) no temporary restraining order, preliminary or permanent injunction
or other order preventing the consummation of the Merger shall have been
issued and remain in effect; nor shall there have been any law, regulation
or order enacted or deemed applicable to the Merger which makes the
consummation of the Merger illegal; and all material authorizations,
consents, orders or approvals of, or material filings with, any
governmental body shall have been obtained or made.

MSI's Conditions. The obligations of MSI to effect the Merger are subject to
the satisfaction prior to or at the Closing of the following conditions:

(i) the material accuracy when made and as of the Closing of the
representations and warranties of Pharmacopeia and Merger Subsidiary;

(ii) Pharmacopeia and Merger Subsidiary shall have complied with or
performed all of the covenants required by the Merger Agreement to be
performed at or prior to the Closing, in each case in all material
respects;

(iii) MSI shall have received (i) the affiliate letters executed by
affiliates of Pharmacopeia, (ii) a letter from Ernst & Young LLP regarding
its concurrence with Pharmacopeia management's conclusion as to the
appropriateness of pooling of interests accounting treatment for the Merger
under Accounting Principles Board Opinion No. 16 if closed and consummated
in accordance with the terms of the Merger Agreement, and a letter from
Arthur Andersen LLP regarding its concurrence with MSI management's
conclusion that MSI could be a combining entity in a transaction accounted
for as a pooling of interests in accordance with GAAP and (iii) legal
opinions of Cooley Godward LLP and Dechert Price & Rhoads; and

(iv) there shall have been no material adverse change with respect to
Pharmacopeia.

Pharmacopeia's Conditions. The obligations of Pharmacopeia and Merger
Subsidiary to effect the Merger are subject to the satisfaction prior to or at
the Closing of the following conditions:

(i) the material accuracy when made and as of the Closing of the
representations and warranties of MSI;

(ii) MSI shall have complied with or performed all of the covenants
required by the Merger Agreement to be performed at or prior to the date of
Closing, in each case in all material respects;

(iii) Pharmacopeia shall have received (i) the affiliate agreements
executed by affiliates of MSI, (ii) certain tax materials executed by MSI,
(iii) a letter from Ernst & Young LLP regarding its concurrence with
Pharmacopeia management's conclusion as to the appropriateness of pooling
of interests accounting treatment for the Merger under Accounting
Principles Board Opinion No. 16 if closed and consummated in accordance
with the terms of the Merger Agreement, and a letter from Arthur Andersen
LLP regarding its concurrence with MSI management's conclusion that MSI
could be a combining entity in a transaction

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accounted for as a pooling of interests in accordance with GAAP and (iv)
legal opinions of Cooley Godward LLP and Dechert Price & Rhoads; and

(iv) there shall have been no material adverse change with respect to
MSI.

TERMINATION; TERMINATION FEES AND EXPENSES

The Merger Agreement may be terminated prior to the Effective Time:

(i) by mutual consent of the Boards of Directors of MSI and Pharmacopeia;

(ii) by either MSI or Pharmacopeia, if the Merger shall not have been
consummated by July 1, 1998 (unless the failure to consummate is
attributable to a failure on the part of the party seeking to terminate to
perform a material obligation required to be performed by such party at or
prior to the Effective Time);

(iii) by either MSI or Pharmacopeia if a court of competent jurisdiction
or other governmental body shall have issued a final nonappealable order or
ruling or shall have taken any other action permanently restraining,
enjoining or otherwise prohibiting the Merger;

(iv) by either MSI or Pharmacopeia if the Merger Proposal shall not have
been approved at the MSI Special Meeting; provided, however, that a party
may not terminate the Merger Agreement if the failure to obtain such
approval is attributable to the failure of such party to perform a material
obligation required to be performed by it under the Merger Agreement;
provided, further, that if the Merger Agreement is terminated for this
reason, then MSI must pay Pharmacopeia $1,750,000;

(v) by either MSI or Pharmacopeia if the Issuance Proposal shall not have
been approved at the Pharmacopeia Annual Meeting; provided, however, that a
party may not terminate the Merger Agreement if the failure to obtain such
approval is attributable to the failure of such party to perform a material
obligation required to be performed by it under the Merger Agreement;
provided, further, that if the Merger Agreement is terminated for this
reason, then Pharmacopeia must pay MSI $1,750,000;

(vi) by either MSI or Pharmacopeia if MSI or any committee of its Board
of Directors (A) shall withdraw or modify in an adverse manner its approval
of the Merger Agreement or the transactions contemplated thereunder, (B)
shall approve or recommend any merger or acquisition of MSI or of a
material portion of its assets, or any tender offer for shares of MSI
Capital Stock (other than by Pharmacopeia or any of its affiliates) or (C)
shall resolve to take any of the foregoing actions; provided, that if the
Merger Agreement is terminated for this reason, then MSI must pay
Pharmacopeia $3,000,000;

(vii) by either MSI or Pharmacopeia if Pharmacopeia or any committee of
its Board of Directors (A) shall withdraw or modify in an adverse manner
its approval of the Merger Agreement or the transactions contemplated
thereunder, (B) shall approve or recommend any merger or acquisition of
Pharmacopeia or a material portion of its assets, or any tender offer for
Pharmacopeia Common Stock or (C) shall resolve to take any of the foregoing
actions; provided, that if the Merger Agreement is terminated for this
reason, Pharmacopeia must pay MSI $3,000,000;

(viii) by either Pharmacopeia or MSI, after a breach of any
representation, warranty or covenant of the other party, provided, that if
such breach is curable by the breaching party through reasonable efforts
within forty-five (45) days of such breach, the non-breaching party may not
terminate the Merger Agreement during such period so long as the breaching
party continues to exercise reasonable efforts to cure, and the non-
breaching party shall not terminate the Merger Agreement if such breach has
been cured in all material respects or if it shall have willfully and
materially breached the Merger Agreement; provided, that if the Merger
Agreement is terminated for this reason, then the breaching party must pay
the non-breaching party 120% of the non-breaching party's out-of-pocket
legal and accounting costs and expenses.

AMENDMENT OF THE MERGER AGREEMENT

The Merger Agreement may be amended in writing with the approval of the
Boards of Directors of MSI and Pharmacopeia at any time before or after
approval of the Merger Proposal; provided, however, that after

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such approval, no amendment shall be made which requires further approval of
MSI's stockholders without such stockholder approval.

EXPENSES AND FEES

All fees and expenses incurred in connection with the Merger Agreement and
the transactions contemplated under the Merger Agreement will be paid by the
party incurring such expenses; provided, however, that MSI and Pharmacopeia
have each agreed to pay 50% of the filing fees paid pursuant to the HSR Act
and in connection with the filing of the Registration Statement of which this
Joint Proxy Statement/Prospectus forms a part.

APPRAISAL RIGHTS

If the merger is consummated, stockholders of MSI who make the demand
described below with respect to their shares, who continuously are the record
holders of such shares through the Effective Time, who otherwise comply with
the statutory requirements of Section 262 of the DGCL (a copy of which Section
is attached as Annex 4 to this Joint Proxy Statement/Prospectus) and who
neither vote in favor of the Merger Agreement nor consent thereto in writing
will be entitled to an appraisal by the Delaware Court of Chancery (the
"Delaware Court") of the fair value of their shares of MSI Capital Stock.
Except as set forth herein, stockholders of MSI will not be entitled to
appraisal rights in connection with the Merger. Holders of Pharmacopeia Common
Stock do not have rights of appraisal under Section 262 in connection with the
Merger because Pharmacopeia is not a constituent corporation in the merger.

A holder of shares of MSI Capital Stock wishing to exercise dissenters'
rights of appraisal must, before the taking of the vote on the Merger at the
MSI Special Meeting, deliver to MSI a written demand for appraisal of such
shares. A demand for appraisal will be sufficient if it reasonably informs MSI
of the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his or her shares. A proxy or vote against the Merger
shall not constitute such a demand. A failure to vote against the Merger shall
not constitute waiver of appraisal rights.

Within 10 days after the Effective Time, the Surviving Corporation shall
notify each stockholder of MSI who has satisfied the foregoing conditions and
not voted in favor of the Merger of the date on which the Merger became
effective. Within 120 days after the Effective Time, either the Surviving
Corporation or any stockholder who has complied with the required conditions
of Section 262 may file a petition in the Delaware Court, with a copy served
on the Surviving Corporation in the case of a petition filed by a stockholder,
demanding a determination of the fair value of the shares of all dissenting
stockholders. There is no present intent on the part of the Surviving
Corporation to file an appraisal petition and stockholders seeking to exercise
appraisal rights should not assume that the Surviving Corporation will file
such a petition or that the Surviving Corporation will initiate any
negotiations with respect to the fair value of such shares. Accordingly,
stockholders who desire to have their shares appraised should initiate any
petitions necessary for the perfection of their appraisal rights within the
time periods and in the manner prescribed in Section 262. Within 120 days
after the Effective Time, any stockholder who has theretofore complied with
the applicable provisions of Section 262 will be entitled, upon written
request, to receive from the Surviving Corporation, a statement setting forth
the aggregate number of shares of MSI Common Stock and MSI Preferred Stock not
voted in favor of the Merger and the number of shares of MSI Capital Stock
with respect to which demands for appraisal have been received by MSI and the
aggregate number of holders of such shares. Such statement must be mailed
within 10 days after the written request therefor has been received by the
Surviving Corporation or within 10 days after expiration of the period for the
delivery of demands for appraisal, whichever is later.

If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine which stockholders are entitled to
appraisal rights. The Delaware Court may require the stockholders who have
demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings;

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and if any stockholder fails to comply with such direction, the Delaware Court
may dismiss the proceedings as to such stockholder. Where proceedings are not
dismissed, the Delaware Court will appraise the shares of MSI Capital Stock
owned by such stockholders, determining the fair value of such shares
exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining fair
value, the Delaware Court is to take into account all relevant factors. In
Weinberger v. UOP Inc., the Delaware Supreme Court discussed the factors that
could be considered in determining fair value in an appraisal proceeding,
stating that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered, and that "fair price obviously requires
consideration of all relevant factors involving the value of a company." The
Delaware Supreme Court stated that in making this determination of fair value
the court must consider market value, asset value, dividends, earnings
prospects, the nature of the enterprise and any other facts which could be
ascertained as of the date of the merger which throw light on future prospects
of the merged corporation. In Weinberger, the Delaware Supreme Court stated
that "elements of future value, including the nature of the enterprise, which
are known or susceptible of proof as of the date of the merger and not the
product of speculation, may be considered." However, the court noted that, in
determining fair value under Section 262, "the speculative elements of value
that may arise from the "accomplishment' or "expectation' of the merger are
excluded."

Holders of shares of MSI Capital Stock considering seeking appraisal should
recognize that the fair value of their shares determined under Section 262
could be more than, the same as or less than the consideration they are
entitled to receive pursuant to the Merger Agreement if they do not seek
appraisal of their shares. The cost of the appraisal proceeding may be
determined by the Delaware Court and taxed against the parties as the Delaware
Court deems equitable in the circumstances. Upon application of a dissenting
stockholder of Pharmacopeia, the Delaware Court may order that all or a
portion of the expenses incurred by any dissenting stockholder in connection
with the appraisal proceeding, including without limitation, reasonable
attorney's fees and the fees and expenses of experts, be charged pro rata
against the value of all shares of stock entitled to appraisal.

From and after the Effective Time, no stockholder who has demanded appraisal
rights in compliance with the requirements of Section 262 of the DGCL will be
entitled to vote such stock for any purpose or to receive payment of dividends
or other distributions on the stock (except dividends or other distributions
that were payable to record holders prior to the Effective Time).

At any time within 60 days after the Effective Time, any stockholder will
have the right to withdraw such demand for appraisal and to accept the terms
offered in the Merger; after this period, the stockholder may withdraw such
demand for appraisal only with the consent of the Surviving Corporation. If no
petition for appraisal is filed with the Delaware Court within 120 days after
the Effective Time, stockholders' rights to appraisal will cease, and all
holders of shares of MSI Capital Stock will be entitled to receive the
consideration offered pursuant to the Merger Agreement. Inasmuch as the
Surviving Corporation has no obligation to file such a petition, and the
Surviving Corporation has no present intention to do so, any holder of shares
of MSI Capital Stock who desires such a petition to be filed is advised to
file it on a timely basis. No petition timely filed in the Delaware Court of
Chancery demanding appraisal shall be dismissed as to any stockholder without
the approval of the Delaware Court, and such approval may be conditioned upon
such terms as the Delaware Court deems just.

The foregoing is only a summary of Section 262, and is qualified in its
entirety by reference to the provisions thereof, the full text of which is set
forth as Annex 4 to this Joint Proxy Statement/Prospectus. Each stockholder of
MSI is urged to read carefully the full text of Section 262.

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ACCOUNTING TREATMENT OF THE MERGER

The Merger is intended to qualify as a pooling of interests for accounting
purposes. Under this method of accounting, the recorded assets and liabilities
of Pharmacopeia and MSI will be carried forward to the consolidated financial
statements of Pharmacopeia at their recorded amounts; income (loss) of
Pharmacopeia will include income (loss) of Pharmacopeia and MSI for the entire
fiscal year in which the Merger occurs; and the reported income of the
separate corporations for prior periods will be combined and restated as
income (loss) of Pharmacopeia. It is a condition to the consummation of the
Merger that Ernst & Young LLP deliver a letter regarding its concurrence with
Pharmacopeia management's conclusion as to the appropriateness of pooling of
interests accounting treatment for the Merger under Accounting Principles
Board Opinion No. 16 if closed and consummated in accordance with the terms of
the Merger Agreement, and that Arthur Andersen LLP deliver a letter regarding
its concurrence with MSI management's conclusion that MSI could be a combining
entity in a transaction accounted for as a pooling of interests in accordance
with GAAP. Although the receipt of these letters is a condition to the
consummation of the Merger that may be waived by Pharmacopeia and MSI, it is
not currently expected that such condition would be waived if not satisfied.
However, if such condition was waived, the Registration Statement of which
this Joint Proxy Statement/Prospectus forms a part would be amended and
proxies would be resolicited. Representatives of Ernst & Young LLP and Arthur
Andersen LLP are expected to be present at their respective Stockholder
Meetings and to be available to respond to questions, and will have an
opportunity to make a statement if they desire to do so. See "THE MERGER
AGREEMENT--Conditions to Consummation of the Merger" and "UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS."

FEDERAL SECURITIES LAW CONSEQUENCES

All shares of Pharmacopeia Common Stock received by MSI stockholders in the
Merger will be freely transferable, except that shares of Pharmacopeia Common
Stock received by persons who are deemed to be "affiliates" (as such term is
defined under the Securities Act) of MSI prior to or at the Effective Time may
be resold by them only in transactions permitted by the resale provisions of
Rule 145 promulgated under the Securities Act or as otherwise permitted under
the Securities Act. Persons who may be deemed to be affiliates of MSI
generally include individuals or entities that control, are controlled by, or
are under common control with, MSI and may include certain officers and
directors of such party as well as principal stockholders of MSI. This Joint
Proxy Statement/Prospectus does not cover any resales of Pharmacopeia Common
Stock received by persons who may be deemed to be affiliates of MSI. MSI's
affiliates have entered into agreements pursuant to which they have agreed to
comply with the applicable requirements of Rule 145.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following discussion is based on the opinions of Dechert Price & Rhoads,
counsel for Pharmacopeia, and Cooley Godward LLP, counsel for MSI, and
summarizes the material federal income tax consequences of the Merger to
Pharmacopeia, MSI and holders of MSI Capital Stock. This summary does not
discuss all aspects of federal income taxation that may be relevant to a
particular holder of MSI Capital Stock in light of such holder's specific
circumstances or to certain types of holders of MSI Capital Stock subject to
special treatment under the federal income tax laws (for example, foreign
persons, brokers/dealers in securities, banks and other financial
institutions, insurance companies, holders subject to the alternative minimum
tax provisions of the Code, tax-exempt organizations, holders who acquired MSI
Capital Stock pursuant to the exercise of options or otherwise as compensation
or through a tax-qualified retirement plan and persons holding their shares as
a hedge or as part of a hedging, straddle, conversion or other risk reduction
transaction). This summary does not discuss any aspect of state, local,
foreign or other tax laws, or the tax consequences of transactions effective
prior to or after the Merger (whether or not such transactions are in
connection with the Merger).

This summary is based upon the Code, applicable Treasury regulations
thereunder, judicial authority and administrative rulings and practice as of
the date hereof, all of which are subject to change, possibly with retroactive
effect. Any such change could affect the continuing validity of this summary.
THE FOLLOWING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL

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POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. HOLDERS OF MSI CAPITAL STOCK
SHOULD CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM
OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL
AND FOREIGN INCOME AND OTHER TAX LAWS IN THEIR PARTICULAR CIRCUMSTANCES.

THE MERGER

It is the opinion of Dechert Price & Rhoads and Cooley Godward LLP, that, if
consummated as described herein, the Merger will constitute a reorganization
for federal income tax purposes within the meaning of Section 368(a) of the
Code and will result in the tax consequences set forth below. The opinions of
Dechert Price & Rhoads and Cooley Godward LLP are expressly based upon the
accuracy of certain assumptions and the truth and accuracy of certain
representations made to such counsel by Pharmacopeia, MSI and certain holders
of MSI Capital Stock, including representations in certain tax representation
letters delivered or to be delivered by the date of the closing of the Merger
to counsel by MSI, Pharmacopeia and Merger Subsidiary. It is a condition to
the consummation of the Merger that Pharmacopeia and MSI receive the foregoing
opinions as of the Closing Date confirming such tax treatment. Although the
receipt of these opinions is a condition to the consummation of the Merger
that may be waived by Pharmacopeia and MSI, it is not currently expected that
such condition would be waived if not satisfied. However, if such condition
was waived, the Registration Statement of which this Joint Proxy
Statement/Prospectus forms a part would be amended and proxies would be
resolicited. As a reorganization for federal income tax purposes within the
meaning of Section 368(a) of the Code, the Merger will result in the following
general federal income tax consequences:

1. Pharmacopeia, MSI and Merger Subsidiary will not recognize any gain or
loss as a result of the Merger.

2. No gain or loss will be recognized by holders of MSI Capital Stock who
exchange their MSI Capital Stock for Pharmacopeia Common Stock, except with
respect to any cash received by MSI stockholders in lieu of fractional
shares of Pharmacopeia Common Stock.

3. A holder of MSI Capital Stock who receives cash in lieu of a
fractional share of Pharmacopeia Common Stock generally will be treated as
if the fractional share had been distributed to such holder as part of the
Merger (with an appropriate amount of tax basis in the holder's MSI Capital
Stock allocated to such fractional share) and then redeemed by Pharmacopeia
in exchange for the cash distributed in lieu of the fractional share in a
transaction governed by Section 302 of the Code. The holder will recognize
either ordinary income or loss, or capital gain or loss, as a result and
should consult its tax advisors to determine the particular tax
consequences in its case.

4. Each holder's aggregate tax basis in the Pharmacopeia Common Stock
received in the Merger will equal his or her aggregate tax basis in the MSI
Capital Stock exchanged therefor, decreased by the amount of any tax basis
allocable to any fractional share interest for which cash is received.

5. Provided that the MSI Capital Stock is held as a capital asset at the
Effective Time, the holding period of Pharmacopeia Common Stock received in
the Merger in exchange therefor will include the holding period of such MSI
Capital Stock.

6. There will be no federal income tax consequences to holders of
Pharmacopeia Common Stock as a result of the Merger.

FEDERAL INCOME TAX CONSEQUENCES TO DISSENTERS

The payment of cash to a holder of MSI Capital Stock who exercises
dissenters' rights under the DGCL with respect to such shares will result in a
taxable transaction to such holder. Such payment will be treated as a
distribution in redemption of MSI Capital Stock with respect to which
dissenters' rights were exercised and perfected, the consequences of which
will be determined in accordance with Section 302 of the Code.

COMPARISON OF STOCKHOLDERS' RIGHTS

The following is a summary of certain material differences between the
rights of holders of MSI Common Stock, MSI Class B Common Stock and MSI
Preferred Stock on the one hand and Pharmacopeia Common Stock

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on the other. Because each of MSI and Pharmacopeia is organized under the laws
of Delaware, these differences arise from various provisions of the Restated
Certificate of Incorporation (the "MSI Certificate") and the By-laws (the "MSI
By-laws") of MSI, and the Pharmacopeia Certificate and the By-laws (the
"Pharmacopeia By-laws") of Pharmacopeia. The following discussion is meant
only to summarize certain of such differences and does not purport to be
complete. Copies of the Pharmacopeia Certificate and the Pharmacopeia By-laws
may be obtained from Pharmacopeia. See "AVAILABLE INFORMATION."

VOTING

Except as otherwise required by law, the holders of shares of MSI Class B
Common Stock are not entitled to vote in any meeting of stockholders. The
holders of shares of MSI Common Stock and Pharmacopeia Common Stock are
entitled to one vote for each share held. Except as otherwise set forth in the
MSI Certificate or under applicable law, the holders of shares of MSI
Preferred Stock are entitled to vote together with all other classes and
series of stock of MSI as a single class on all actions to be taken by the
stockholders of MSI, and each share of MSI Preferred Stock entitles the holder
to such number of votes per share as shall equal the number of whole shares of
MSI Common Stock into which each share is convertible.

DIRECTORS

The MSI By-laws provide that the MSI Board of Directors shall consist of
between two and ten members, with the actual number to be determined by the
Board of Directors. The Pharmacopeia Certificate provides that the number of
directors shall be fixed from time to time by a bylaw or amendment thereof
duly adopted by the Pharmacopeia Board of Directors or the stockholders. The
Pharmacopeia By-laws provide that the number of directors shall be fixed from
time to time by resolution of the Pharmacopeia Board of Directors. The
Pharmacopeia Certificate also provides for three classes of directors, with
each director serving for a term ending on the third annual meeting of
stockholders following the annual meeting at which the director was elected.
The MSI Certificate does not divide the MSI Board of Directors into separate
classes. Both the Pharmacopeia By-laws and the MSI By-laws provide that no
reduction of the number of directors shall have the effect of removing a
director before his or her term expires.

Both the Pharmacopeia By-laws and the MSI By-laws provide that a director
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors. However, in the case
of Pharmacopeia, if less than the entire Pharmacopeia Board of Directors is to
be removed, no director may be removed without cause if the votes cast against
his or her removal would be sufficient to elect him or her if then
cumulatively voted at an election of the entire Pharmacopeia Board of
Directors. The Pharmacopeia By-laws and the MSI By-laws provide that vacancies
in the Board of Directors may be filled by the vote of a majority of the
remaining members of the Board of Directors or by a sole remaining director,
and that vacancies resulting from resignations may be filled by the vote of a
majority of the directors then in office (including the resigning director).

LIABILITY OF OFFICERS AND DIRECTORS; INDEMNIFICATION

Both the MSI Certificate and the Pharmacopeia Certificate provide that the
directors of the respective companies are not liable to the respective
corporations or their stockholders for monetary damages for breach of
fiduciary duty as a director, except to the extent such exemption from
liability is not permitted under the DGCL.

The Pharmacopeia Certificate provides that Pharmacopeia shall indemnify its
officers and directors in each and every situation permitted under the DGCL.
In addition, the Pharmacopeia Certificate provides that Pharmacopeia may, in
the sole discretion of its Board of Directors, indemnify any other person who
may be indemnified under Section 145 of the DGCL to the extent the
Pharmacopeia Board of Directors deems advisable. The Pharmacopeia By-laws and
MSI By-laws each provide that the respective company shall indemnify its
directors, officers, employees and agents, subject to certain exceptions
regarding such persons' standard of conduct.

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SPECIAL MEETINGS

Under the DGCL, special meetings of stockholders may be called by the Board
of Directors or such persons authorized by the corporation's certificate of
incorporation or by-laws. The MSI By-laws provide that the MSI Board of
Directors, the President or persons holding at least 20% of the voting power
of the outstanding stock entitled to vote at such meeting can call a special
meeting of stockholders. The Pharmacopeia By-laws provide that a special
meeting of the stockholders may be called by the Pharmacopeia Board of
Directors, the Chairman of the Board, the President or persons holding shares
entitled to cast at least 50% of the votes at such meeting.

PHARMACOPEIA PREFERRED STOCK

The Pharmacopeia Certificate authorizes Pharmacopeia's Board of Directors to
issue, without stockholder approval, 2,000,000 shares of Preferred Stock
having such voting, conversion and other rights as determined by the Board of
Directors. No such Preferred Stock is currently outstanding. Such an issuance
of Preferred Stock could adversely affect the holders of Pharmacopeia Common
Stock. See "RISK FACTORS--Risks Related to Pharmacopeia--Anti-Takeover Effect
of Certain Charter and By-Law Provisions and Delaware Law." The MSI
Certificate does not grant the MSI Board of Directors this authority.

VOTING BY BALLOT

The MSI By-laws provide that all elections of directors shall be by written
ballot, unless otherwise provided in the MSI Certificate. The MSI Certificate
states that elections of directors need not be by written ballot, unless
provided otherwise in the MSI By-laws. The Pharmacopeia Certificate states
that the election of directors need not be by written ballot unless the By-
laws so provide. The Pharmacopeia By-laws are silent on this matter.

AMENDMENT OF CERTIFICATE OF INCORPORATION AND BY-LAWS

Under the DGCL, a certificate of incorporation may be amended by the
affirmative vote of a majority of the outstanding stock entitled to vote
thereon, and a majority of the outstanding stock of each class entitled to
vote thereon as a class, unless a greater percentage is required by the
certificate of incorporation. The Pharmacopeia Certificate states that it may
be amended in the manner prescribed by statute. The MSI Certificate also
provides that MSI reserves the right to amend or repeal any provision of the
MSI Certificate in the manner prescribed by statute; however, except where the
vote or written consent of the holders of a greater number of shares of MSI is
required by law or the MSI Certificate, the MSI Certificate may not be amended
to materially and adversely affect the rights of the holders of MSI Class B
Common Stock or MSI Preferred Stock, without the approval of the holders of
such shares voting as a separate class.

Each of the MSI By-laws and the Pharmacopeia By-laws can be amended, altered
or repealed by such companies' respective Boards of Directors or by the vote
of the holders of a majority of the outstanding stock entitled to vote
thereon.

DIVIDENDS; LIQUIDATION RIGHTS

The MSI Certificate provides that dividends may be declared and paid on the
MSI Common Stock as and when determined by the MSI Board of Directors and
subject to any preferential dividend rights of any then outstanding MSI
Preferred Stock, and that no dividends may be paid or declared on the MSI
Class B Common Stock. The MSI Certificate further provides that the holders of
MSI Preferred Stock are entitled to receive dividends at the same rate as
dividends are paid with respect to the MSI Common Stock (treating each share
of MSI Preferred Stock as equal to the number of shares of MSI Common Stock
into which each share of MSI Preferred Stock is convertible). The Pharmacopeia
Certificate provides that dividends may be declared and paid on the Common
Stock only if dividends shall have been paid to or declared for the Preferred
Stock, and that the holders of Common Stock and Preferred Stock shall be
entitled to dividends when and if declared by the Board of Directors.

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In the event of liquidation or dissolution, the MSI Certificate provides
that holders of MSI Common Stock and MSI Class B Common Stock will be entitled
to receive all assets available for distribution (in equal amounts per share
and without any preference) subject to any preferential rights of holders of
MSI Preferred Stock. The MSI Certificate further provides that in the event of
liquidation or dissolution, holders of MSI Preferred Stock are entitled to
payment before any payment is made to the holders of MSI Common Stock or MSI
Class B Common Stock, of an amount equal to the greater of $2.70 per share or
the amount payable had each share of MSI Preferred Stock been converted into
MSI Common Stock immediately prior to the liquidation or dissolution. The
shares of Pharmacopeia Common Stock do not have any such preferential rights.

SPECIAL RIGHTS OF MSI PREFERRED STOCK AND MSI CLASS B COMMON STOCK

In addition to the rights discussed above, the MSI Certificate grants
certain rights to the holders of MSI Preferred Stock and MSI Class B Common
Stock. Such shares are convertible under certain circumstances into shares of
MSI Common Stock. In addition, except where the vote or written consent of the
holders of a greater number of shares of MSI is required by law or the MSI
Certificate, (i) the rights of the holders of MSI Preferred Stock or MSI Class
B Common Stock may not be materially and adversely affected without obtaining
the approval of the holders of a majority of such shares, voting as a separate
class, and (ii) MSI may not authorize or issue any class of securities, or
reclassify any class of securities, so as to create a class of securities
having superior rights to the MSI Preferred Stock, without obtaining the
approval of the holders of a majority of the MSI Preferred Stock, voting as a
separate class. Holders of Pharmacopeia Common Stock are not entitled to any
such conversion or special voting rights.

INFORMATION CONCERNING PHARMACOPEIA

Since its inception in March 1993, Pharmacopeia has focused its research
efforts in developing a novel, proprietary technology for accelerating the
pace of drug discovery for its pharmaceutical and biotechnology customers.
Pharmacopeia's Encoded Combinatorial Library on Polymeric Support
("ECLiPS(TM)") technology addresses a key challenge in the drug discovery
process: generating and evaluating large numbers of diverse and readily
identifiable small molecule compounds to find new, orally active drugs. ECLiPS
enables Pharmacopeia to generate hundreds of thousands of small molecule
compounds at a fraction of the cost of traditional chemical synthesis methods.
Pharmacopeia focuses on drug discovery, and seeks customers to develop,
manufacture, market and sell resulting drugs. To date, Pharmacopeia has signed
contracts with several customers, including Schering Corporation and Shering-
Plough Ltd., Berlex Laboratories, Inc., Novartis Corporation, Bayer
Corporation, Daiichi Pharmaceutical Co., Ltd., N.V. Organon and Bristol-Myers
Squibb Company.

Pharmacopeia's technology supports its pharmaceutical and biotechnology
customers in improving their drug discovery productivity. Pharmacopeia uses a
patented "Direct Divide" approach to combinatorial chemistry to build
collections, or libraries, of 10,000 to 500,000 or more small molecule
compounds by performing only 50 to 200 individual chemical reactions. This
"Direct Divide" approach yields a more controlled distribution of final
compounds than does the "pool and split" method currently used by certain
other companies in drug discovery and previously practiced at Pharmacopeia.
Pharmacopeia's ECLiPS technology offers substantial productivity improvements
as compared to the 10,000 to 500,000 or more reactions that would be required
to prepare similarly sized chemical libraries by synthesizing each compound
individually. The ECLiPS productivity advantage results from Pharmacopeia's
synthesis of compounds on tiny plastic beads in large mixtures. After each
solid phase synthesis step, proprietary tag sets are attached to the beads to
indicate the chemical building block and reaction conditions used in that
step. These stable, easily detectable tag sets enable Pharmacopeia to rapidly
identify from the mixture any compound that is active in a biological
screening assay. Pharmacopeia's tagging technology is licensed exclusively
from Columbia University ("Columbia") and Cold Spring Harbor Laboratory ("Cold
Spring").

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biotechnology companies. Pursuant to collaborative agreements, Pharmacopeia
licenses its libraries for screening by customers, forms drug discovery
collaborations with its customers and plans to license internally-developed
compounds. Pharmacopeia's technology strategy is to enhance productivity
through cost reductions and increased throughput and to build Pharmacopeia's
library collection and its knowledge base of the relationships between
chemical structures and biological targets for use in future drug discovery
programs.

INFORMATION CONCERNING MSI

The discussion in this Joint Proxy Statement/Prospectus contains forward-
looking statements which involve risks and uncertainties. MSI's actual results
could differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to such differences
include, without limitation, those discussed in this section and in the
sections entitled "RISK FACTORS" and "MSI MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," as well as those discussed
elsewhere in this Joint Proxy Statement/Prospectus.

GENERAL

MSI is a leading provider of molecular modeling and simulation software. MSI
designs, develops, markets and supports software that facilitates the
discovery and development of new products and processes in the pharmaceutical,
biotechnology, chemical, petrochemical and materials industries. Using MSI's
products, researchers are able to increase the speed and efficiency of the
research and development cycle, thereby reducing product development costs and
shortening the time to market for new product introductions and process
improvements. MSI's customers comprise leading commercial, governmental and
academic organizations, including many of the largest pharmaceutical,
biotechnology, chemical, petroleum and semiconductor companies worldwide.

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

MSI has assembled its proprietary product suite through internal
development, licensing of technologies from third parties and acquisitions of
other companies. In August 1995, MSI acquired Biosym, a leading provider of
molecular modeling and simulation software and a wholly owned subsidiary of
Corning. The acquisition of Biosym allowed MSI to achieve several important
strategic objectives, including the addition of key technologies and
personnel; the addition of complementary products; a significant expansion of
MSI's customer base; penetration into new markets; improved cost efficiencies;
and broader research and development, marketing and sales capabilities.

MSI plans to continue enhancing its product and service offerings for
simulation specialists, who are the principal users of MSI's products. In
addition, MSI plans to broaden significantly its user base to include the much
larger population of experimentalists--laboratory scientists and engineers
that engage in experimental activities. MSI has packaged its core simulation
technologies into solutions-oriented applications known as computational
instruments. These products are easier to use than traditional simulation
products and perform specific functions analogous to typical laboratory
procedures. Recently, MSI has developed its WebLab family of products, which
are computational instruments accessible over corporate intranets. These
instruments create a

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"virtual laboratory" of computational instruments and other products for use
on desktop computers by a broad range of scientists to perform computational
chemistry, biology and materials experiments.

INDUSTRY BACKGROUND

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

Many factors that affect a product's performance, including activity,
bioavailability, toxicity, shelf life and environmental impact, are governed
by fundamental, atomic level properties such as molecular shape, structure and
reactivity. Molecular simulation was developed to predict these molecular
properties and help researchers discover new products, sharpen the focus of
experimental activities and improve ultimate product performance. Beginning in
the late 1970's, major pharmaceutical and chemical companies began to use
molecular simulation in their research and development activities.

Increased academic and commercial investment in the 1980's improved the
utility of these new simulation technologies. As researchers began to migrate
from mainframe and minicomputer-based systems to high performance UNIX
workstations, companies emerged to provide commercial quality molecular
visualization and computational chemistry software products.

THE MSI SOLUTION

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

. Validated Core Technology. MSI's core technology consists of a number of
fundamental, scientifically proven methods for conducting predictive
computer modeling of chemical, biological and materials phenomena at the
atomic and molecular scale. This core technology is validated by over a
decade of industrial use and by the publication of more than 400
presentations, papers and articles citing applications of this
technology.

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

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

. Ease of Use. MSI develops software products that are integrated,
modular, focused on specific research areas or techniques, and
accessible by an intuitive graphical user interface ("GUI"). MSI's GUI
enables experimentalists to use molecular simulation in a manner
consistent with established analytical and laboratory techniques, in a
user-friendly computational environment.

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. Increased Access. MSI is developing a Web-based product line that
targets a broader group of users, including experimentalists and
engineers. Web browsers and other software products are used
increasingly by scientific researchers on desktop computers to search
for, analyze and communicate scientific data, particularly within
corporate intranets. MSI's Web-based products use familiar Web browser
technology and are built upon MSI's open architecture and validated core
technology.

STRATEGY

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

. Expand User Base. MSI plans to increase its number of sales personnel in
order to increase sales to its key accounts and pursue new customers
within existing markets. In addition, MSI's products have been designed
to expand use of its software to include not only a growing number of
simulation specialists, but also the much larger group of
experimentalists. MSI believes it can leverage its strong relationships
with simulation specialists to help promote use of MSI products by other
scientists working in the same organization as the specialists.

. Leverage Core Technology and Maintain Technology Leadership. MSI
believes its core technology has helped position MSI at the forefront of
simulation technology providers. MSI intends to continue to make
significant investments in research and development in order to improve
the efficiency and predictive accuracy of its core technology and to
maintain its technology leadership. Further, MSI's strategy for WebLab
is to create a "virtual laboratory" that allows access to MSI's
validated core technology from desktop computers operating within
corporate intranets.

. Become the Industry Standard. MSI has created a development product, the
Cerius/2/ Software Developer's Kit ("Cerius/2/ SDK"), that allows
customers and third-party licensees to use MSI's open architecture to
create their own applications for internal use or for distribution. MSI
is extending this development product to include the WebLab SDK for
applications development within MSI's WebLab environment. The open
architecture facilitates communication within and between companies and
institutions that use MSI's products. MSI intends to continue to promote
its development environment as the industry standard for use and
development of molecular simulation and related applications.

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

TECHNOLOGY

MSI's core technology delivers predictive models of chemical, biological and
materials phenomena within MSI's open environment. This technology simulates
interatomic and intermolecular interactions, and a wide range of corresponding
properties, including molecular structure, activity, diversity, stability,
morphology, solubility, adhesion, adsorption, diffusion, color, analytical
spectra, and optical, electrical and mechanical properties. The benefits of
MSI's technology have been validated by more than 400 published presentations,
papers and articles citing MSI's technology.

Methods

There are four primary classes of molecular simulation methods, all of which
are employed by MSI in its products:

Quantum Methods. Quantum methods, the most fundamental of MSI's methods,
compute interatomic interactions at the level of electrons and nuclei.
These methods make the least number of assumptions about

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the nature of relevant interactions and require little or no
parameterization. These methods are capable of simulating which
combinations of elements are stable, how chemical reactions occur, and
other electronic structural properties such as reactivity, color and
magnetism. These methods are the most computationally demanding and are
applied to small, carefully selected models.

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

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

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

Open Architecture. MSI has pioneered an open molecular simulation software
architecture, Cerius/2/, which includes an efficient data model; libraries of
mathematical, chemical and graphical utilities; and a client/server data and
communications management layer. Cerius/2/, a modular, object-oriented system,
is written principally in C++ and uses industry-standard protocols such as
MOTIF and TCP/IP. This modular architecture is designed to provide streamlined
access to the various methods, allowing their use in discrete, combined and
packaged ways. The Cerius/2/ application programming interfaces ("APIs") are
used by MSI's internal developers to create products. The same APIs are made
available through the Cerius/2/ SDK to customers and third-party licensees.
Using the Cerius/2/ open architecture and its validated methods, MSI has
created its computational instruments. In each of these computational
instruments, a particular application of one or more methods is precalibrated,
parameters and protocols are predefined and results are delivered in an easily
interpretable fashion. These computational instruments are designed for and
used by experimentalists, such as synthetic, analytical and formulation
chemists.

WebLab is a Web-enabling extension of the Cerius/2/ open architecture, and
is the medium by which MSI can deliver desktop products for experimentalists.
Accessed from a Web browser operating as a client, these products make use of
both the Cerius/2/ architecture and MSI's methods running on a server machine.
The server is a UNIX workstation accessed through a corporate intranet. The
client browser application is created using industry-standard languages and
protocols. The WebLab Viewer, a helper application, provides improved
performance in the display and manipulation of molecular structures. Versions
of the WebLab Viewer have been released for PCs running under Windows 95 and
Windows NT.

MSI's Cerius/2/ architecture, graphics and interface subsystems are
supported on Silicon Graphics and IBM UNIX workstations. Certain of the
methods are also supported on vector supercomputers and on shared and
distributed memory parallel architectures. Existing and planned WebLab
products will run on major platforms that support standard browser technology.

PRODUCTS AND SERVICES

MSI provides an extensive suite of products used throughout the research and
development cycle. MSI believes that offering a "single-shop," integrated
molecular simulation solution is a significant benefit to its

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customers. MSI's product family consists of over 100 application modules. The
following table sets forth information with respect to representative examples
of MSI's products and products under development.

<TABLE>
<CAPTION>
FIRST
SOFTWARE COMMERCIAL
PRODUCTS DESCRIPTION INDUSTRIES(1) RELEASE DATE
-------- ----------- --------------- ------------
<C> <S> <C> <C>
INTEGRATION AND
MOLECULAR GRAPHICS
PRODUCTS
QUANTA Graphical modeling Pharmaceutical/ 1986
system Biotechnology
InsightII Graphical modeling All 1988
system
Cerius/2/ Visualizer Graphical modeling All 1994
system
Cerius/2/ SDK Open architecture and All 1995
development environment
METHODS PRODUCTS
Discover Molecular mechanics and All 1984
dynamics simulations
CHARMm Protein structure Pharmaceutical/ 1985
simulations Biotechnology
QSAR Property predictions by All 1989
correlative methods
Dmol Density functional All 1989
quantum methods for
molecules
CASTEP Density functional Chemicals/ 1994
quantum methods for Materials
solids
APPLICATION PACKAGES
X-PLOR Protein structure Pharmaceutical/ 1987
determination package Biotechnology
Catalyst Analog-based drug Pharmaceutical/ 1990
discovery package Biotechnology
Felix NMR data plotting and Pharmaceutical/ 1990
analysis package Biotechnology/
Chemicals
Cerius/2//InsightII Suite of more than 50 All 1994/1998
application modules for specific
modules applications
WEBLAB PRODUCTS
WebLab Viewer Molecular display and All 1996
integration with desktop
productivity tools
WebLab Gene Explorer Gene sequence data Pharmaceutical/ 1997
interpretation Biotechnology
WebLab Polymer Explorer Design and selection of Chemicals/ 1997
polymers Materials
WebLab MedChem Explorer Analysis tools for Pharmaceutical/ 1997
medicinal chemistry Biotechnology
WebLab Diversity Explorer Combinatorial chemistry Pharmaceutical/ 1998
tools Biotechnology
</TABLE>
- --------
(1) "All" indicates the pharmaceutical, biotechnology, chemicals and materials
industries.

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<PAGE>

MSI's methods products are powerful, full-featured simulation engines used
primarily by simulation specialists. MSI's application packages are targeted,
solutions-oriented modules usually built upon MSI's methods. These application
packages are also used by simulation specialists and, in the case of
computational instruments, by experimentalists. The Cerius/2/ Visualizer has a
flexible card-stack layout and is designed to be user-friendly for the
experimentalist as well as the simulations specialist. MSI's WebLab products
are simple-to-use, desktop products designed for specific research tasks of
experimental chemists, biologists and engineers. MSI's methods products,
applications packages, graphical modeling systems and WebLab Viewer are used
throughout the pharmaceutical, biotechnology, chemical and materials
industries.

MSI's individual software modules are priced from $2,500 to $75,000 for an
industrial customer on a UNIX workstation with a single processor. A typical
commercial product installation for a new user in one application area costs
approximately $50,000. Larger installations might include software modules for
several different application areas and for multiple processors or
workstations. MSI's WebLab products have individual user prices of less than
$5,000; the WebLab ViewerLite is provided at no charge on a compact disc or
may be downloaded from MSI's Web site.

Research and Development

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

Protein Design. The pharmaceutical, biotechnology, cosmetics and
agrochemical industries use MSI's software to understand the relationship
between protein structure and function and to analyze, modify and tailor
proteins and peptides. MSI's protein modeling products integrate
capabilities in structure generation, molecular simulation, protein
database search and analysis, molecular visualization and presentation.
Products used in protein design include Cerius/2/ and Insight II modules,
QUANTA, Discover and CHARMm.

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

Rational Drug Design. MSI's rational drug design products are used in the
pharmaceutical and biotechnology industries. These products allow the
design and optimization of small, organic therapeutics, based on a protein
active site model or on activity data for a set of compounds. Related
techniques are used to design and assess combinatorial molecular libraries.
Products used in drug design include Catalyst, Cerius/2/ and Insight II
application modules, QSAR and Discover.

Polymer Modeling. Polymer modeling products are used by researchers in
the chemical, plastics, rubber, adhesives, petrochemical, aerospace and
automotive industrial sectors. Polymer researchers seek to analyze and
predict polymer properties and establish the link between these properties
and the molecular-level structure of the material. MSI's polymer software
products allow these researchers to construct and characterize models of
polymers and predict key properties, such as blend compatibility,
mechanical behavior, cohesion and adhesion to surfaces. MSI's polymer
products include Cerius/2/ and Insight II application modules, QSAR and
Discover.

Crystallization. Crystallization phenomena are important to development
and formulation departments in companies in the pharmaceutical, paint and
pigment, petrochemical and chemical industrial sectors. MSI offers products
to predict crystal structure, polymorphism and crystal shapes, and to
design additives to control or inhibit crystal growth. MSI's
crystallization products include Cerius/2/ and Insight II application
modules, Discover, DMol, CASTEP and QSAR.

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<PAGE>

Electronics Research. The trend toward microminiaturization of electronic
devices has created a need for improved processes and materials. MSI's
software products are used by semiconductor and electronics companies to
understand surface chemistry, defects, thin oxide layers, magnetic
properties and the performance of new packaging materials. These products
include Cerius/2/ and Insight II application modules, Discover, DMol and
CASTEP.

Chemical Reactions. Understanding, controlling and improving chemical
conversions is a key research and development objective of petrochemical,
chemical and pharmaceutical companies. MSI offers a range of quantum
methods products for simulating chemical reactivity, conversions and
thermochemical data, including Cerius/2/ and Insight II application
modules, DMol and CASTEP.

Catalysis and Sorption. MSI's catalysis and sorption products are used by
companies in the chemical, petrochemical, natural gas and plastics
industries and by catalyst manufacturers to characterize catalysts and
sorbent materials and to simulate thermodynamic and reactivity data. MSI's
products are used to characterize and design metallocene catalysts,
zeolites and other molecular sieves, and metal oxides. MSI's catalysis and
sorption products include Cerius/2/ and Insight II application modules,
Discover, DMol and CASTEP.

Analytical Simulation. MSI's analytical products are used by companies in
each of the markets served by MSI to display and interpret diffraction,
electron microscopy, infra-red and other analytical data. MSI's analytical
products include Cerius/2/ and Insight II application modules, and Felix.

Other Products and Services

Integration Products. The Cerius/2/ SDK offers customers and third-party
licensees a standard simulation environment in which to develop and integrate
their own applications. The Cerius/2/ SDK provides an external developer with
access to the full set of Cerius/2/ APIs used by MSI's own internal
development staff. With the Cerius/2/ SDK a developer can employ any of the
functions, subsystems or methods embodied in or accessible through Cerius/2/
to integrate an external program or to create additional application
functionality, with a corresponding Cerius/2/ GUI. MSI is extending Cerius/2/
SDK to include the WebLab SDK for applications development within MSI's WebLab
environment.

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

Accelerated Research Services. MSI offers consulting, contract research,
custom development and systems integration services. MSI's accelerated
research services allow its customers to benefit from MSI's facilities and the
expertise of MSI's staff in outsourcing these types of specialist functions.
In certain contract research projects, MSI may receive some future
compensation in the form of a royalty payment on sales of products or
processes that result from the project. MSI intends to continue to apply its
technology and the expertise of its staff to design new products and
processes, both internally and through collaborative activity, and to benefit
from such projects when possible through future royalty payments.

Computer Hardware. As a convenience to its customers, MSI acts as a value-
added reseller of computer hardware in order to deliver a complete turn-key
molecular simulation system. MSI purchases substantially all of its hardware
for resale from Silicon Graphics, Inc. ("SGI"). MSI's agreement with SGI
obligates MSI to meet an annual minimum purchase volume. Under the agreement,
SGI provides installation, support and maintenance with respect to the
computer hardware.

CUSTOMERS

MSI's customer base consists of leading commercial, governmental and
academic organizations. Except for TMSI, the joint venture formed by MSI with
Teijin, no customer accounted for more than 10% of MSI's revenues during the
fiscal year ended December 31, 1997.

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

Set forth below is a representative list of current industrial customers of
MSI based on the nature of MSI's customers and the products purchased by the
identified customers:

PHARMACEUTICALS CHEMICALS AND PETROCHEMICALS MATERIALS

Abbott Laboratories AECI, Ltd. Asahi Glass Co., Ltd.
Banyu Pharmaceuticals Air Products and Hitachi, Ltd.
Co., Ltd. Chemicals Inc. Kubota Corp.
Boehringer Ingelheim AKZO Nobel N.V. Matsushita Electric
International GmbH Amoco Corporation Industrial Co., Ltd.
Bristol-Myers Squibb Asahi Chemical Industry Motorola, Inc.
Company Co., Ltd. PPG Industries, Inc.
Chisso Corporation BASF AG Ricoh Co., Ltd.
Chugai Pharmaceutical Bayer AG Sharp Electronics Corp.
Co., Ltd. BHP Research Texas Instruments Inc.
Chiyoda Corp. Laboratories Tokyo Electron Ltd.
Daiichi Pharmaceutical Chevron Research and Toray Industries, Inc.
Co., Ltd. Technology Company
DuPont Merck Courtaulds PLC BIOTECHNOLOGY
Pharmaceuticals Cytec Industries Inc.

Eli Lilly and Company Dainippon Ink & Agouron Pharmaceuticals,
GlaxoWellcome plc Chemicals, Inc. Inc.
Green Cross Corp. Dow Chemical Company Alanex Corporation
Hoechst Marion Roussel, DSM Research Amgen Inc.
Inc. Eastman Kodak Company Axys Pharmaceuticals,
Kaken Pharmaceutical Engelhard Corporation Inc.
Co., Ltd. EniChem SpA Astra Merck, Inc.
LG Biomedical Eniricerche SpA Berlex Biosciences
Merck & Co., Inc. Exxon Chemical Co. Biogen, Inc.
Monsanto E.I. du Pont de Nemours Cape Cod Research
Nippon Roche KK and Company Genentech, Inc.
Novartis Hoechst AG Genetics Institute, Inc.
Novo-Nordisk ICI Katalco Genome Therapeutics
Pfizer Inc. Intevep S.A. Corp.
Pharmacia and Upjohn, Kelco Corp. Genzyme Corporation
Inc. L'Air Liquide H. Lundbeck A/S
R.W. Johnson The Lubrizol Corporation Incyte Pharmaceuticals,
Pharmaceutical Research Mitsubishi Chemical Inc.
Institute Industries, Ltd. Isis Pharmaceuticals,
Roche Bioscience Mitsui Toatsu Chemicals, Inc.
Roussel Uclaf Inc. Japan Tobacco Inc.
Santen Pharmaceutical Mobil Corporation Millenium
Co., Ltd. Nissan Chemical Pharmaceuticals, Inc.
Schering-Plough Industries, Ltd. Vertex Pharmaceuticals
Corporation Norsk Hydro A/S Incorporated
SmithKline Beecham The Proctor & Gamble ZymoGenetics, Inc.
Taisho Pharmaceutical Company
Co., Ltd. Rhone-Poulenc Chimie
Wyeth-Ayerst Research Saudi Aramco
Zeneca Limited Smith & Nephew plc
Sumitomo Chemical Co.
Ltd.
Teijin Ltd.
Tonen Corp.
Total
Ube Industries, Ltd.
Unilever
Union Carbide
Corporation

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

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

STRATEGIC AND ACADEMIC ALLIANCES

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

CONSORTIA

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

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

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

SALES AND MARKETING

MSI markets its products and services worldwide. In the United States and
Europe, MSI has direct sales forces, consisting of field sales and telesales
representatives. In Japan and other Asia/Pacific countries, MSI distributes
its products and services through TMSI, which manages a network of
subdistributors in this region. MSI and Teijin each own 50% of TMSI. As of
December 31, 1997, MSI's sales organization consisted of 59 management, sales
and administrative employees, excluding those employed by TMSI. MSI intends to
increase the number of its sales personnel worldwide.

North and South America; Europe. As of December 31, 1997, MSI employed 17
direct sales representatives and nine telesales representatives to market and
sell MSI's products and services in North and South America. As of December
31, 1997, MSI employed 15 direct sales representatives and eight telesales
representatives to market and sell MSI's products and services primarily in
Europe. Certain of the telesales representatives focus exclusively on sales to
academic researchers. The direct sales representatives and remaining telesales
representatives work in teams selling to commercial and governmental accounts
in assigned geographic territories and focus on either life science industries
or material sciences industries. The direct sales representatives typically
focus on larger accounts and account transactions greater than $50,000 and
work closely with MSI's pre-sales support scientists in order to demonstrate
MSI's products and their applicability to various

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research and development efforts. Five senior sales persons (two in the United
States and three in Europe) focus on sales of MSI's full product and service
offerings to a specified group of major accounts that have operations in sites
throughout the world.

Japan and the Asia/Pacific region. MSI has a distribution agreement with
TMSI under which TMSI serves as the exclusive distributor of MSI's products
and services in Japan, South Korea, Taiwan, Hong Kong, China, India,
Singapore, Malaysia, Australia and New Zealand. TMSI has been MSI's exclusive
distributor in Japan since April 1, 1992 and in the other Asia/Pacific
countries since April 1, 1994. TMSI's Japanese office has six sales, marketing
and administrative personnel who manage and support four subdistributors in
Japan. TMSI also maintains an office in Korea with four sales, marketing and
administrative personnel who manage and support subdistributors and conduct
direct sales activities in the other Asian countries. TMSI's subdistributor
agreements generally renew automatically each year but may be terminated if
either party gives notice 90 days prior to expiration of the then current
term.

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

PRODUCT DEVELOPMENT

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

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

CUSTOMER SERVICES AND SUPPORT

MSI is committed to providing customers with superior support including
telephone, electronic mail, fax and Internet-based technical support services;
training; user group conferences; and targeted contract and consulting
services involving application of MSI's technology and scientific expertise to
particular research needs of customers. MSI believes that a high level of
customer service, support and training is critical to the adoption and
successful utilization of its products.

Purchases of multi-year licenses to use MSI's software products include one
year of maintenance services, consisting of technical support and software
upgrades. Thereafter, MSI offers renewals of maintenance services on an annual
basis for an annual fee. Annual licenses to use MSI's software products
generally include all maintenance services. Most of MSI's customers contract
for maintenance and support services. These give customers access to new
releases, technical notes, documentation addenda and other support required to
utilize MSI's products effectively, including access to MSI's technical and
scientific support personnel during extended business hours. Through its
distribution channels, MSI offers training conducted by staff knowledgeable in
both the theory and application of molecular simulation. Technical newsletters
and bulletins and advance notification

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about future software releases are sent to customers to keep them informed and
to help them with resource allocation and scheduling. To maintain an ongoing
understanding of customer requirements, MSI sponsors scientific symposia and
user group meetings throughout the year.

COMPETITION

The market for MSI's products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other
market activities of industry participants. MSI's competitors offer a variety
of products and services to address this market. MSI believes that the
principal competitive factors in this market are product quality, flexibility,
ease-of-use, scientific validation and performance, functionality and
features, open architecture, quality of support and service, reputation and
price. Competition currently comes from the following principal sources: other
molecular simulation software packages and software for analysis of chemical
and biological data; desktop software applications, including chemical
drawing, molecular modeling and analytical data simulation applications;
consulting and outsourcing services; other types of simulation software
provided to engineers; and firms supplying databases, such as chemical or
genomic information databases, database management systems and information
technology. In addition, certain of MSI's licenses grant the right to
sublicense MSI's software. As a result, MSI's customers and third-party
licensees could develop specific simulation applications using the Cerius/2/
SDK and compete with MSI by distributing such programs to potential customers
of MSI. Customers or licensees could also develop their own simulation
technology and cease using MSI's products and services. Further, they may
choose to sublicense such technology, in which case MSI may receive royalty
payments.

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

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

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

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infringe patents or other intellectual property rights. In particular, MSI has
received letters from Tripos, Inc. and Immunex Corporation stating that MSI's
products may be relevant to patents held by them. MSI has investigated these
matters and believes that they are immaterial to the operations of MSI. There
can be no assurance, however, that MSI's products do not infringe upon the
patent or other intellectual property rights of these or other third parties,
that MSI will not be required to seek licenses for or otherwise acquire rights
to technology as a result of claims of infringement or that these or other
companies will not bring infringement suits against MSI. MSI expects in
general that simulation software product developers will increasingly be
subject to infringement claims as the number of products and competitors in
MSI's industry segments grows and the functionality of products in different
industry segments overlaps. Any such claims, with or without merit, could be
time consuming to defend, result in costly litigation, divert management's
attention and resources, cause product shipment delays or require MSI to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to MSI, if at all. In the
event of a successful claim of product infringement against MSI, the failure
or inability of MSI to license or design around the infringed technology would
have a material adverse effect on MSI's business, financial condition and
results of operations.

MSI PROPERTY

MSI's principal administrative, sales, support, marketing and product
development facilities and the corporate headquarters are located in San
Diego, California, where MSI has leased 51,635 square feet through April 2000.
MSI's European headquarters, also with administrative, sales, support,
marketing and product development functions, are located in Cambridge,
England, where MSI has leased 6,545 square feet through July 26, 2008 and has
subleased an additional 4,952 square feet in the same building through October
2006. MSI leases additional offices in the United States and Europe.

MSI SELECTED CONSOLIDATED FINANCIAL DATA

The following selected historical financial information of MSI is qualified
in its entirety by the more detailed financial statements and notes thereto
included elsewhere in this Joint Proxy Statement/Prospectus. The statement of
operations data for the years ended December 31, 1995, 1996 and 1997 and the
balance sheet data as of December 31, 1996 and 1997 have been derived from
such financial statements and notes thereto. The statement of operations data
for the years ended December 31, 1993 and 1994, and the balance sheet data as
of December 31, 1993, 1994 and 1995 have been derived from the Company's
consolidated financial statements, which statements have been audited by
Arthur Andersen LLP and are not included in this Joint Proxy
Statement/Prospectus. This data should be read in conjunction with "MSI
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the financial statements and notes thereto appearing elsewhere
herein.

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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994(1) 1995(1) 1996 1997
------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue:
Software licenses................ $ 7,987 $ 7,920 $ 14,482 $19,739 $23,658
Service and other................ 5,609 6,110 11,165 21,344 25,450
Hardware......................... 1,672 1,342 4,473 6,178 7,566
------- ------- -------- ------- -------
Total revenue.................. 15,268 15,372 30,120 47,261 56,674
Cost of revenue:
Software licenses................ 948 1,743 2,709 2,517 3,512
Hardware......................... 1,361 1,145 3,900 5,242 6,720
------- ------- -------- ------- -------
Total cost of revenue.......... 2,309 2,888 6,609 7,759 10,232
------- ------- -------- ------- -------
Gross profit................... 12,959 12,484 23,511 39,502 46,442
Operating expenses:
Sales, marketing and customer
support......................... 6,463 7,536 12,003 17,359 18,471
Research and development......... 6,832 5,552 7,603 12,834 12,663
General and administrative....... 2,197 2,095 3,383 5,609 7,488
Acquisition-related charges(2)... 12,161
------- ------- -------- ------- -------
Total operating expenses....... 15,492 15,183 35,150 35,802 38,622
------- ------- -------- ------- -------
Operating income (loss)............ (2,533) (2,699) (11,639) 3,700 7,820
Interest and other income.......... 5 33 319 368 126
------- ------- -------- ------- -------
Income (loss) before provision for
income taxes...................... (2,528) (2,666) (11,320) 4,068 7,946
Provision for income taxes......... 253 262 560 1,471 2,496
------- ------- -------- ------- -------
Net income (loss).................. $(2,781) $(2,928) $(11,880) $ 2,597 $ 5,450
======= ======= ======== ======= =======
Basic net income (loss) per
share(3).......................... $ (1.18) $ (1.12) $ (2.28) $ 0.27 $ 0.56
======= ======= ======== ======= =======
Diluted net income (loss) per
share(3).......................... $ (1.18) $ (1.12) $ (2.28) $ 0.17 $ 0.35
======= ======= ======== ======= =======
Weighted average common stock
outstanding--basic(3)............. 2,350 2,605 5,206 9,531 9,709
Weighted average common stock and
common stock equivalents
outstanding--diluted(3)........... 2,350 2,605 5,206 15,160 15,567
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents... $ 1,609 $ 5,855 $ 10,371 $ 14,509 $ 15,019
Total assets................ 11,080 14,916 34,152 41,265 46,464
Long-term liabilities, net
of current portion......... 2,137 2,774 3,116 2,982 2,207
Accumulated deficit......... (19,323) (22,251) (34,131) (31,534) (26,084)
Total stockholders' equity.. 3,381 6,812 5,149 7,388 12,259
</TABLE>
- --------
(1) The financial information set forth above excludes financial information
for Biosym prior to August 16, 1995, the effective date of MSI's
acquisition of Biosym.
(2) The 1995 amount includes a $6.5 million write-off of acquired in-process
research and development, $4.5 million in restructuring costs and a $1.1
million write-off of capitalized software, all in connection with the
acquisition of Biosym.
(3) See Note 2 of Notes to MSI Consolidated Financial Statements for a
description of the computation of the net income (loss) per share and the
number of shares used in the per share calculations.

85
<PAGE>

MSI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of
operations of MSI should be read in conjunction with the consolidated
financial statements and the related notes thereto included herein. The
discussion in this Joint Proxy Statement/Prospectus contains forward-looking
statements that involve risks and uncertainties. MSI's actual results may
differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences
include, without limitation, those discussed in this section and the sections
entitled "Risk Factors" and "INFORMATION CONCERNING MSI" as well as those
discussed elsewhere in this Joint Proxy Statement/Prospectus.

OVERVIEW

MSI was founded in 1984 and is a leading provider of molecular modeling and
simulation software. MSI designs, develops, markets and supports software that
facilitates the discovery and development of new products and processes in the
pharmaceutical, biotechnology, chemical, petrochemical and materials
industries. Using MSI's products, researchers are able to increase the speed
and efficiency of the research and development cycle, thereby reducing product
development costs and shortening the time to market for new product
introductions and process improvements.

MSI has pursued a strategy that involves internal product development as
well as licensing and acquiring complementary products and technologies. In
August 1995, MSI took a significant step in pursuit of this strategy by
acquiring Biosym, a leading provider of molecular modeling and simulation
software and a wholly owned subsidiary of Corning. The Biosym acquisition has
had a significant effect on MSI's 1995 and 1996 revenue growth and other
financial results and allowed MSI to achieve several important strategic
objectives, including the acquisition of key technologies and personnel; the
addition of complementary products; a significant expansion of MSI's customer
base; expansion into new markets; improved cost efficiencies; and broader
research and development, marketing, and sales capabilities. In conjunction
with this acquisition, MSI undertook a corporate restructuring that resulted
in a reduction of excess facilities and personnel, as well as a streamlining
of overlapping projects, duplicate systems and redundant processes.

MSI's revenue is primarily derived from the license of its software products
and from services, as well as the resale of third-party hardware products.
License revenue is recognized upon execution of a license agreement and
shipment of the product, if no significant contractual obligations remain.
MSI's services revenue includes software maintenance fees, consortia fees and
fees for other services associated with use of MSI's software products. MSI's
consortia are collaborative arrangements among MSI and third parties created
for purposes of product development and validation.

MSI generally licenses its software either under long-term (ten years or
perpetual) licenses or annual, renewable licenses. In 1996 and 1997, MSI
continued its program of emphasizing the benefits of annual licenses. MSI
believes that annual licenses offer customers increased flexibility with
respect to product modules and features at a lower up-front cost. Because
annual licenses are typically priced substantially lower than long-term
licenses, they generate lower initial revenue upon sale compared to sales of
long-term licenses. However, they generate incremental future revenue each
time the license is renewed. MSI has experienced a marked increase in the
relative proportion of annual licenses, which increased from 14% of software
license revenue in 1995 to 27% in 1996 and 36% in 1997. MSI expects that this
shift towards annual licenses will continue. See "RISK FACTORS--Risks Related
to MSI--Increasing Dependence on License Renewals."

Service and other revenue consists principally of software maintenance fees
for ongoing support and product updates; payments for training, contract and
consulting services; and consortia membership fees. Software maintenance
revenue is recognized ratably over the term of the contract, which is
typically 12 months. Training, contract and consulting revenue is recognized
as the services are performed. Consortia services fees are recognized ratably
over the membership term of the consortium, which is typically one to three
years. (See Note 1 of Notes to MSI Consolidated Financial Statements.) In
addition to initiating a shift toward annual software licenses, MSI has placed
added emphasis on marketing its services in order to increase the proportion
of its recurring revenue. As a result, MSI's service revenue has increased as
a percentage of total revenue since 1995.

86
<PAGE>

As a convenience to its customers, MSI acts as a value-added reseller of
third-party computer hardware products in order to provide a complete turn-key
molecular simulation system. MSI's sales of computer hardware are highly
variable and unpredictable. Although fluctuations in the sale of computer
hardware can cause significant variability in MSI's reported revenue, the
gross profit earned by MSI on such sales is relatively small and fluctuations
in revenue from computer hardware have little effect on MSI's overall gross
profit.

MSI markets its products and services worldwide. MSI has committed and
continues to commit significant management time and financial resources to
develop direct and indirect international sales and support channels.
International revenue accounted for approximately 49% of total revenue in
fiscal 1997. MSI expects international license, service and maintenance
revenue to be a significant percentage of total revenue in the future. In
North America and Europe, MSI has a direct sales force consisting of field
sales representatives and telesales representatives. In Japan and other
Asia/Pacific countries, MSI markets and sells its products through TMSI, which
has certain exclusive rights to distribute MSI's products and services. TMSI
is a 50/50 joint venture between MSI and Teijin, a large Japanese manufacturer
and pharmaceutical company, and distributes MSI's products and services
through a network of subdistributors. MSI accounts for its investment in TMSI
using the equity method.

MSI's international operations are subject to risks inherent in the conduct
of international business. Because international sales of products by MSI
typically are denominated in local currencies, the results of operations of
MSI are expected to continue to be affected by changes in exchange rates
between certain foreign currencies and the United States dollar. MSI currently
engages in limited hedging of foreign currency sales denominated in the
Japanese yen. To date, the hedging activities have not had a material effect
on the financial condition or results of operations of MSI. There can be no
assurance that MSI will not experience currency fluctuation effects in future
periods, which could have an adverse impact on its business, results of
operation or financial condition. The operations and financial results of MSI
also may be significantly affected by other international factors, including
changes in governmental regulations or import and export restrictions, and
foreign economic and political conditions generally. Certain East Asian
countries are currently experiencing severe economic turmoil represented by
depressed business conditions and volatility in local currencies. Such
conditions may adversely impact MSI's financial results as a result of
customers altering their spending plans and by subjecting MSI to greater
foreign exchange exposure. During 1997, MSI had sales of $8.5 million in the
region, of which $7.7 million were in Japan. The balance of $800,000 consists
of sales through the remainder of the region. Thus MSI's principal risk from
conducting business in Asia occurs as a result of business conditions in Japan
and currency fluctuations in the Japanese yen. Any significant decline in the
Japanese economy or its currency could have a material adverse impact on MSI's
financial results. There can be no assurance that MSI will be able to sustain
or increase international revenue from licenses or from service or maintenance
arrangements. See "RISK FACTORS--Risks Related to MSI--Risks Associated with
International Operations."

The operating results of many software companies reflect seasonal trends,
and MSI has been and expects to continue to be affected by such seasonal
trends in the future. MSI's operating results have fluctuated significantly
from quarter to quarter because of seasonal and other factors and MSI expects
that future operating results will be subject to similar fluctuations. MSI
also has typically earned a significant portion of its quarterly revenue late
in the quarter. In the past, MSI has recognized its highest revenue in the
fourth quarter followed by lower revenue in the first quarter. In addition,
MSI's sales to TMSI have in the past been higher in MSI's first quarter, in
part because the fiscal year of most Japanese companies ends on March 31, and
have declined sharply in the second quarter. Furthermore, MSI's operating
expenses have generally increased beginning in its second quarter due to
implementation of annual wage increases and increased hiring. The decline in
Japanese sales combined with increased operating expenses typically has caused
MSI's results of operations to be lowest in the second quarter. MSI also has
experienced quarterly variability in service and other revenue. Finally, MSI
has experienced decreased European sales in its third quarter. Consistent with
these seasonal trends, MSI expects that its revenues and results of operations
will be lower in the first quarter of 1998 as compared to the fourth quarter
of 1997, and

87
<PAGE>

that its results of operations will decrease in the second quarter of 1998 as
compared to the first quarter of 1998. The failure to achieve expected revenue
during any individual quarter may have a material adverse effect on MSI's
financial condition and results of operations, and the adverse effect may be
magnified by MSI's inability to adjust spending in a timely manner to
compensate for any revenue shortfall. There can be no assurance that MSI's
historical trends will continue in the future. See "RISK FACTORS--Risks
Related to MSI--Fluctuations in Future Operating Results; Seasonality; Lengthy
Sales Cycles" and "--Risks Related to MSI--Risks Associated with International
Operations."

In June 1997, the American Institute of Certified Public Accountants issued
"Statement of Position: Software Revenue Recognition." MSI has reviewed the
statement of position and determined that its consolidated financial
statements for each of the three years in the period ended December 31, 1997
are, in all material respects, in compliance with the provisions of the
statement of position.

YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

Revenue

Software license revenue. Software license revenue increased 36% from $14.5
million in 1995 to $19.7 million in 1996, and 20% to $23.7 million in 1997.
The increase in software license revenue from 1995 to 1996 was due primarily
to an additional $5.2 million of software license revenue from Biosym's
product lines during the period from August 16, 1995 to December 31, 1995, and
to an increase of $2.0 million or 25% in sales of MSI software product lines.
In 1997, software license revenue increased primarily as a result of an
increase in customer sites and additional sales to existing customers. During
1997, revenue from annual licenses grew to $8.6 million or 36% of software
license revenue from $5.3 million or 27% of software license revenue in 1996.
Software license revenue as a percentage of total revenue remained stable in
1996 and 1997 primarily as a result of increased annual license revenue offset
by foreign exchange effects.

Service and other revenue. Service and other revenue increased 91% from
$11.2 million in 1995 to $21.3 million in 1996, and 19% to $25.5 million in
1997. The increase from 1995 to 1996 was primarily attributable to the
inclusion of a full year of Biosym service and other revenue in MSI's 1996
results. Additionally, the increase in service and other revenue in 1996 was
partially attributable to the growing installed base of MSI's products and the
associated increase in demand for maintenance services. Continued focus on
marketing software maintenance, consulting and other services also contributed
to increased service and other revenue in 1997. All of these factors had the
effect of increasing service and other revenue as a percentage of total
revenue from 37% in 1995 to 45% in 1996 and 1997.

Hardware revenue. Hardware revenue increased 38% from $4.5 million in 1995
to $6.2 million in 1996, and 23% to $7.6 million in 1997. The increase from
1995 to 1996 was due to MSI's larger customer base resulting in a greater
volume of hardware orders. The 1997 increase in hardware revenue was primarily
attributable to continued growth in volume of hardware orders.
Total revenue. Total revenue increased 57% from $30.1 million in 1996 to
$47.3 million in 1996, and 20% to $56.7 million in 1997. The increase from
1995 to 1996 was principally attributable to the $10.2 million increase in
service and other revenue, while the increase from 1996 to 1997 was primarily
due to increases in software license revenue and service revenue.

Cost of revenue

Cost of software license revenue. Cost of software license revenue consists
primarily of royalty expenses for software licensed to MSI; amortization of
capitalized software development costs; and product media, documentation,
packaging and freight expenses. The cost of software license revenue was $2.7
million in 1995, $2.5 million in 1996 and $3.5 million in 1997. The cost of
license revenue as a percentage of license revenue was, 19%, 13% and 15%,
respectively, for these periods. The decrease in the cost of software license
revenue

88
<PAGE>

from 1995 to 1996 was primarily the result of a reduction in documentation
costs following the integration of the Biosym product line in 1995. The
increase in the cost of software license revenue from 1996 to 1997 was
primarily the result of increased software royalties associated with the
increases in software revenue. Cost of service and other revenue is immaterial
and such cost is included in the cost of software license revenue.

Cost of hardware revenue. The cost of hardware revenue was $3.9 million in
1995, $5.2 million in 1996 and $6.7 million in 1997. The cost of hardware
revenue as a percentage of hardware revenue was 87%, 85% and 89%,
respectively, for these periods. The absolute dollar increase in the cost of
hardware revenue for all periods was the result of a corresponding increase in
hardware revenue. Although fluctuations in the sale of computer hardware can
cause significant variability in MSI's reported revenue, the gross profit
earned by MSI on such sales is relatively small and fluctuations in revenue
from computer hardware have little effect on MSI's overall gross profit.

Operating expenses

Sales, marketing and customer support expense. Sales, marketing and customer
support expense was $12.0 million in 1995, $17.4 million in 1996 and $18.5
million in 1997. These amounts represented 40%, 37% and 33% of total revenue,
respectively, for these periods. The increases were largely attributable to
additional expenses associated with the larger sales force and increased
customer support requirements resulting from the Biosym acquisition. The
increase in sales, marketing and customer support expense in 1996 also
reflected the hiring of additional sales, marketing and customer support
personnel, as well as increased costs associated with expanded promotional
activities. MSI believes that a significant level of sales, marketing and
customer support is essential to market leadership and anticipates that it
will continue to commit substantial resources to such support in the future.

Research and development expense. Research and development expense, net of
capitalized software costs, was $7.6 million in 1995, $12.8 million in 1996
and $12.7 million in 1997. Research and development expense as a percentage of
total revenue was 25%, 27% and 22%, respectively, for these periods. Research
and development expense consists primarily of personnel, facilities and
related expenses. Research and development costs are expensed when incurred,
with the exception of certain software development costs required to be
capitalized in accordance with Statement of Financial Accounting Standard No.
86 ("SFAS No. 86"). In accordance with SFAS No. 86, MSI capitalized $2.2
million, $1.5 million and $1.9 million of software costs in 1995, 1996 and
1997, respectively. MSI believes that a significant level of investment in
research and product development is essential to market leadership and
anticipates that it will continue to commit substantial resources to research
and product development in the future.

General and administrative expense. General and administrative expense was
$3.4 million in 1995, $5.6 million in 1996 and $7.5 million in 1997. As a
percentage of total revenue, general and administrative expense was 11%, 12%
and 13%, respectively, for these periods. The increase in general and
administrative expense during 1996 was due in part to increased staffing and
additional investment in infrastructure necessary to manage and support MSI's
growing operations. The increase in general and administrative expense in 1997
was due primarily to $0.7 million in costs associated with an uncompleted
initial public offering. MSI believes that its general and administrative
expense will increase in dollar amount for 1998 as a result of an anticipated
expansion of MSI's administrative staff required to support its growing
operations.

Acquisition-related charges. During the quarter ended September 30, 1995,
MSI charged to operations approximately $6.5 million of acquired research and
development costs associated with the Biosym acquisition, $4.5 million of
restructuring costs, as well as $1.1 million for the impairment of capitalized
software. The acquired research and development was expensed in accordance
with generally accepted accounting principles. The restructuring costs related
primarily to reductions in personnel, consolidation of facilities, and
elimination of duplicate products and systems resulting from the Biosym
acquisition. The charge for the impairment of capitalized software reflects
capitalized software development costs for software products rendered obsolete
or redundant by the Biosym acquisition.

89
<PAGE>

Interest and other income

Interest and other income primarily represents interest income earned on
MSI's cash, cash equivalents and short-term investments, net of interest
expense, and equity income from MSI's 50% ownership of TMSI. Interest and
other income was $319,000, $368,000 and $126,000 in fiscal 1995, 1996 and
1997, respectively. The increase from 1995 to 1996 was due primarily to an
increase in cash and cash equivalents.

Provision for income tax

MSI's provision for income tax consists primarily of foreign income taxes
withheld on foreign revenue. The tax provision for 1995 reflects the inability
to offset these foreign taxes with operating losses. The tax provision for
1996 of 36% reflects the impact of foreign income taxes withheld on revenue as
well as MSI's inability to completely offset its operating income with loss
carryforwards because of minimum tax requirements. MSI was able in 1997 to
offset a substantial portion of its income with net operating loss
carryforwards. In 1998 and afterwards, all remaining loss carryforwards will
be subject to significant annual limitations.

Due to the uncertainty surrounding MSI's foreign and domestic loss
carryforwards, management has placed a valuation allowance against those net
operating loss carryforwards and other tax assets for which realizability is
uncertain. Should the realizability of these assets become more likely than
not they will be recorded as a reduction in MSI's income tax provision at that
time.

YEAR 2000

MSI has conducted a review of the software products that it markets
commercially and the computer programs that it uses internally to identify the
systems that could be affected by the "Year 2000" issue. The Year 2000 problem
is the result of computer programs being written using two-digits rather than
four to define the applicable year. Any program that has time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculation. MSI
presently believes that the Year 2000 problem will not pose significant
operational problems for MSI's current software products that it markets
commercially or the computer programs that it currently uses internally, and
that MSI will not incur significant costs as a result of the Year 2000
problem. However, it is possible that future software marketed or used by MSI
will suffer from a Year 2000 problem. In addition, it is possible that
operating system software or other third party programs with which MSI's
software products function could be affected by the Year 2000 problem and
adversely affect actual or perceived performance of MSI's software products.
In addition, Year 2000 problems of MSI's customers could affect the demand for
MSI's products. Any such Year 2000 problems could have a material adverse
effect upon MSI's business, financial condition and results of operation.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, MSI has funded its operations primarily through cash flows
from operations and private sales of $39.4 million of equity securities. Net
cash provided by operating activities was $1.4 million, $7.7 million and $5.9
million in 1995, 1996 and 1997, respectively.

MSI's primary investing activities have consisted of capitalized software
development costs and purchases of equipment and software rights. Capital
expenditures were primarily for computer equipment used in support of product
development and other company activities. MSI expects to continue to invest in
capital assets and capitalized software development activities to support its
growth.

In January 1998, MSI entered into a $4.0 million credit arrangement with a
bank consisting of a $2.0 million revolving line of credit and a $2.0 million
equipment financing line. The equipment financing line of credit provides for
a one-year advance period with repayment required over 48 months thereafter.
The lines of credit bear interest at the prime rate. As of December 31, 1997,
MSI had a note outstanding to Teijin in the amount of $1.4 million, of which
$0.7 million in principal is due within the next twelve months. See Note 8 of
Notes to MSI Consolidated Financial Statements.

As of December 31, 1997, MSI had cash and cash equivalents totaling $15.0
million. MSI's principal commitments as of December 31, 1997 consist of leases
on facilities and equipment and the note payable to Teijin. There are no
material commitments for capital expenditures.

90
<PAGE>

MSI MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The names of MSI's directors and executive officers and certain information
about them are set forth below.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael J. Savage......... 44 President, Chief Executive Officer and Director
Saiid Zarrabian........... 45 Chief Operating Officer
David B. Hiatt............ 51 Chief Financial Officer; Senior Vice President,
Finance and Administration; Secretary and
Treasurer
Thomas M. Carney.......... 36 Vice President, Corporate Development; General
Counsel
Stephen D. Herbert........ 44 Vice President, Sales
Christopher Herd.......... 42 Vice President and General Manager, Life
Sciences
John M. Newsam, D. Phil... 44 Chief Scientific Officer
Michael R. Stapleton, 33 Vice President, Marketing; General Manager,
Ph.D..................... Europe
C. Derek Statham, D. 54
Phil..................... Chairman of the Board of Directors
R. Pierce Baker........... 50 Director
C. Peter W. Booth......... 58 Director
Thomas J. Cable........... 58 Director
Peter H. Engel............ 63 Director
Bruns H. Grayson.......... 50 Director
</TABLE>

Michael J. Savage has been President, Chief Executive Officer and a Director
of MSI since December 1991. He has been employed by MSI or its predecessors in
an executive capacity since April 1990. Mr. Savage earned his M.S. degree in
molecular biology at the California Institute of Technology and holds B.S.
degrees in chemistry and biology.

Saiid Zarrabian has been Chief Operating Officer of MSI since October 1994.
From 1988 to October 1994, Mr. Zarrabian was Vice President and a Director of
Symbolics Inc., which declared Chapter 11 bankruptcy in January 1993. From
1978 to 1988, Mr. Zarrabian was Director of Mechanical Applications
Development at Computervision Corporation.

David B. Hiatt has been MSI's Chief Financial Officer; Senior Vice
President, Finance and Administration; Secretary and Treasurer, since April
1992. From November 1986 to September 1991, he was Vice President, Finance and
Administration, and Chief Financial Officer at Language Technology Inc. Mr.
Hiatt holds an M.S. in finance from the Sloan School of M.I.T., and an M.S. in
computer science and a B.S. in mechanical engineering from M.I.T.

Thomas M. Carney has been MSI's Vice President, Corporate Development and
General Counsel since November 1995. From February 1993 to October 1995, he
was MSI's Corporate Counsel. From October 1992 to January 1993, Mr. Carney was
in-house counsel for Easel Corporation, a software company. Mr. Carney was a
private consultant from October 1991 through September 1992, prior to which he
was an attorney with Testa, Hurwitz & Thibeault. He holds a B.A. from Amherst
College and a J.D. from Harvard University.
Christopher Herd has been MSI's Vice President and General Manager, Life
Sciences since 1993. Mr. Herd joined Biosym at its inception in 1984, and
thereafter held various executive positions with Biosym. He holds B.S. and
M.S. degrees in mechanical engineering from the University of Delaware.

91
<PAGE>

John M. Newsam has been MSI's Chief Scientific Officer since March 1996.
From March 1996 to February 1997, he also served as MSI's Vice President,
Partnering and Services. From August 1995 to March 1996 he served as MSI's
Vice President and General Manager, Materials Sciences. Dr. Newsam joined
Biosym in October 1990 and served in various executive positions including
Director, Catalysis & Sorption Project; Senior Director, Solid State and Vice
President, Materials Technology. Dr. Newsam received B.A., M.A. and D.Phil
degrees in chemistry from Oxford University.

Michael R. Stapleton, currently MSI's Vice President, Marketing and General
Manager, Europe, has served in various scientific and executive positions,
including Vice President, Materials Sciences, and Director, Product Marketing
since joining MSI in 1991. Dr. Stapleton received his B.Sc. and M.Phil. in
chemistry and his Ph.D. in chemical physics from the University of
Southampton.

C. Derek Statham has been Chairman of the Board of MSI since August 1995.
Dr. Statham was Director of Corporate Development at Corning from 1986 to
December 1994. From December 1994 to August 1995, he was President and Chief
Executive Officer of Biosym. From August 1995 to December 1997, he was Senior
Director of Corporate Development at Corning, an affiliate of MSI. Since
December 1997, he has served as the Vice President of Corporate Development at
Corning. Dr. Statham also serves as a Director of Saturn Solutions, Inc., a
Canadian software services company. Dr. Statham holds B.A., M.A. and D.Phil.
degrees in metallurgy and materials science from Oxford University and an
M.B.A. from Rider College.

R. Pierce Baker has been a Director of MSI since January 1997. Since April
1996, Mr. Baker has served as Vice President and General Manager-Science
Products Division of Corning. From May 1995 to April 1996, he was President
and Chief Executive Officer of Corning Costar Corporation. From May 1993 to
May 1995, he served as Executive Vice President of Corning Costar Corporation.
From November 1987 to May 1993, he served as Corning's Director--Marketing and
Business Development for Science Products. Mr. Baker holds a B.S. degree in
management science from the University of Rochester and an M.B.A. from the
University of Maine.

C. Peter W. Booth has been a Director of MSI since August 1995. Mr. Booth
has served as Senior Vice President, Strategy and Development of Corning since
1991. Mr. Booth is also a Director of Samsung Corning Co., Ltd., Corning Asahi
Video Co., and Corning International K.K. He holds A.B. and J.D. degrees from
Harvard University.

Thomas J. Cable has been a Director of MSI since August 1991. Mr. Cable
serves as General Partner of Cable and Howse Ventures, L.P. Mr. Cable is also
a Director of Endosonics, Inc., a medical equipment company; Fischer Imaging,
Inc., a medical equipment company; Mycogen Corporation, an agricultural
products company; and Ostex International, Inc., a medical diagnostic
procedure company. He earned his A.B. degree from Harvard University, and his
M.B.A. from Stanford University.

Stephen D. Herbert has been Vice President of Sales of MSI since 1997. From
1990 to 1997 he has served in various executive positions in sales and
marketing for MSI, including Vice President, Marketing and Vice President of
Sales, Americas. Mr. Herbert holds a B.A., with Honors in Biology and
Biochemistry from the University of York and a graduate certificate in
Administration and Management from Harvard University.

Peter H. Engel has been a Director of MSI since August 1991. Mr. Engel
serves as President and Chief Executive Officer of American Consulting
Corporation, Inc. and Affinity Communications Corporation. He earned his B.Com
degree from McGill University.

Bruns H. Grayson has been a Director of MSI since July 1985. Mr. Grayson has
served as the Managing General Partner of Calvert Capital, L.P. since August
1987. He is also a Director of Anadigics, Inc., a semiconductor manufacturer.
He earned his B.A. from Harvard College, his M.A. from Oxford University and
his J.D. from the University of Virginia.

92
<PAGE>

EMPLOYMENT AND SEVERANCE ARRANGEMENTS

On November 30, 1995, MSI entered into Employment Agreements with Michael J.
Savage, Saiid Zarrabian and David B. Hiatt, in connection with their
relocation from Massachusetts to California following MSI's acquisition of
Biosym.
Under these Employment Agreements, each employee's employment may be
terminated by MSI without cause for any reason or no reason, subject to MSI's
obligation to make certain severance payments to the terminated employee. Each
employee may also be terminated for "cause" as defined in the agreements
without any obligation of MSI to make severance payments. In addition, these
agreements provide for a base salary, target annual bonus, option grant, one-
time relocation bonus, reimbursement of relocation expenses, accelerated
vesting of 50% of unvested options in connection with a "change of control" of
MSI coupled with certain changes of employment status and the potential for
MSI to be obligated to make severance payments to the employee if his target
compensation is reduced by more than 10% below his 1996 target compensation.
These Employment Agreements were amended in 1997 to reflect 1997 annual base
salaries and bonus targets, and will continue after the Merger as obligations
of the Surviving Corporation.
As President and Chief Executive Officer of MSI, Mr. Savage's Employment
Agreement provides for an annual base salary of $195,000, a target annual
bonus of $146,000, option grants for 492,593 shares of MSI Common Stock
vesting over four years, and severance payments equal to his 1997 base salary
paid in each of the two years following termination of employment without
cause.
As Chief Operating Officer of MSI, Mr. Zarrabian's Employment Agreement
provides for an annual base salary of $187,500, a target annual bonus of
$140,000, an option grant for 271,980 shares of MSI Common Stock vesting over
four years, and severance payments equal to his 1997 base salary paid during
the one-year period following termination of employment without cause.
As Senior Vice President, Finance and Administration and Chief Financial
Officer of MSI, Mr. Hiatt's Employment Agreement provides for an annual base
salary of $150,000, a target annual bonus of $75,000, an option grant for
175,555 shares of Common Stock vesting over four years, and severance payments
equal to his 1997 base salary paid during the one-year period following
termination of employment without cause.
MSI and John M. Newsam, MSI's Chief Scientific Officer, have entered into an
Employment Agreement dated as of September 29, 1992. Pursuant to the
agreement, Dr. Newsam is entitled to a base annual salary of $130,000, subject
to increases and annual bonuses at the discretion of MSI's Board of Directors.
The agreement terminated as of June 30, 1997.

93
<PAGE>

COMPENSATION OF EXECUTIVE OFFICERS OF MSI

The following table sets forth certain information regarding compensation
paid by MSI to MSI's Chief Executive Officer and the four other most highly
compensated executive officers of MSI who earned in excess of $100,000 in
salary and bonus (collectively, the "MSI Named Executive Officers") for
services rendered to MSI during the year ended December 31, 1997.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION(1) COMPENSATION(1)
------------------------- -----------------
SECURITIES UNDER- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(2) LYING OPTIONS(#) COMPENSATION($)(3)
- --------------------------- ----------- ------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Michael J. Savage....... 195,000 200,000 -- 27,431
President, Chief
Executive Officer and
Director
Saiid Zarrabian......... 187,000 150,000 -- 31,947
Chief Operating Officer
David B. Hiatt ......... 150,000 100,000 -- 4,705
Chief Financial
Officer; Senior Vice
President, Finance and
Administration;
Secretary and Treasurer
John M. Newsam.......... 130,000 78,500 -- --
Chief Scientific
Officer
Stephen D. Herbert...... 98,000 131,155 50,000 --
Vice President, Sales
</TABLE>
- --------
(1) In accordance with the rules of the Securities and Exchange Commission
(the "Commission"), the compensation described in this table includes
amounts paid in 1997. It does not include medical, group life insurance or
other benefits received by the MSI Named Executive Officers that are
available generally to all salaried employees of MSI and certain
perquisites and other personal benefits received by the MSI Named
Executive Officers that do not exceed the lesser of $50,000 or 10% of any
such officer's salary and bonus disclosed in this table.
(2) For Mr. Herbert, bonus compensation represents, in part, the value of
commission-based compensation paid in 1997.
(3) Represents reimbursement of relocation expenses.

94
<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR

The table below sets forth for each of the MSI Named Executive Officers
information regarding grant of stock options under MSI's 1996 Incentive Stock
Option Plan during the fiscal year ended December 31, 1997. The potential
realizable value of the option is based solely on arbitrarily assumed rates of
appreciation required by applicable SEC regulations. Actual gains, if any, on
option exercises are dependent on the future performance of MSI's Common Stock
and overall stock market conditions.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR OPTION
UNDERLYING GRANTED TO OR BASE TERM
OPTION EMPLOYEES IN PRICE EXPIRATION ---------------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ------------- ------------ -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen D. Herbert...... 20,000 5.6% 4.50 7/20/07 56,601 143,437
30,000 8.4% 5.50 10/28/07 103,768 262,968
</TABLE>
- --------
(1) Options granted vest 25% per year on the anniversary date of the grant. In
addition, the vesting of the option for 20,000 shares of MSI Common Stock
accelerates on the first and second anniversary dates of grant if certain
sales and performance milestones are achieved. The option price is equal
to the fair market value of MSI Common Stock on the date of grant.

AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE

The following table sets forth for each of the MSI Named Executive Officers
the number and value of securities underlying unexercised options held by the
MSI Named Executive Officers at December 31, 1997. No shares of Common Stock
were acquired by exercise of stock options during the year ended December 31,
1997 by any of the MSI Named Executive Officers.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997(#) DECEMBER 31, 1997(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael J. Savage........... 548,144 276,296 $2,507,635 $1,250,834
Saiid Zarrabian............. 179,317 150,432 817,757 680,556
David B. Hiatt.............. 154,555 92,777 712,190 418,749
John M. Newsam.............. 45,000 45,000 202,500 202,500
Stephen D. Herbert.......... 32,875 67,125 151,875 93,500
</TABLE>
- --------
(1) Amount based on the difference between the fair market value at December
31, 1997 of $5.50 per share and the exercise price, multiplied by the
number of shares of MSI Common Stock underlying the option.

DIRECTOR COMPENSATION

Directors of MSI did not receive any cash compensation for their services as
members of the MSI Board of Directors in the year ended December 31, 1997.

MSI PRINCIPAL STOCKHOLDERS

The following tables set forth certain information, for each person known by
MSI to be the beneficial owner of more than 5% of the MSI Common Stock or MSI
Preferred Stock, each director of MSI, each MSI Named Executive Officer and
all current directors and officers of MSI as a group, with respect to (i) the
total number of shares of MSI Common Stock, MSI Class B Common Stock and MSI
Preferred Stock owned by such persons as of January 31, 1998, (ii) the percent
of each such class owned as of January 31, 1998, (iii) the total number of

95
<PAGE>

shares of Pharmacopeia Common Stock into which such persons' reported
ownership interests in MSI Capital Stock would be converted upon consummation
of the Merger and (iv) the percentage of the outstanding Pharmacopeia Common
Stock to be owned by such persons after the consummation of the Merger. Except
as indicated in the footnotes to this table, the persons named in the table
have sole voting and investment power with respect to all shares of MSI Common
Stock shown as beneficially owned by them, subject to community property laws
where applicable.

<TABLE>
<CAPTION>
SHARES OF MSI CAPITAL STOCK BENEFICIALLY OWNED (1)
------------------------------------------------------------
MSI CLASS B
MSI COMMON STOCK COMMON STOCK MSI PREFERRED STOCK
------------------ ------------------ ----------------------
NUMBER OF PERCENT NUMBER OF PERCENT NUMBER OF PERCENT
BENEFICIAL OWNER SHARES OF CLASS SHARES OF CLASS SHARES OF CLASS
- ---------------- --------- -------- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Corning Incorporated.... 4,186,001 42.7% 1,246,882 100%
One Riverfront Plaza
Corning, New York 14831
D.E. Shaw Investment 186,278 1.9% 2,222,223 100%
Group, LP..............
120 West 45th Street,
30th Floor
New York, NY 10036(2)
The Corning Museum of 1,050,500 10.7%
Glass..................
One Museum Way
Corning, New York 14830
Michael J. Savage(3).... 548,144 5.3%
Saiid Zarrabian(4)...... 179,317 1.8%
David B. Hiatt(5)....... 154,555 1.6%
Stephen D. Herbert(6)... 32,875 *
John M. Newsam(7)....... 45,000 *
C. Derek Statham(8)..... 4,186,001 42.7% 1,246,882 100%
R. Pierce Baker(8)...... 4,186,001 42.7% 1,246,882 100%
C. Peter W. Booth(8).... 4,186,001 42.7% 1,246,882 100%
Thomas J. Cable(9)...... 445,326 4.5%
Peter H. Engel(10)...... 156,919 1.6%
Bruns H. Grayson(11).... 487,808 4.9%
All directors and
executive officers as a
group (14
persons)(12)........... 6,331,862 57.5%
</TABLE>
- --------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power
with respect to all shares of MSI Capital Stock shown as beneficially
owned by them. Percentages of beneficial ownership are based on 9,805,135
shares of MSI Common Stock outstanding as of January 31, 1998, 1,246,882
shares of MSI Class B Common Stock outstanding as of January 31, 1998 and
2,222,223 shares of MSI Preferred Stock outstanding as of January 31,
1998.
(2) The General Partner of D.E. Shaw & Co., L.P. is D.E. Shaw & Co., Inc.
(3) All of the indicated shares of MSI Common Stock are represented by stock
options exercisable within 60 days of January 31, 1998.
(4) All of the indicated shares of MSI Common Stock are represented by stock
options exercisable within 60 days of January 31, 1998.
(5) All of the indicated shares of MSI Common Stock are represented by stock
options exercisable within 60 days of January 31, 1998.
(6) All of the indicated shares of MSI Common Stock are represented by stock
options exercisable within 60 days of January 31, 1998.
(7) All of the indicated shares of MSI Common Stock are represented by stock
options exercisable within 60 days of January 31, 1998.
(8) All of the indicated shares of MSI Common Stock and MSI Class B Common
Stock are held by Corning. The director is affiliated with Corning, but
the director disclaims beneficial ownership of such shares.
(9) Represents 19,699 shares of MSI Common Stock held by The Cable Family
Partnership and 388,960 shares of MSI Common Stock held by CH Partners IV.
Mr. Cable, a director of MSI, is a general partner of the above named
partnerships. Mr. Cable disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest therein. Also includes
36,667 shares of MSI Common Stock subject to stock options granted to Mr.
Cable which are exercisable within 60 days of January 31, 1998.
(10) Represents 105,478 shares of MSI Common Stock held by American Consulting
Corporation Inc. Mr. Engel, a director of MSI, is President and Chief
Executive Officer of American Consulting Corporation Inc. Also includes
51,441 shares of MSI Common Stock subject to stock options granted to Mr.
Engel which are exercisable within 60 days of January 31, 1998.

96
<PAGE>

(11) Represents 175,126 shares of MSI Common Stock held by ABS Ventures II
Prime Limited Partnership, 116,871 shares of MSI Common Stock held by ABS
Ventures III Limited Partnership and 122,478 shares of MSI Common Stock
held by Brown Technology Associates Limited Partnership. Mr. Grayson, a
director of MSI, is a managing general partner of Calvert Capital, LP,
which manages the investments of the above named partnerships. Mr.
Grayson disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein. Also includes 73,333 shares of
MSI Common Stock subject to stock options granted to Mr. Grayson which
are exercisable within 60 days of January 31, 1998.
(12) Includes 1,217,249 shares of MSI Common Stock subject to stock options
exercisable within 60 days of January 31, 1998, and 4,186,001 shares of
MSI Common Stock held by Corning Incorporated. Pursuant to that certain
Shareholders Agreement, dated as of August 15, 1995, by and among
Corning, MSI and Certain Shareholders of MSI, Corning and its transferees
are required to vote all of their shares of MSI Common Stock in
accordance with a majority of the MSI Board of Directors on any matter
submitted for or requiring a stockholder vote.

<TABLE>
<CAPTION>
SHARES OF PHARMACOPEIA COMMON STOCK
BENEFICIALLY OWNED IMMEDIATELY AFTER
THE EFFECTIVE TIME
---------------------------------------
BENEFICIAL OWNER NUMBER OF SHARES(1) PERCENT OF CLASS(2)
---------------- ------------------- -------------------
<S> <C> <C>
Corning Incorporated.................. 2,875,081 15.3%
One Riverfront Plaza
Corning, New York 14831
D.E. Shaw Investment Group, LP........ 1,274,578 6.8%
120 West 45th Street, 30th Floor
New York, NY 10036
The Corning Museum of Glass........... 555,924 3.0%
One Museum Way
Corning, New York 14830
Michael J. Savage..................... 290,077 1.5%
Saiid Zarrabian....................... 94,894 *
David B. Hiatt........................ 81,790 *
Stephen D. Herbert.................... 17,397 *
John M. Newsam........................ 23,814 *
C. Derek Statham...................... 2,875,081 15.3%
R. Pierce Baker....................... 2,875,081 15.3%
C. Peter W. Booth..................... 2,875,081 15.3%
Thomas J. Cable....................... 235,666 1.3%
Peter H. Engel........................ 83,041 *
Bruns H. Grayson...................... 258,147 1.4%
All directors and executive officers 4,010,671 20.2%
as a group (14 persons)..............
</TABLE>
- --------
* Represents beneficial ownership of less than 1%.
(1) Determined by multiplying the number of shares of MSI Capital Stock
reported on the preceding table by the Exchange Ratio.
(2) Based on the number of outstanding shares of Pharmacopeia Common Stock on
January 31, 1998, plus the number of shares of Pharmacopeia Common Stock
issuable in connection with the Merger for the MSI Capital Stock
outstanding on January 31, 1998.

EXPERTS

The financial statements of Pharmacopeia, Inc. appearing in Pharmacopeia,
Inc.'s Annual Report (Form 10-K) for the year ended December 31, 1997, as
amended, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon included therein and incorporated herein by
reference. Such financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.

The consolidated financial statements of MSI included in this Joint Proxy
Statement/Prospectus and elsewhere in the Registration Statement of which this
Joint Proxy Statement/Prospectus forms a part have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report
with respect thereto, and are included herein, upon the authority of said firm
as experts in accounting and auditing.

97
<PAGE>

LEGAL OPINIONS

The legality of the shares of Pharmacopeia Common Stock to be issued to MSI
stockholders pursuant to the Merger will be passed upon by Dechert Price &
Rhoads, Lawrenceville, New Jersey.

The Merger Agreement provides that it is a condition to the obligation of
Pharmacopeia and Merger Subsidiary to consummate the Merger that they receive
the opinion of Dechert Price & Rhoads, Lawrenceville, New Jersey, to the
effect that the Merger will be treated for federal income tax purposes as a
reorganization qualifying under the provisions of Section 368(a) of the Code,
which opinion shall not have been withdrawn or modified in any effect.

In addition, the Merger Agreement provides that it is a condition to the
obligation of MSI to consummate the Merger that it receive the opinion of
Cooley Godward LLP, Palo Alto, California to the effect that the Merger will
be treated for federal income tax purposes as a reorganization qualifying
under the provisions of Section 368(a) of the Code, which opinion shall not
have been withdrawn or modified in any effect.

ELECTION OF PHARMACOPEIA DIRECTORS

GENERAL

Pharmacopeia's Board of Directors is divided into three classes, with the
term of office of one class expiring each year. Pharmacopeia currently has
eight directors with two directors in Class I, two directors in Class II and
four directors in Class III. Pursuant to the Pharmacopeia Certificate, the
Pharmacopeia Board of Directors has reduced the number of members of the Board
from eight directors to six effective as of the time of the Pharmacopeia
Annual Meeting. After giving effect to such reduction, the Pharmacopeia Board
of Directors will consist of six directors, with two directors in each class.
The terms of office of Class III directors Paul A. Bartlett, Charles A.
Sanders, Samuel D. Colella and Eileen M. More expire at the 1998 Annual
Meeting of Pharmacopeia stockholders. The terms of office of Class I directors
Joseph A. Mollica and Gary E. Costley expire at the 1999 Annual Meeting of
Pharmacopeia stockholders and the terms of office of Class II directors Frank
Baldino, Jr. and Edith W. Martin expire at the 2000 Annual Meeting of
Pharmacopeia stockholders. At the Pharmacopeia Annual Meeting, Pharmacopeia's
stockholders will elect two Class III directors for a term of three years.

Unless otherwise instructed, the proxy holders will vote the proxies
received by them for Pharmacopeia's two nominees named below. If any of the
nominees of Pharmacopeia is unable or declines to serve as a director at the
time of the Pharmacopeia Annual Meeting, the proxies will be voted for any
nominee who is designated by the present Pharmacopeia Board of Directors to
fill the vacancy. It is not expected that any of the nominees will be unable
or will decline to serve as a director. THE PHARMACOPEIA BOARD OF DIRECTORS
RECOMMENDS THAT PHARMACOPEIA'S STOCKHOLDERS VOTE FOR THE NOMINEES LISTED
BELOW.

NOMINEES FOR ELECTION AT THE PHARMACOPEIA ANNUAL MEETING

The names of the nominees, and certain information about them, are set forth
below:

<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE POSITION/PRINCIPAL OCCUPATION SINCE
--------------- --- ----------------------------- --------
<S> <C> <C> <C>
Paul A. Bartlett, 50 Director; Chair, Department of Chemistry at the 1998
Ph.D................... University of California, Berkeley
Charles A. Sanders,
M.D.................... 66 Director; Retired 1997
</TABLE>

Dr. Bartlett has served as a director of Pharmacopeia since January 1998.
Dr. Bartlett is a member of Pharmacopeia's Scientific Advisory Board. Dr.
Bartlett has been a Professor of Chemistry at the University of California,
Berkeley since 1973 and is the Chairman of the Department of Chemistry at the
University of California, Berkeley.

98
<PAGE>

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

INCUMBENT DIRECTORS WHOSE TERMS OF OFFICE CONTINUE AFTER THE PHARMACOPEIA
ANNUAL MEETING

The names and certain other information about the directors whose terms of
office continue after the Pharmacopeia Annual Meeting are set forth below:

<TABLE>
<CAPTION>
DIRECTOR
NAME OF DIRECTOR AGE POSITION/PRINCIPAL OCCUPATION SINCE
---------------- --- ----------------------------- --------
<S> <C> <C> <C>
Joseph A. Mollica, 57 Director; Chairman of the Board, President and 1994
Ph.D. ................. Chief Executive Officer
Gary E. Costley, 54 Director; Chairman of the Board, President and 1996
Ph.D.(2)............... Chief Executive Officer of International
Multifoods Corporation
Frank Baldino, Jr.,
Ph.D.(2)............... 44 Director; President and CEO of Cephalon, Inc. 1996
Edith W. Martin, Director; President of Advanced Global
Ph.D.(1)............... 52 Technologies 1997
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee

There is no family relationship between any director, executive officer or
nominee for director of Pharmacopeia.

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

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

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

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

99
<PAGE>

STOCK OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT

The following table sets forth the beneficial ownership of Pharmacopeia
Common Stock as of January 31, 1998 (i) by all persons known to Pharmacopeia
to be the beneficial owners of more than 5% of Pharmacopeia Common Stock, (ii)
by each of the executive officers named in the table under "EXECUTIVE
COMPENSATION--Compensation Tables--Summary Compensation Table," (iii) by each
director and nominee for director, and (v) by all current directors and
executive officers as a group:

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

100
<PAGE>

BOARD MEETINGS AND COMMITTEES

The Board of Directors of Pharmacopeia held a total of five meetings during
1997. The standing committees of the Pharmacopeia Board of Directors are the
Audit Committee and the Compensation Committee.
The Audit Committee's current members are Eileen M. More and Edith W.
Martin. This committee is primarily responsible for approving the services
performed by Pharmacopeia's independent auditors and for reviewing and
evaluating Pharmacopeia's accounting principles and its system of internal
accounting controls. The Audit Committee met two times during 1997.

The Compensation Committee's current members are Frank Baldino, Jr., Samuel
D. Colella and Gary E. Costley. The Compensation Committee reviews and
recommends to the Board the compensation of all executive officers. The
Compensation Committee met five times during 1997.

No current director attended fewer than 75% of the aggregate of the total
number of meetings of the Board of Directors (held during the period for which
he or she has been a director) and the total number of meetings held by all
committees of the Board of Directors on which he or she served (during the
period that he or she served).

BOARD COMPENSATION

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

EMPLOYMENT AGREEMENTS

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

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

101
<PAGE>

employment with Pharmacopeia, then Pharmacopeia will pay Dr. Spearman his base
salary through the earlier of (i) the end of such twenty-four month period and
(ii) Dr. Spearman's obtaining full-time employment.

PROPOSAL TO AMEND THE 1994 INCENTIVE STOCK PLAN TO
INCREASE THE NUMBER OF SHARES AUTHORIZED FOR ISSUANCE
THEREUNDER TO 2,250,000 SHARES

The Incentive Plan was approved by the Pharmacopeia Board of Directors and
by the stockholders of Pharmacopeia in 1994, with a total of 750,000 shares of
Pharmacopeia Common Stock reserved for issuance under the Incentive Plan. In
1996 and 1997, the Pharmacopeia Board of Directors and stockholders approved
cumulative increases of 1,000,000 shares authorized for issuance under the
Incentive Plan. Subject to stockholder approval, in January 1998, the
Pharmacopeia Board of Directors approved an additional increase of 500,000
shares authorized for issuance under the Incentive Plan, increasing the total
number of shares of Pharmacopeia Common Stock authorized for issuance
thereunder from 1,750,000 to 2,250,000 shares. This proposed increase in the
total number of shares of Pharmacopeia Common Stock available for issuance
under the Incentive Plan equals approximately 4% of the total outstanding
shares of Pharmacopeia Common Stock on the Pharmacopeia Record Date. A summary
description of the Incentive Plan, as proposed to be amended, is attached as
Annex 5 to this Joint Proxy Statement/Prospectus. Said summary is qualified in
its entirety by the prospectus covering the shares available for issuance
pursuant to the Incentive Plan, and by the full text of the Incentive Plan,
copies of which may be obtained by Pharmacopeia's stockholders upon request to
the Office of the Secretary of Pharmacopeia.

As of January 31, 1998, options to purchase 1,340,440 shares of Pharmacopeia
Common Stock (net of exercised and terminated options) had been granted under
the Incentive Plan, 312,566 shares remained available for future option grants
and 93,181 options had been exercised.

The Pharmacopeia Board of Directors believes that this proposed increase in
the number of shares authorized for issuance under the Incentive Plan is in
the best interest of Pharmacopeia. The Pharmacopeia Board of Directors
believes that this increase will provide an adequate reserve of shares for
issuance under the Incentive Plan (unless the Merger is consummated), which is
necessary to enable Pharmacopeia to compete successfully with other companies
to attract and retain valuable employees.

THE PHARMACOPEIA BOARD OF DIRECTORS RECOMMENDS THAT PHARMACOPEIA
STOCKHOLDERS VOTE FOR THE INCREASE IN THE NUMBER OF SHARES AUTHORIZED FOR
ISSUANCE UNDER THE INCENTIVE PLAN TO 2,250,000 SHARES OF PHARMACOPEIA COMMON
STOCK.

PROPOSAL TO AMEND THE 1994 INCENTIVE STOCK PLAN TO
INCREASE THE NUMBER OF SHARES AUTHORIZED FOR ISSUANCE
THEREUNDER TO 2,750,000 SHARES EFFECTIVE UPON
CONSUMMATION OF THE MERGER

In addition to the authority sought to increase the number of shares of
Pharmacopeia Common Stock authorized for issuance under the Incentive Plan to
2,250,000, Pharmacopeia is seeking the authority to increase the number of
authorized shares to 2,750,000. This further increase would only take effect
if the Merger is consummated. The Board of Directors of Pharmacopeia has
approved this proposed amendment to the Incentive Plan because Pharmacopeia
cannot be certain that the Merger will be approved and consummated. Therefore,
Pharmacopeia cannot be certain how many employees it will have or how many
shares of Pharmacopeia Common Stock should be authorized for issuance under
the Incentive Plan. Pharmacopeia is seeking authority under the immediately
preceding proposal for an increase in the number of shares authorized for
issuance under the Incentive Plan that Pharmacopeia believes would be
sufficient if Pharmacopeia does not acquire MSI.

102
<PAGE>

Pharmacopeia is seeking authority under this proposal for an additional
increase that would be necessary, and would take effect, only if the Merger is
consummated. This proposed increase in the total number of shares of
Pharmacopeia Common Stock available for issuance under the Incentive Plan,
combined with the increase sought under the preceding proposal, would equal
approximately 8% of the total outstanding shares of Pharmacopeia Common Stock
on the Pharmacopeia Record Date and 5% of the total number of outstanding
shares of Pharmacopeia Common Stock immediately after the Effective Time
(assuming that the number of outstanding shares of Pharmacopeia Common Stock
does not change between the Pharmacopeia Record Date and the Effective Time,
and that all shares of Pharmacopeia Common Stock registered under the
Registration Statement of which this Joint Proxy Statement/Prospectus forms a
part are issued at the Effective Time).

The Pharmacopeia Board of Directors believes that this proposed increase in
the number of shares authorized for issuance under the Incentive Plan is in
the best interest of Pharmacopeia. The Pharmacopeia Board of Directors
believes that if the Merger is consummated, this increase will provide an
adequate reserve of shares for issuance under the Incentive Plan, which is
necessary to enable Pharmacopeia to compete successfully with other companies
to attract and retain valuable employees.

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

Management has selected Ernst & Young LLP ("Ernst & Young"), independent
auditors, to audit the books, records and accounts of Pharmacopeia for the
current fiscal year ending December 31, 1998.

A representative of Ernst & Young is expected to be available at the
Pharmacopeia Annual Meeting to make a statement if such representative desires
to do so and to respond to appropriate questions.

103
<PAGE>

OTHER INFORMATION REGARDING PHARMACOPEIA

PERFORMANCE GRAPH

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

12/5/95 12/31/95 12/31/96 12/31/97

Pharmacopeia, Inc. 100 151.96 121.09 100

Dow Jones Biotechnology
Industry Group Index 100 111.47 115.13 121.60

Nasdaq Market Index 100 99.63 123.81 151.45

ASSUMES $100 INVESTED ON DEC. 05, 1995
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 1997

104
<PAGE>

EXECUTIVE COMPENSATION

COMPENSATION TABLES

Summary Compensation Table. The following table sets forth the compensation
awarded to, earned by or paid to the Chief Executive Officer and each of the
other four most highly compensated executive officers of Pharmacopeia (the
"Pharmacopeia Named Executive Officers") for services rendered to Pharmacopeia
in each of the three fiscal years ended December 31, 1997:

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS(1)
----------------------------------- --------------------------
RESTRICTED
OTHER ANNUAL STOCK SECURITIES ALL OTHER
NAME AND PRINCIPAL COMPENSATION AWARDS UNDERLYNG COMPENSATION
POSITION YEAR SALARY($) BONUS($) ($)(2) ($)(3) OPTIONS(#) ($)
------------------ ---- --------- -------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph A. Mollica....... 1997 362,833 140,000 -- -- 50,000 --
President and Chief 1996 336,875 135,000 -- -- 55,000 --
Executive Officer 1995 312,375 110,000 -- -- 20,000 --
Stephen A. Spearman..... 1997 234,167 60,000 -- -- 15,000 31,582(6)
Executive Vice 1996 87,837(4) 55,000(5) -- -- 50,000 121,262(6)
President of Operations
John J. Baldwin......... 1997 241,083 50,000 -- -- 20,000 --
Senior Vice President 1996 230,250 50,000 -- -- 25,000 --
of Chemistry 1995 221,263 42,000 -- -- 7,500 --
Nolan H. Sigal.......... 1997 223,667 40,000 -- -- 20,000 --
Senior Vice President 1996 208,250 50,000 -- -- 25,000 --
of Drug Discovery 1995 199,333 42,000 -- -- 7,500 --
Lewis J. Shuster........ 1997 199,008 50,000 -- -- 20,000 --
Executive Vice 1996 186,925 50,000 -- -- 25,000 --
President, Corporate 1995 174,000 44,000 -- -- 15,000 49,424(6)
Development & CFO
</TABLE>
- --------
(1) Pharmacopeia did not grant any stock appreciation rights or make any long-
term incentive plan payments to any Pharmacopeia Named Executive Officer
in 1995, 1996 or 1997.
(2) Unless otherwise disclosed, the value of certain perquisites or personal
benefits is not included in the amounts disclosed because it did not
exceed for any Pharmacopeia Named Executive Officer the lesser of either
$50,000 or 10% of total annual salary and bonus reported for the
Pharmacopeia Named Executive Officer.
(3) During 1995, 1996, and 1997 no shares of restricted Common Stock were
awarded or sold to the Pharmacopeia Named Executive Officers. The
restricted Common Stock was sold at a price which was equal to the then
current market value as determined by the Board of Directors. The
restricted shares of Common Stock are subject to a repurchase right of
Pharmacopeia in the event these individuals' employment terminates. The
repurchase right terminated with respect to one-fourth of the amount of
the restricted Common Stock held by each Pharmacopeia Named Executive
Officer one year after the individual's first date of employment, and
terminated and will terminate at a rate of one-forty-eighth of the total
amount for each month thereafter. Such restricted Common Stock is eligible
to receive dividends at the same rate as those paid on Common Stock
although Pharmacopeia has not declared or paid dividends on Common Stock.
As of December 31, 1997, Dr. Mollica held 202,400 shares of restricted
Common Stock with an aggregate value of $3,238,400, Dr. Baldwin held
135,750 shares of restricted Common Stock with an aggregate value of
$2,172,000, Dr. Sigal held 123,400 shares of restricted Common Stock with
an aggregate value of $1,974,400, and Mr. Shuster and Dr. Spearman held no
shares of restricted Common Stock.
(4) Dr. Spearman became employed by Pharmacopeia in August 1996 at an annual
salary of $225,000.
(5) Represents a $25,000 signing bonus and a $30,000 performance bonus.
(6) Represents relocation expenses.

105
<PAGE>

Option Grants in Last Fiscal Year. The following table sets forth each grant
of stock options made during the year ended December 31, 1997 to each of the
Pharmacopeia Named Executive Officers:

<TABLE>
<CAPTION>
% OF TOTAL POTENTIAL REALIZABLE VALUE AT
OPTIONS OPTIONS GRANTED ASSUMED ANNUAL RATE OF
GRANTED TO EMPLOYEES IN EXERCISE EXPIRATION STOCK APPRECIATION FOR
NAME #(1) FISCAL YEAR PRICE DATE OPTION TERM(2)
---- ------- --------------- -------- ---------- -----------------------------
5% 10%
-----------------------------
<S> <C> <C> <C> <C> <C> <C>
Joseph A. Mollica....... 50,000 10% $16.00 5/9/07 $ 503,116 $ 1,274,994
John J. Baldwin......... 20,000 4% $16.00 5/9/07 201,246 509,998
Nolan H. Sigal.......... 20,000 4% $16.00 5/9/07 201,246 509,998
Lewis J. Shuster........ 20,000 4% $16.00 5/9/07 201,246 509,998
Stephen A. Spearman..... 15,000 3% $16.00 5/9/07 150,935 382,498
</TABLE>
- --------
(1) The listed options become exercisable as follows: one-fourth of the total
number of shares subject to the options are exercisable one year from the
grant date and an additional one forty-eighth of the total number of
shares are exercisable each full month thereafter based on the optionee's
continuing to be employed by Pharmacopeia.
(2) Potential realizable value is based on an assumption that the stock price
appreciates at the annual rate shown (compounded annually) from the date
of grant until the end of the ten-year option term. These numbers are
calculated based on the requirements promulgated by the Commission and do
not reflect Pharmacopeia's estimate of future stock price growth.

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values. The following table sets forth for each of the Pharmacopeia Named
Executive Officers options exercised during 1997 and the fiscal year-end value
of unexercised options.

<TABLE>
<CAPTION>
SHARES
ACQUIRED
ON VALUE VALUE OF UNEXERCISED
EXERCISE REALIZED($) NUMBER OF UNEXERCISED IN-THE-MONEY
NAME (#) (1) OPTIONS AT YEAR-END(#) OPTIONS AT YEAR-END($)(1)
---- -------- ----------- ------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joseph A. Mollica....... -- -- 32,395 92,605 $190,640 $104,560
John J. Baldwin......... -- -- 13,697 38,803 71,483 39,217
Nolan H. Sigal.......... -- -- 13,697 38,803 71,483 39,217
Lewis J. Shuster........ -- -- 63,685 55,315 843,260 293,820
Stephen A. Spearman..... -- -- 16,666 48,334 -- --
</TABLE>
- --------
(1) Market value of underlying securities at exercise date or year-end, as the
case may be, minus the exercise price.

REPORT OF THE COMPENSATION COMMITTEE

The following is a report of the Compensation Committee of Pharmacopeia
describing the compensation policies and rationale applicable to
Pharmacopeia's executive officers with respect to the compensation paid to
such executive officers for the year ended December 31, 1997. The information
contained in this report shall not be deemed to be "soliciting material" or to
be "filed" with the Commission nor shall such information be incorporated by
reference into any future filing under the Securities Act or the Exchange Act,
except to the extent that Pharmacopeia specifically incorporates it by
reference into any such filing.

The Compensation Committee (the "Committee") of the Pharmacopeia Board of
Directors reviews and approves Pharmacopeia's executive compensation policies.
The following is the report of the Committee describing the compensation
policies and rationales applicable to Pharmacopeia's executive officers with
respect to the compensation paid to such executive officers for the fiscal
year ended December 31, 1997.

106
<PAGE>

Compensation Philosophy. Pharmacopeia's philosophy in setting its
compensation policies for executive officers is to maximize stockholder value
over time. The primary goal of Pharmacopeia's executive compensation program
is therefore to closely align the interests of the executive officers with
those of Pharmacopeia's stockholders. To achieve this goal, Pharmacopeia seeks
to offer its executive officers competitive compensation based upon their
performance, and the performance of Pharmacopeia. The executive compensation
program is designed to attract and retain executive talent that contributes to
Pharmacopeia's long-term success, to reward the achievement of Pharmacopeia's
short-term and long-term strategic goals, to recognize and reward individual
contributions to Pharmacopeia's performance, and to link executive officer
compensation and stockholder interests through equity-based plans.
Pharmacopeia currently uses three integrated components--Base Salary, Variable
Annual Incentives and Long-Term Incentives--to meet these goals.

Base Salary. The base salary component of the total compensation is designed
to compensate executives competitively within the industry. The Committee
reviewed and approved fiscal 1997 base salaries for the Chief Executive
Officer and other executive officers at the beginning of the fiscal year. Base
salaries were established by the Committee based upon competitive compensation
data, the executive's job responsibilities, level of experience, individual
performance and contribution to the business. Executive officer base salaries
have been targeted at or above the average rates paid by competitors to enable
Pharmacopeia to attract, motivate, reward and retain highly skilled
executives. In order to evaluate Pharmacopeia's competitive posture in the
industry, the Committee reviewed and analyzed the compensation packages,
including base salary levels, offered by other biotechnology and
pharmaceutical companies. The competitive information was obtained from
surveys prepared by consulting companies or industry associations (e.g., the
Radford Biotechnology Compensation survey and the Top Five Data Services
Report on Executive Compensation in the Biopharmaceutical Industry). In making
base salary decisions, the Committee exercised its discretion and judgment
based upon these factors. No specific formula was applied to determine the
weight of each factor.

Variable Annual Incentives. Variable incentive bonuses for executive
officers are intended to reflect the Committee's belief that a portion of the
compensation of each executive officer should be contingent upon the
performance of Pharmacopeia as well as the individual contribution of each
executive officer. To carry out this philosophy, Pharmacopeia has implemented
a compensation policy (the "Compensation Policy") which compensates officers
in the form of annual bonuses which may be paid in cash or, at the option of
the officer, up to 25% in stock. At the beginning of fiscal 1997, the
Committee established target bonuses for each executive officer relative to
the officer's base salary. The Compensation Policy is intended to motivate and
reward executive officers by directly linking the amount of any cash bonus to
specific company-based performance targets and specific individual-based
performance evaluations. Pharmacopeia-based performance goals are tied to
different indicators of company performance, such as achievement of revenue,
research and development, manufacturing, and other operating objectives. These
company-based performance goals vary from year to year, are somewhat
subjective in nature, and account for 50% of the bonus amount. The individual
officer's performance goals account for 50% of the bonus amount, are tied to
different indicators of the individual officer's performance (such as having
achieved a research and development project milestone) and, except in the case
of the Chief Executive Officer, are based upon the evaluation of the Chief
Executive Officer. The Chief Executive Officer's achievement of individual
performance goals is determined by the Committee. The Committee evaluates the
achievement level of Pharmacopeia annual goals and approves a performance
rating relative to the goals. At the beginning of each year, Pharmacopeia
objectives are assigned a relative weighting factor to assist in the priority
setting and subsequent evaluation of performance against objectives is
conducted at the end of the year. This evaluation is subjective and is
influenced by the Committee's perception of the importance of the various
corporate goals. The aggregate amount of bonus payments can range from 50-150%
of the total individual target amounts based upon achievement of individual
goals, provided that if less than 75% of the annual Pharmacopeia objectives
are met no bonus amounts will be paid. For 1997, the Board of Directors
awarded Pharmacopeia's executive officers incentive bonuses based upon the
officers and Pharmacopeia's having achieved the goals and objectives set for
1997 performance. The Committee believes that Pharmacopeia's Compensation
Policy provides an excellent link between Pharmacopeia's performance and the
incentives paid to executives.

107
<PAGE>

Long-Term Incentives. The Committee provides Pharmacopeia's executive
officers with long-term incentive compensation through grants of stock options
under Pharmacopeia's 1994 Incentive Stock Plan and the opportunity to purchase
stock under the 1995 Employee Stock Purchase Plan (the "Purchase Plan"). The
Pharmacopeia Board of Directors believes that stock options provide
Pharmacopeia's executive officers with the opportunity to purchase and
maintain an equity interest in Pharmacopeia and to share in the appreciation
of the value of Pharmacopeia Common Stock. The Pharmacopeia Board of Directors
believes that stock options directly motivate an executive to maximize long-
term stockholder value. The options also utilize vesting periods (generally
four years) that encourage key executives to continue in the employ of
Pharmacopeia. All options granted to executive officers to date have been
granted at the fair market value of Pharmacopeia Common Stock on the date of
grant. The Pharmacopeia Board of Directors considers the grant of each option
subjectively, considering factors such as the individual performance of the
executive officer and the anticipated contribution of the executive officer to
the attainment of Pharmacopeia's long-term strategic performance goals. Long-
term incentives granted in prior years are also taken into consideration. The
Committee has not yet made a determination with respect to long-term incentive
grants based on 1997 performance.

Pharmacopeia established the Purchase Plan both to encourage employees to
continue in the employ of Pharmacopeia and to motivate employees through
ownership interest in Pharmacopeia. Under the Purchase Plan, employees,
including officers, may have up to 10% of their earnings withheld for
purchases of Pharmacopeia Common Stock on certain dates specified by the
Pharmacopeia Board of Directors. The price of Pharmacopeia Common Stock
purchased will be equal to 85% of the lower of the fair market value of the
Pharmacopeia Common Stock on the date of commencement of participation in each
six-month offering period or on each specified purchase date.

Chief Executive Officer Compensation. The compensation of the Chief
Executive Officer is reviewed annually on the same basis as discussed above
for all executive officers. Joseph A. Mollica's base salary for 1997 was set
at $365,000. Dr. Mollica's base salary was established in part by comparing
the base salaries of chief executive officers at other biotechnology and
pharmaceutical companies of similar size. In 1997, Dr. Mollica was granted
options to purchase 50,000 shares of Pharmacopeia Common Stock based on 1996
performance. The Compensation Committee has not yet made a determination with
respect to option grants to Dr. Mollica based on 1997 performance. Under the
Compensation Policy, Dr. Mollica received a $140,000 bonus for 1997
performance, which performance exceeded the goals and objectives set by the
Pharmacopeia Board of Directors at the beginning of 1997. Dr. Mollica's total
compensation was based on Pharmacopeia's accomplishments and his contribution
thereto, including the proactive acquisition strategy launched during 1997,
culminating in the executed Merger Agreement with MSI. In addition, in 1997,
Dr. Mollica was instrumental in (i) attracting new executive talent and
directors to Pharmacopeia, (ii) signing a Collaboration and License Agreement
with Bristol-Myers Squibb Company ("BMS") pursuant to which BMS undertook
sponsorship of internal research program(s), and (iii) Pharmacopeia's
exceeding 1997 financial measurements in terms of lower expenses, lower net
loss and a significantly improved balance sheet and earnings per share.

SECTION 162(m)

The Board has considered the potential future effects of Section 162(m) of
the Internal Revenue Code on the compensation paid to Pharmacopeia's executive
officers. Section 162(m) disallows a tax deduction for any publicly-held
corporation for individual compensation exceeding $1.0 million in any taxable
year for any of the executive officers named in the proxy statement, unless
compensation is performance-based. Pharmacopeia has adopted a policy that,
where reasonably practicable, Pharmacopeia will seek to qualify the variable
compensation paid to its executive officers for an exemption from the
deductibility limitations of Section 162(m).

108
<PAGE>

In approving the amount and form of compensation for Pharmacopeia's
executive officers, the Committee will continue to consider all elements of
the cost to Pharmacopeia of providing such compensation, including the
potential impact of Section 162(m).

Respectfully submitted by:

COMPENSATION COMMITTEE

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

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

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

CERTAIN TRANSACTIONS

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

STOCKHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING OF PHARMACOPEIA STOCKHOLDERS

It is currently anticipated that the 1999 Annual Meeting of Stockholders of
Pharmacopeia will be held in May 1999. Stockholder proposals intended to be
presented at such meeting must be received by Pharmacopeia not later than
January 13, 1999.

109
<PAGE>

INDEX TO MSI CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-1
Consolidated Balance Sheets as of December 31, 1996 and 1997............. F-2
Consolidated Statements of Income for the Years Ended December 31, 1995,
1996 and 1997........................................................... F-3
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997........................................ F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997..................................................... F-5
Notes to Consolidated Financial Statements............................... F-6
</TABLE>
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Molecular Simulations Incorporated:

We have audited the accompanying consolidated balance sheets of Molecular
Simulations Incorporated (a Delaware Corporation) and subsidiaries as of
December 31, 1996 and 1997 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Molecular
Simulations Incorporated and subsidiaries as of December 31, 1996 and 1997 and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

Arthur Andersen LLP

San Diego, California
February 4, 1998

F-1
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 14,509 $ 15,019
Trade receivables, net of allowance for doubtful accounts
of $496 in 1996 and
$466 in 1997............................................ 16,178 19,424
Deferred tax asset....................................... 1,600 2,100
Prepaid expenses and other current assets................ 2,888 2,781
-------- --------
Total current assets................................... 35,175 39,324
Long-term assets:
Property and equipment, net.............................. 1,511 2,267
Software development costs, net of accumulated
amortization of $4,208 in 1996 and $5,813 in 1997....... 3,099 3,437
Investment in joint venture.............................. 1,019 1,013
Other assets............................................. 461 423
-------- --------
Total assets........................................... $ 41,265 $ 46,464
======== ========
Current liabilities:
Accounts payable......................................... $ 1,634 $ 2,476
Accrued liabilities...................................... 12,930 15,568
Current portion of deferred revenue...................... 15,731 13,254
Current portion of note payable.......................... 600 700
-------- --------
Total current liabilities.............................. 30,895 31,998
Long-term liabilities:
Note payable, net of current portion..................... 1,400 700
Other long-term liabilities.............................. 446 440
Deferred revenue, net of current portion................. 1,136 1,067
-------- --------
Total long-term liabilities............................ 2,982 2,207
-------- --------
Total liabilities...................................... 33,877 34,205
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred stock, $0.01 par value--
authorized:
2,222,223 shares; issued and outstanding: 2,222,223
shares.................................................. 22 22
Common stock, $0.001 par value--authorized:
25,000,000 shares; issued and outstanding: 9,651,654
shares in 1996 and
9,791,633 shares in 1997 ............................... 10 10
Class B convertible nonvoting common stock, $0.001 par
value--authorized: 1,500,000 shares; issued and
outstanding: 1,307,445 shares in 1996 and
1,246,882 shares in 1997................................ 1 1
Additional paid-in capital............................... 39,388 39,498
Accumulated deficit...................................... (31,534) (26,084)
Cumulative translation adjustment........................ (499) (1,188)
-------- --------
Total stockholders' equity............................. 7,388 12,259
-------- --------
Total liabilities and stockholders' equity............. $ 41,265 $ 46,464
======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-2
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996 1997
-------- ------- -------
<S> <C> <C> <C>
Revenue:
Software licenses................................. $ 14,482 $19,739 $23,658
Service and other................................. 11,165 21,344 25,450
Hardware.......................................... 4,473 6,178 7,566
-------- ------- -------
Total revenue................................... 30,120 47,261 56,674
-------- ------- -------
Cost of revenue:
Software licenses................................. 2,709 2,517 3,512
Hardware.......................................... 3,900 5,242 6,720
-------- ------- -------
Total cost of revenue........................... 6,609 7,759 10,232
-------- ------- -------
Gross profit.................................... 23,511 39,502 46,442
Operating expenses:
Sales, marketing and customer support............. 12,003 17,359 18,471
Research and development.......................... 7,603 12,834 12,663
General and administrative........................ 3,383 5,609 7,488
Acquired in-process research and development...... 6,500 -- --
Restructuring charge.............................. 4,519 -- --
Impairment of capitalized software................ 1,142 -- --
-------- ------- -------
Total operating expenses........................ 35,150 35,802 38,622
-------- ------- -------
Operating income (loss)............................. (11,639) 3,700 7,820
Interest and other income, net...................... 319 368 126
-------- ------- -------
Income (loss) before provision for income taxes..... (11,320) 4,068 7,946
Provision for income taxes.......................... 560 1,471 2,496
-------- ------- -------
Net income (loss)................................... $(11,880) $ 2,597 $ 5,450
======== ======= =======
Basic net income (loss) per share................... $ (2.28) $ 0.27 $ 0.56
======== ======= =======
Diluted net income (loss) per share................. $ (2.28) $ 0.17 $ 0.35
======== ======= =======
Weighted average common stock outstanding--basic.... 5,206 9,531 9,709
======== ======= =======
Weighted average common stock and common stock
equivalents outstanding--diluted................... 5,206 15,160 15,567
======== ======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-3
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
SERIES A CLASS B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL CUMULATIVE
----------------- ------------- -------------- PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
-------- ------- ------ ------ ------ ------ ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 2,222 $ 22 3,587 $ 4 -- $-- $29,121 $(22,251) $ (82) $ 6,814
Stock issued in
connection with
Purchase of company.... -- -- 5,776 6 1,468 1 10,126 -- -- 10,133
Exercise of stock
options and Warrants... -- -- 46 -- -- -- 33 -- -- 33
Translation adjustment.. -- -- -- -- -- -- -- -- 49 49
Net Loss................ -- -- -- -- -- -- -- (11,880) -- (11,880)
-------- ------ ----- --- ----- ---- ------- -------- ------- --------
Balance, December 31,
1995................... 2,222 22 9,409 10 1,468 1 39,280 (34,131) (33) 5,149
Conversion of Class B
Common Stock........... -- -- 160 -- (160) -- -- -- -- --
Exercise of stock
options and Warrants... -- -- 83 -- -- -- 108 -- -- 108
Translation adjustment.. (466) (466)
Net Income.............. -- -- -- -- -- -- -- 2,597 -- 2,597
-------- ------ ----- --- ----- ---- ------- -------- ------- --------
Balance, December 31,
1996................... 2,222 22 9,652 10 1,308 1 39,388 (31,534) (499) 7,388
Conversion of Class B
Common Stock........... -- -- 61 -- (61) -- -- -- -- --
Exercise of stock
options and Warrants... -- -- 79 -- -- -- 110 -- -- 110
Translation adjustment.. -- -- -- -- -- -- -- -- (689) (689)
Net Income.............. -- -- -- -- -- -- -- 5,450 -- 5,450
-------- ------ ----- --- ----- ---- ------- -------- ------- --------
Balance, December 31,
1997................... 2,222 $ 22 9,792 $10 1,247 $ 1 $39,498 $(26,084) $(1,188) $ 12,259
======== ====== ===== === ===== ==== ======= ======== ======= ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $(11,880) $ 2,597 $ 5,450
Adjustments to reconcile net income (loss) to net
cash provided by
(used in) operating activities:
Depreciation and amortization.................... 2,250 2,531 2,985
Charge for acquired in-process research and
development..................................... 6,500 -- --
Impairment of capitalized software............... 1,142 -- --
Equity in undistributed earnings of joint
venture......................................... (67) (55) 6
Changes in assets and liabilities, net of
businesses acquired:
Accounts receivable............................. (5,936) (1,347) (3,246)
Other current assets............................ 717 (1,912) (393)
Accounts payable................................ 244 (840) 842
Accrued liabilities............................. 4,146 2,941 2,830
Deferred revenue................................ 4,693 3,859 (2,546)
Other........................................... (380) (29) 37
Other liabilities............................... -- -- (6)
-------- ------- -------
Net cash provided by operating activities...... 1,429 7,745 5,959
-------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment, net........... (319) (756) (2,216)
Increase in capitalized software development
costs............................................ (2,210) (1,520) (1,923)
Cash proceeds from acquisition.................... 6,262 -- --
-------- ------- -------
Net cash provided by (used in) investing
activities.................................... 3,733 (2,276) (4,139)
-------- ------- -------
Cash flows from financing activities:
Principal payments under capital lease
obligations...................................... (180) (373) (193)
Proceeds from exercise of stock options and
warrants......................................... 35 108 110
Payments on note payable.......................... (400) (600) (600)
Net repayments under lines of credit.............. (150) -- --
-------- ------- -------
Net cash used in financing activities.......... (695) (865) (683)
-------- ------- -------
Exchange rate effects on cash...................... 49 (466) (627)
-------- ------- -------
Net increase in cash............................... 4,516 4,138 510
Cash and cash equivalents, beginning of year....... 5,855 10,371 14,509
-------- ------- -------
Cash and cash equivalents, end of year............. $ 10,371 $14,509 $15,019
======== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest......................................... $ 61 $ 44 $ 148
======== ======= =======
Income taxes..................................... $ 531 $ 817 $ 1,555
======== ======= =======
Supplemental disclosure of noncash investing and
financing activities:
Stock issued in connection with acquisitions...... $ 10,133 $ -- $ --
======== ======= =======
Fixed assets acquired under capital leases........ $ 139 $ 34 $ 425
======== ======= =======
Realization of the benefit of certain Biosym net
operating loss carryforwards through the
reduction of goodwill by approximately $983 and
capitalized software by approximately $617....... $ -- $ 1,600 $ --
======== ======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY

Molecular Simulations Incorporated and Subsidiaries (the "Company") was
incorporated in June 1984 to develop and market integrated molecular modeling
systems and technical information systems. The Company designs, develops,
markets and supports computer software products for the pharmaceutical,
biotechnology, chemical, petrochemical and materials industries and also
offers consulting, training and maintenance services in support of its
customers' use of its software products. Distribution of Company products is
primarily through a direct sales force and foreign distributors.

2. SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying notes to consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of Molecular
Simulations Incorporated and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The Company has a
50 percent ownership interest in a joint venture, which is accounted for under
the equity method.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenue from licenses of computer software provided
that a customer signed purchase order has been obtained, a noncancelable
license agreement has been signed, the software and related documentation has
been shipped, no material uncertainties regarding customer acceptance exist,
collection of the resulting receivable is deemed probable and no other
significant obligations by the Company exist. Prepaid post contract support
and maintenance ("PCS") revenue bundled with software license agreements is
unbundled using objective, vendor specific evidence. PCS revenue is recognized
over the related license period, which is generally one year. PCS services and
other revenue generated from consulting, training and software customization
sold separately from license agreements are recognized as the services are
performed.
Under certain circumstances, the Company sells computer hardware to a
licensee that is used to run the Company's software products. In these
instances, the Company typically orders the hardware from an unrelated vendor
and records revenue upon shipment of the hardware to the licensee by the
vendor.
Cost of license revenue consists primarily of royalty expense for software
licensed to the Company, amortization of capitalized software development
costs, and product media, documentation, packaging and freight expenses. Cost
of service and other revenue is immaterial and is included in the cost of
license revenue. Service personnel costs are included in sales, marketing and
customer support expenses.
The Company earns revenue under product development and consortia agreements
wherein several unrelated parties enter into a joint product development
agreement with the Company. The Company's product development and consortia
agreements are generally one to three years in length, require an annual fee
and

F-6
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

contain progressive milestones. The Company recognizes consortia development
revenue under such agreements on a straight-line basis over the life of the
agreement. The Company is not required to deliver specified products under the
agreements and the consortia fees are non-refundable. If the Company is
successful in developing products under the product development and consortia
agreements described above, a non-transferable license is typically awarded to
the consortia members. For the years ended December 31, 1995, 1996 and 1997,
the Company recognized revenue totaling approximately $1,641,000, $4,777,000
and $4,613,000, respectively, under such product development and consortia
agreements, which is included in service and other revenue.

Concentrations of Risk

The Company purchases substantially all hardware products it sells to its
licensees from a single vendor. Management believes that other vendors could
be identified who could provide the Company and its licensees with similar
hardware products at comparable terms.

Financial instruments that potentially subject the Company to concentrations
of risk consist primarily of cash equivalents. The Company licenses its
products primarily to corporations, including value added resellers and
academic institutions, serving a wide variety of domestic and foreign markets.
The Company extends credit to its licensees based on its evaluation of the
customer's financial condition, generally without requiring a deposit or
collateral. Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure for credit
losses and maintains allowances for estimated losses.

During 1997, international sales accounted for approximately 49% of the
Company's revenues, 33% of which is derived from the Company's foreign
subsidiaries as disclosed in note 13. The Company expects that international
sales will continue to account for a significant portion of the Company's
revenue in future periods. The Company's international sales are generally
denominated in foreign currencies. Losses on the conversion of foreign-
denominated receivables into U.S. dollars could have a material adverse effect
on the Company's financial statements.

The Company conducts business in the Asia/Pacific region, selling its
products principally through TMSI, its Japanese joint venture. Certain East
Asian countries are currently experiencing severe economic turmoil represented
by depressed business conditions and volatility in local currencies. During
1997, the Company had sales of $8.5 million in the region, of which $7.7
million were in Japan. The balance of $800,000 consists of sales throughout
the remainder of the region. Thus, the Company's principal risk from
conducting business in Asia occurs as a result of business conditions in Japan
and currency fluctuations in the Yen. Any significant decline in the Japanese
economy or the value of its currency could have a material adverse impact on
the Company.

Disclosures about Fair Value of Financial Instruments

FSAS 107, "Disclosures about Fair Value of Financial Instruments" requires
companies to disclose the fair value of financial instruments, including both
assets and liabilities recognized and not recognized, in its consolidated
financial statements. It is management's opinion that the carrying amounts
reflected in the accompanying consolidated financial statements for such
instruments are reasonably estimated at their related fair values.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid instruments with a
maturity of three months or less when purchased.

F-7
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Property and Equipment

Property and equipment are recorded at cost. The Company provides for
depreciation and amortization using the straight-line method by charges to
operations in amounts estimated to allocate the costs of the property and
equipment over their estimated useful lives. The estimated useful lives are as
follows:

<TABLE>
<CAPTION>
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -------------
<S> <C>
Equipment.................................................... 3-5 years
Leasehold improvements....................................... Life of Lease
Purchased Software........................................... 3 years
Equipment under capital leases............................... Life of lease
</TABLE>

Maintenance and repairs are charged to operations as incurred. When assets
are sold or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
the results of operations.

Intangibles

Software Development Costs

Product development costs related to the Company's software products are
expensed as incurred until technological feasibility has been established.
Thereafter, the Company capitalizes computer software development costs in
accordance with Statement of Financial Accounting Standards No. 86 (SFAS 86),
"Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise
Marketed". The Company amortizes such costs using the greater of (a) the ratio
that current gross revenues for a product bears to the total of current and
estimated future gross revenues for that product, and (b) the estimated
product life, not to exceed three years from the date on which the product is
available for general release. The Company capitalized approximately
$2,210,000, $1,520,000 and $1,923,000 in 1995, 1996 and 1997, respectively.
Included in the accompanying consolidated statements of operations for 1995,
1996 and 1997, respectively, is approximately $1,123,000, $902,000 and
$1,585,000 of amortization expense related to capitalized software.

The Company periodically re-evaluates the original assumptions and rationale
utilized in the establishment of the carrying value and estimated life of its
assets. The criteria used for these evaluations include management's estimates
of the assets continuing ability to generate income from operations and
positive cash flow in future periods, as well as the strategic significance of
its intangible assets to the Company's business objectives. During the year
ended December 31, 1995, the Company expensed approximately $1,142,000 of
previously capitalized software development costs in order to recognize an
impairment of this asset as determined by management.

Foreign Currency Translation

The Company translates certain of its accounts and the financial statements
of its foreign subsidiaries in accordance with Statement of Financial
Accounting Standards No. 52 (SFAS No. 52), "Foreign Currency Translation". In
translating the accounts of the foreign subsidiaries into U.S. dollars, assets
and liabilities are translated at the rate of exchange in effect at year-end.
Resulting translation adjustments are reflected as a separate component of
stockholders' equity as a cumulative translation adjustment. Revenue and
expense accounts are translated using the weighted average exchange rate in
effect during the year. Transaction gains and losses are reflected in the
results of operations.

Computation of Net Income (Loss) Per Share

Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares are included in the per share

F-8
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

calculations where the effect of the inclusion would be dilutive. Dilutive
common equivalent shares consist of the incremental common shares issuable
upon conversion of convertible preferred stock and convertible common stock
using the "if converted" method and incremental shares issuable upon the
exercise of stock options and warrants using the modified treasury stock
method in all periods.

Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128) is effective for financial statements issued for periods ending
after December 15, 1997. SFAS 128 replaces APB Opinion No. 15, Earnings Per
Share. SFAS 128 simplifies the computation of EPS by replacing the
presentation of primary EPS with a presentation of basic EPS. It requires dual
presentation of basic and diluted EPS by entities with complex capital
structures. The Company has restated all periods to conform with SFAS 128.

Earnings Per Share

Earnings per share is calculated as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS:
Income available to common
shareholders........................ $5,450 9,709 $0.56
Stock options........................ -- 2,357 --
Conversion of Class B common stock... -- 1,279 --
Conversion of preferred stock........ -- 2,222 --
------ ------ -----
Diluted EPS:
Income available to common
stockholders plus assumed
conversions......................... $5,450 15,567 $0.35
====== ====== =====
<CAPTION>
DECEMBER 31, 1996
-----------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS:
Income available to common
shareholders........................ $2,597 9,531 $0.27
Stock options........................ -- 2,019 --
Conversion of Class B common stock... -- 1,388 --
Conversion of preferred stock........ -- 2,222 --
------ ------ -----
Diluted EPS:
Income available to common
stockholders plus assumed
conversions......................... $2,597 15,160 $0.17
====== ====== =====
</TABLE>

Income Taxes

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes", which requires the use of the liability method of accounting for
deferred income taxes. Under this method, deferred income taxes are recorded
to reflect the tax consequences on future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at each
year-end. If it is more likely than not that some portion or all of the
deferred tax asset will not be realized, a valuation allowance is recognized.

F-9
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Recent Accounting Pronouncements

In June 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2: "Software Revenue Recognition", which is effective
for transactions entered into for fiscal years beginning after December 15,
1997. The Company has reviewed the statement of position and determined that
its consolidated financial statements for each of the three years in the
period ended December 31, 1997 are, in all material respects, in compliance
with the provisions of the statement of position.

In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 129 (SFAS 129) "Disclosure of Information about Capital
Structure." This statement establishes standards for disclosure information
about an entity's capital structure. This statement is effective for financial
statements for periods ending after December 15, 1997. The adoption of SFAS
No. 129, in fiscal 1997, had no impact on the Company's results of operations
or financial position.

Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) is effective for financial statements
beginning after December 15, 1997. SFAS 130 requires that changes in
comprehensive income be shown in a financial statement that is displayed with
the same prominence as other financial statements. The Company will adopt SFAS
130 beginning in the first quarter of the 1998.

Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131) is effective for
fiscal years beginning after December 15, 1997. This statement requires
reporting certain information about operating segments in annual and interim
period financial statements. It also requires entity-wide disclosures about
the products and services an entity provides, the material countries in which
it holds assets and reports revenues, and its major customers. The Company
operates in one segment. The adoption of SFAS 131 will have no impact on the
Company.

In November 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-
Based Compensation", which establishes a fair-value-based method of accounting
for stock compensation plans with employees and others. As permitted, the
Company has not adopted the recognition and measurement aspects of SFAS 123,
but has adopted the disclosure requirements of SFAS 123 effective January 1,
1996. See note 9.

3. ACQUISITIONS

On August 15, 1995, the Company acquired 100 percent of the outstanding
shares of common stock of Biosym Technologies, Inc. (Biosym) from Corning
Incorporated (See note 9), Biosym's sole shareholder, in exchange for 50
percent of the Company's fully diluted equity, consisting of 5,776,558 shares
of common stock and 1,467,825 shares of non-voting common stock valued at
approximately $10,133,000. The Company was treated as the acquiring
corporation in the transaction on the basis of a number of factors, including
the fact that the pre acquisition stockholders retained control of the seven
person, post acquisition Board of Directors. The pre acquisition shareholders
retained the right to nominate three directors plus the Chief Executive
Officer (the "MSI directors") and Corning retained the right to nominate three
directors. Additionally, Corning is required to vote all of its shares of the
Company in accordance with a majority of the MSI Board of Directors on any
matter submitted to the Board of Directors requiring a shareholder vote.
Corning also maintains no control over the voting rights of the MSI directors.

The acquisition was accounted for as a purchase and accordingly, the results
of operations of Biosym have been included in the consolidated financial
statements of the Company since August 16, 1995. The purchase price has been
allocated to the net assets acquired based on an independent appraisal of,
among other things, the

F-10
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

acquired capitalized software and the acquired in-process research and
development. A summary of the net assets acquired, after allocation of
purchase price, at August 15, 1995 is as follows (in thousands):

<TABLE>
<S> <C>
Tangible assets:
Current assets (including cash of approximately $6,262)........ $ 8,585
Property and equipment......................................... 2,119
Other assets................................................... 3,309
--------
14,013
Intangible assets:
Capitalized software........................................... 1,000
Acquired in-process research and development................... 6,500
Goodwill....................................................... 1,300
--------
8,800
Total assets acquired........................................ 22,813
Liabilities assumed.............................................. (12,680)
--------
Net assets acquired.......................................... $ 10,133
========
</TABLE>

Acquired in-process research and development represents the present value of
the estimated cash flows expected to be generated by the Biosym related
technology, which at the acquisition date had not yet reached the point of
technological feasibility and does not have an alternative future use.
Therefore, in accordance with generally accepted accounting principles,
acquired in-process research and development of approximately $6,500,000 was
written off and charged to operations during the year ended December 31, 1995.

During 1996 the Company realized the tax benefit of certain Biosym net
operating loss carryforwards and concurrently recorded a $1,600,000 reduction
in goodwill and capitalized software. (See note 6).

The accompanying consolidated statements of operations reflect the operating
results of Biosym since the effective date of the acquisition. Pro forma
unaudited consolidated operating results of the Company and Biosym for the
year ended December 31, 1995, are summarized below (in thousands):

<TABLE>
<CAPTION>
1995
-----------
(UNAUDITED)
<S> <C>
Revenue..................................................... $ 46,758
Operating loss.............................................. (15,234)
Net loss.................................................... (16,398)
</TABLE>

These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments such as the expensing of the
acquired in-process research and development costs and additional goodwill
amortization. They do not purport to be indicative of the results of
operations that actually would have resulted had the acquisition been in
effect on January 1, 1995 or of future results of operations of the
consolidated entities.

4. RESTRUCTURING CHARGE

During 1995, the Company commenced a formal plan of restructuring. The plan
was initiated primarily as a result of the Company's acquisition of Biosym
which resulted in, among other things, excess facilities and

F-11
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

personnel, duplicate projects in process and duplicate systems and processes
worldwide. A summary of the restructuring charge is as follows (in thousands):

<TABLE>
<S> <C>
Reductions in personnel......................................... $1,287
Facility consolidation.......................................... 2,387
Elimination of duplicate products and systems................... 337
Other........................................................... 508
------
$4,519
======
</TABLE>

During 1996 substantially all activities related to the restructuring were
completed. There were no material variations from the amounts originally
accrued.

5. BALANCE SHEET COMPONENTS

Following is a summary of property and equipment at December 31, 1996 and
1997 (in thousands):

<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Equipment................................................ $ 4,006 $ 4,743
Purchased software....................................... 227 579
Equipment under capital leases........................... 278 514
Leasehold improvements................................... 257 584
------- -------
4,768 6,420
Less: accumulated depreciation and amortization.......... (3,257) (4,153)
------- -------
$ 1,511 $ 2,267
======= =======

Following is a summary of accrued liabilities at December 31, 1996 and 1997
(in thousands):

<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Payroll and other compensation........................... $ 5,310 $ 4,109
Commissions.............................................. 1,933 2,360
Royalties................................................ 624 1,041
Income and other accrued taxes........................... 2,013 4,975
Other.................................................... 3,050 3,083
------- -------
$12,930 $15,568
======= =======
</TABLE>

6. INCOME TAXES

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997
--------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax provision:
Federal........................................ $ -- $ 47 $ 1,637
State.......................................... -- 59 480
Foreign........................................ 560 1,365 913
------ -------- --------
560 1,471 3,030
------ -------- --------
Deferred tax provision:
Federal........................................ -- -- (381)
State.......................................... -- -- (153)
------ -------- --------
-- -- (534)
------ -------- --------
Total provision.............................. $ 560 $ 1,471 $ 2,496
====== ======== ========
</TABLE>

F-12
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The provision for income taxes differs from the amount computed by applying
the federal statutory rate to the Company's income before taxes as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate..... $ (3,849) $ 1,383 $ 2,701
State tax, net of federal benefit............. (653) 244 477
Increase in valuation allowance............... 4,502 -- --
Foreign taxes provided at rates other than the
U.S. statutory rate.......................... -- 250 --
Foreign taxes other than income............... 560 1,111 --
Tax benefit of utilization of U.S. and foreign
operating losses............................. -- (1,635) (701)
Other......................................... -- 118 19
-------- -------- -------
Provision for income taxes.................... $ 560 $ 1,471 $ 2,496
======== ======== =======
</TABLE>

The components of deferred tax assets (liabilities) are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996 1997
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............. $ 10,264 $ 2,923 $ 2,641
Research and development and other tax
credits..................................... 2,062 79 800
Accrued liabilities.......................... 2,358 2,153 2,203
Other........................................ 164 -- --
-------- ------- -------
14,848 5,155 5,644
Less:
Deferred tax liability:
Depreciation and amortization................ (1,498) (776) (825)
-------- ------- -------
Net asset before valuation allowance......... 13,350 4,379 4,819
Valuation allowance.......................... (13,350) (2,779) (2,719)
-------- ------- -------
Net deferred tax asset....................... $ -- $ 1,600 $ 2,100
======== ======= =======
</TABLE>

As of December 31, 1997, the Company has net operating loss carryforwards of
approximately $7,768,000 for federal tax reporting purposes, respectively. The
federal net operating losses and credits expire through 2011.

The Federal Tax Code contains provisions that may limit the federal net
operating loss carryforwards available to be used in any given year if a
significant change in ownership interests, as defined, occurs. Such a change
in ownership occurred in 1995. As a result, federal net operating losses
incurred prior to August 15, 1995, which amount to approximately $7,768,000,
are limited in their availability to offset any future federal taxable income.
The Company is subject to a 10% withholding tax on software revenue earned in
Japan. The withholding tax expense is reported as current foreign taxes.

Realization of certain components of the net deferred tax asset is dependent
on the Company generating sufficient taxable income prior to expiration of net
operating loss and credit carryforwards. Although realization is not assured,
management believes that it is more likely than not that some or all of the
net deferred tax asset will be realized. The amount of the net deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are changed.
Also, as noted

F-13
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

above, under Federal tax law, certain potential changes in ownership of the
Company may limit annual future utilization of these carryforwards.
Accordingly, a valuation allowance on the net deferred tax asset has been
recorded as of December 31, 1995, 1996 and 1997. The net deferred tax asset of
$2,100,000 represents the estimated benefit from the reversal of temporary
differences, which management currently believes the Company will, more likely
than not, realize in the future. The net operating loss benefit relates
principally to carryforward losses acquired in the Biosym acquisition.
Accordingly, goodwill and other intangible assets acquired in the Biosym
transaction have been reduced concurrent with recognizing the aforementioned
tax asset.

7. LINE OF CREDIT

In January 1998, the Company entered into $4.0 million credit arrangement
with a bank consisting of a $2.0 million revolving line of credit and a $2.0
million equipment financing line of credit. The equipment line of credit
provides for a one-year advance period requiring interest only payments.
Thereafter, the outstanding balance will be repaid in 48 monthly installments.
All borrowings under the credit arrangement bear interest at the prime rate.
The credit agreement contains restrictive covenants, including maintenance of
certain liquidity and profitability levels and is secured by substantially all
of the Company's assets.

The Company had a $1,200,000 working capital line of credit that expired in
February 1996. Borrowings under the line of credit bore interest at the bank's
prime rate plus 3/4% and were collateralized by substantially all of the
Company's assets. No amounts were outstanding under any line of credit
arrangement at December 31, 1996 or 1997.

8. NOTE PAYABLE

In 1993, the Company entered into a software development agreement (the
Agreement) with Teijin Limited ("Teijin"--see note 11) whereby Teijin agreed
to fund the Company's development of new products through loans, up to an
aggregate of $3,000,000. Upon the execution of this agreement, $2,000,000 was
received from Teijin. The remaining $1,000,000 was received in 1994 as the
Company began shipment of a specified product.

In connection with this loan, the Company is obligated to repay the debt at
the rate of 4% of the Company's net software margin, as defined in the
Agreement. The Agreement contains the following cumulative minimum repayments,
to be paid on April 1, of the respective periods:

<TABLE>
<CAPTION>
MINIMUM
CUMULATIVE
YEAR REPAYMENTS
---- ----------
<S> <C>
1995......................................................... $ 400,000
1996......................................................... 1,000,000
1997......................................................... 1,600,000
1998......................................................... 2,300,000
1999......................................................... 3,000,000
</TABLE>

9. STOCKHOLDERS' EQUITY

Convertible Preferred Stock

In 1994, the Board of Directors authorized the issuance of 2,222,223 shares
of Series A, $0.01 par value, convertible preferred stock (Series A preferred
stock). The Series A preferred stock is entitled to vote on an as-converted
basis with common stock as one class. Series A preferred stock is entitled to
dividends, when and if declared, at the same rate as dividends with respect to
the Company's common stock. Each share of Series A preferred stock is
convertible at the option of the holder into one share of common stock. The
Series A preferred

F-14
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

stock automatically converts to common stock upon the closing of an initial
public offering of the Company's common stock in which the Company receives
aggregate gross proceeds of at least $10,000,000. Series A preferred stock has
a preference over common stock, in the event of a liquidation, dissolution or
winding up of the Company, in an amount equal to the greater of (i) $2.70 per
share, subject to adjustment, or (ii) such amount per share as would be
payable had such shares been converted into common stock. The Company is
required to reserve shares of its authorized common stock equal to the amount
required upon conversion of all Series A preferred stock.

Nonvoting Common Stock

In 1995, the Board of Directors authorized 1,500,000 shares of Class B,
$0.001 par value, nonvoting common stock (Class B Common stock) and
concurrently issued 1,467,825 shares of stock. The dividend and liquidation
rights of the holders of the Class B Common stock are subject to and qualified
by the rights of the holders of the Series A preferred stock. The Class B
Common stock is nonvoting, except as required by applicable law. No dividends
may be declared or paid on the Class B Common stock.

Subject to certain terms and conditions, each share of Class B Common stock
is convertible into one share of common stock at any time after a conversion
event. Conversion events include 1) the issuance of additional shares of
common stock or convertible preferred stock to parties other than Corning
Incorporated and its transferees, such that, after such issuance, the total
number of shares of common stock plus shares resulting from the conversion of
preferred stock held by Corning Incorporated and its transferees is equal to
or less than forty percent of the total number of then issued and outstanding
shares of common stock plus shares of shares resulting from the conversion of
preferred stock into common stock or 2) the consummation of any acquisition of
the Company or substantially all of its assets by a third party or a merger
with a third party pursuant to which (i) the Company is not the surviving
corporation and (ii) the shares of capital stock of the Company are exchanged
or converted into less than a majority of the surviving corporation's shares
of capital stock. Nonvoting common stock is automatically converted into of
common stock upon the closing of an underwritten initial public offering of
the Company's common stock in which the Company receives aggregate gross
proceeds of at least $10,000,000.

In the event of dissolution or liquidation of the Company, whether voluntary
or involuntary, common stock and Class B Common stock will be entitled to
receive all assets of the Company available for distribution to its
stockholders, subject to any preferential rights of any of then outstanding
preferred stock. In any such dissolution or liquidation of the Company, the
assets available for distribution to the holders of common stock and Class B
Common stock shall be distributed in equal amounts per share and without
preference or priority to either the common stock or the Class B Common stock.

Common Stock

Common stock consists of 25,000,000, $0.001 par value, authorized voting
shares.

Registration Rights

Under the terms of an investor rights agreement, certain of the Company's
common stockholders may require the Company to file a registration statement
under the Securities Act with respect to their shares. Generally, the Company
is required to bear all registration and selling expenses incurred in
connection with any such registrations.

F-15
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Stock Plans

The Board of Directors has established the Incentive Stock Option Plan, the
Supplemental Stock Option Plan, The 1996 Stock Plan and the 1996 Equity
Incentive Plan. The Company has reserved 4,000,000 shares of common stock for
issuance under the combined stock plans.

Incentive Stock Option Plan

Under the Incentive Stock Option Plan, options may be granted to employees
at a price not less than the fair market value of the stock at the date of
grant. Options under this plan generally vest at 25 percent per year over a
four year period. Options typically expire 10 years after issuance.

Supplemental Stock Option Plan

Under the Supplemental Stock Option Plan, non qualified options may be
granted at the discretion of the Board of Directors to non employees,
employees, directors and consultants at not less than 85% of the fair market
value of the stock at the date of grant. Options under this plan generally
vest at 25 percent per year over a four year period. Options typically expire
10 years after issuance.

The 1996 Stock Plan

In May 1996, the Company implemented a stock option plan for employees and
others, to attract, retain and reward key employees and providers to the
Company, by offering such persons stock options of the Company. The plan
provides for the issuance of qualified and nonqualified stock options. Under
this plan, options are granted at an exercise price equal to the fair value of
the Company's common stock, have 10 year terms, and typically vest at 25
percent per year over a four year period.

1996 Equity Incentive Plan

In November 1996 the Board approved the 1996 Equity Incentive Plan. Options
granted under the previous plans will remain outstanding in accordance with
their terms. The 1996 Equity Incentive Plan provides for the grant of
incentive stock option awards to employees and non-qualified options and
certain other direct stock awards to employees and non-employee directors and
consultants. The term of stock options granted under the plan may not exceed
10 years. The exercise price of incentive stock options granted under the plan
may not be less than 100% of the fair market value of common stock on the date
of grant. The exercise price of non-qualified options may not be less than 85%
of the fair market price on the date of grant. Options under the plan
generally vest at a rate of at least 20% per year.

F-16
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Stock Option Plan Activity

The following tables summarize stock option plan activity for the years
ended December 31, 1995, 1996 and 1997 under the combined stock plans:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding, December 31, 1994..................... 1,199,040 $0.75
Granted.......................................... 2,253,896 0.75
Exercised........................................ (44,818) 0.75
Terminated....................................... (115,484) 0.75
--------- -----
Outstanding, December 31, 1995..................... 3,292,634 0.75
Granted.......................................... 149,124 1.00
Exercised........................................ (123,024) 0.79
Terminated....................................... (82,910) 0.80
--------- -----
Outstanding, December 31, 1996..................... 3,235,824 0.97
Granted.......................................... 365,895 4.52
Exercised........................................ (79,416) 0.90
Terminated....................................... (202,090) 1.35
--------- -----
Outstanding, December 31, 1997..................... 3,320,213 $1.33
========= =====
Exercisable, December 31, 1997..................... 1,868,165 $1.12
========= =====
</TABLE>

As permitted, the Company has adopted the disclosure only provisions of SFAS
No. 123 effective January 1, 1996. Accordingly, no compensation expense has
been recognized for the stock option plans. Had compensation expense for the
Company's stock option plans been determined based on the fair value at date
of grant for 1995, 1996 and 1997 awards consistent with the provisions of SFAS
No. 123, the Company's net income (loss) and earnings per share would have
been as indicated in the pro forma amounts below (in thousands, except per
share amounts):

<TABLE>
<CAPTION>
1995 1996 1997
-------- ------ ------
<S> <C> <C> <C>
Net income (loss)--as reported...................... $(11,880) $2,597 $5,450
Net income (loss)--pro forma........................ $(11,924) $2,400 $5,180
Basic earnings (loss) per share--as reported........ $ (2.28) $ 0.27 $ 0.56
Basic earnings (loss) per share--pro forma.......... $ (2.29) $ 0.25 $ 0.53
Diluted earnings (loss) per share--as reported...... $ -- $ 0.17 $ 0.35
Diluted earnings (loss) per share--pro forma........ $ -- $ 0.16 $ 0.33
</TABLE>

Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. The
fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997: risk free interest rate of 5.35%,
expected option life of 6 years, expected volatility of zero percent and a
dividend rate of zero. The weighted average fair value of options granted in
1995, 1996 and 1997 was $0.68, $1.64 and $1.33, respectively.

10. COMMITMENTS AND CONTINGENCIES

Leasing Agreements

The Company has both operating and capital lease commitments for certain
facilities and equipment which expire through 2002.

F-17
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The future commitments under these leases as of December 31, 1997 are
summarized as follows (in thousands):

<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
Year Ending December 31,
1998........................................................ $1,169
1999........................................................ 888
2000........................................................ 230
2001........................................................ 114
2002........................................................ 10
------
Total minimum lease payments.................................. $2,411
======
</TABLE>

Capital lease obligations amounted to $187,000 and $421,000 in total at
December 31, 1996 and 1997, respectively. Rent expense was approximately
$855,000, $1,063,000 and $965,000 in 1995, 1996 and 1997, respectively.

Royalties

The Company pays royalties to approximately forty five partners for the
worldwide licenses to enhance and market certain software developed at
universities, corporations and other institutions. A majority of the royalty
agreements are long term or perpetual in nature and the royalty obligations
thereunder are generally based on a percentage of revenues derived from
certain software licenses plus associated revenues from post contract support
and maintenance. The royalty agreements require quarterly payments and
generally do not limit the maximum royalty amount under the agreement. Certain
agreements contain provisions for quarterly and annual minimum royalty
payments or a minimum per unit royalty. During 1998, the Company is required
to pay minimum royalties of approximately $368,000. The Company paid royalties
under these agreements of approximately $281,000, $606,000 and $1,333,000 in
1995, 1996 and 1997, respectively. Approximately $647,000, 701,000 and
$1,304,000 of royalty expense related to royalty agreements is included in
license cost of revenue for the year ended December 31, 1995, 1996 and 1997,
respectively. Based on existing royalty agreements the Company expects to
incur significant future royalty obligations.

Litigation

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

11. JOINT VENTURE AGREEMENT

In February 1992, the Company formed a joint venture with Teijin, with each
company owning 50% of a Japanese company, Teijin Molecular Simulations
Incorporated (TMSI), formed for the purpose of marketing, distributing,
licensing, selling and supporting the Company's products in Japan. Each
company invested 100,000,000 Japanese yen ($750,000 at February 1992) to form
TMSI. Translation gains or losses related to the Company's investment in TMSI
have been immaterial for all periods presented. The Company had product sales
to TMSI of approximately $2,111,000, $5,924,000 and $8,478,000 in 1995, 1996
and 1997, respectively. The products are shipped directly to the end user by
the Company.

F-18
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Company uses the equity method of accounting for the joint venture.
Condensed financial information of TMSI as of and for the years ended
September 30, is as follows (in thousands):

<TABLE>
<CAPTION>
1996 1997
------ ------
(UNAUDITED)
<S> <C> <C>
Current assets............................................... $5,425 $4,790
Non-current assets........................................... 642 583
Current liabilities.......................................... 4,028 3,353
Stockholders' equity......................................... 2,039 2,020
Revenue...................................................... 6,490 11,067
Operating income............................................. 267 848
Net income................................................... 110 343
</TABLE>

12. EMPLOYEE BENEFIT PLAN

The Company has a 401(k) Plan (the Plan) covering substantially all
employees meeting minimum service requirements. The Plan is subject to the
provisions of the Employee Retirement Income Security Act of 1974 (ERISA). The
Plan allows for the Company to make discretionary matching contributions as
determined by a committee of the Board of Directors. No discretionary
contribution was provided in 1995 and the Company provided for a contribution
of $250,000 and $230,000 in 1996 and 1997, respectively.

13. GEOGRAPHIC OPERATIONS

The Company operates exclusively in a single industry segment, the molecular
modeling and simulation software industry. A summary of the Company's
operations by geographic area is presented below (in thousands):

<TABLE>
<CAPTION>
1995 1996 1997
-------- ------- -------
<S> <C> <C> <C>
Revenues
United States................................... $ 22,161 $34,111 $37,921
Europe.......................................... 7,959 13,150 18,753
-------- ------- -------
$ 30,120 $47,261 $56,674
======== ======= =======
Operating profit (loss)
United States................................... $(11,739) $ 884 $ 8,020
Europe.......................................... 100 2,816 (200)
-------- ------- -------
$(11,639) $ 3,700 $ 7,820
======== ======= =======
Identifiable assets
United States................................... $ 26,594 $26,366 $34,844
Europe.......................................... 7,558 14,899 11,620
-------- ------- -------
$ 34,152 $41,265 $46,464
======== ======= =======
</TABLE>

Operating profit (loss) is computed using net sales less operating expenses
and does not include interest, other income and income taxes. General
corporate expenses primarily located in the United States have been included
in determining operating profit (loss). Revenue in the category United States
includes export sales, primarily to TMSI, the Company's sales and distribution
entity for Japan and the Asia/Pacific region. Export sales totaled $8,305,000,
$12,228,000 and $8,980,000 in 1995, 1996 and 1997, respectively.

F-19
<PAGE>

MOLECULAR SIMULATIONS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)

14. SUBSEQUENT EVENTS

Merger with Pharmacopeia

On February 4, 1998 the Company signed a definitive merger agreement with
Pharmacopeia. The merger is structured as a tax-free reorganization whereby
Pharmacopeia will issue approximately 7.0 million new shares of common stock
for all of the issued and outstanding stock of the Company. The merger will be
accounted for as a pooling of interests and is subject to shareholder and
other regulatory approvals. The transaction is expected to be completed in the
second quarter of 1998.

F-20
<PAGE>

ANNEX 1

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

AGREEMENT AND PLAN OF MERGER AND REORGANIZATION

AMONG:

PHARMACOPEIA, INC.
A DELAWARE CORPORATION;

MICRO ACQUISITION CORPORATION,
A DELAWARE CORPORATION; AND

MOLECULAR SIMULATIONS INCORPORATED
A DELAWARE CORPORATION

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

DATED AS OF FEBRUARY 4, 1998

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

- --------------------------------------------------------------------------------
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 1. Description Of Transaction................................. 1
1.1 Merger of Merger Sub into the Company....................... 1
1.2 Effect of the Merger........................................ 1
1.3 Closing; Effective Time..................................... 1
Certificate of Incorporation and Bylaws; Directors and
1.4 Officers.................................................... 2
1.5 Conversion of Shares........................................ 2
1.6 Closing of the Company's Transfer Books..................... 2
1.7 Exchange of Certificates.................................... 3
1.8 Appraisal Rights............................................ 4
1.9 Tax Consequences............................................ 4
1.10 Accounting Consequences..................................... 4
1.11 Further Action.............................................. 4
Section 2. Representations And Warranties Of The Company.............. 4
2.1 Due Organization; Subsidiaries; Etc. ....................... 5
2.2 Certificate of Incorporation and Bylaws; Records............ 5
2.3 Capitalization, Etc. ....................................... 5
2.4 Financial Statements........................................ 6
2.5 Absence of Changes.......................................... 6
2.6 Title to Assets; Equipment; Real Property................... 7
2.7 Proprietary Assets.......................................... 7
2.8 Contracts................................................... 8
2.9 Compliance with Legal Requirements.......................... 8
2.10 Governmental Authorizations................................. 9
2.11 Tax Matters................................................. 9
2.12 Employee Benefit Plans...................................... 10
2.13 Environmental Matters....................................... 11
2.14 Insurance................................................... 12
2.15 Related Party Transactions.................................. 12
2.16 Legal Proceedings; Orders................................... 12
2.17 Authority; Binding Nature of Agreement...................... 12
2.18 Vote Required............................................... 13
2.19 Non-Contravention; Consents................................. 13
2.20 Financial Advisor........................................... 13
2.21 Employees................................................... 13
Section 3. Representations And Warranties Of Parent And Merger Sub.... 14
3.1 Due Organization, Standing and Power........................ 14
3.2 Capitalization, Etc. ....................................... 14
3.3 SEC Filings; Financial Statements........................... 15
3.4 Absence of Changes.......................................... 15
3.5 Proprietary Assets.......................................... 15
3.6 Contracts................................................... 16
3.7 Compliance with Legal Requirements.......................... 16
3.8 Governmental Authorizations................................. 16
3.9 Employee Benefit Plans...................................... 17
3.10 Environmental Matters....................................... 17
3.11 Insurance................................................... 18
3.12 Legal Proceedings; Orders................................... 18
3.13 Authority; Binding Nature of Agreement...................... 18
3.14 Vote Required............................................... 18
</TABLE>

i
<PAGE>

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
3.15 Non-Contravention; Consents.................................... 18
3.16 Financial Advisor.............................................. 19
3.17 Valid Issuance................................................. 19
Section 4. Certain Covenants Of The Parties.............................. 19
4.1 Access and Investigation....................................... 19
4.2 Operation of the Company's Business............................ 20
4.3 Operation of Parent's Business................................. 21
4.4 No Solicitation................................................ 22
Section 5. Additional Covenants Of The Parties........................... 23
5.1 Registration Statement; Joint Proxy Statement.................. 23
5.2 Stockholders' Meetings......................................... 24
5.3 Regulatory Approvals........................................... 24
5.4 Stock Options.................................................. 25
5.5 Indemnification of Officers and Directors...................... 25
5.6 Pooling of Interests; Tax Free Reorganization.................. 26
5.7 Additional Agreements.......................................... 26
5.8 Disclosure..................................................... 26
5.9 Affiliate Agreements........................................... 27
5.10 Tax Matters.................................................... 27
5.11 Parent Plans and Benefit Arrangements.......................... 27
5.12 Nasdaq Quotation............................................... 27
5.13 Resignation of Directors....................................... 27
5.14 Election to Board of Directors................................. 27
5.15 FIRPTA Matters................................................. 27
Section 6. Conditions Precedent to Obligations of Parent and Merger Sub.. 27
6.1 Accuracy of Representations.................................... 27
6.2 Performance of Covenants....................................... 28
6.3 Effectiveness of Registration Statement........................ 28
6.4 Stockholder Approval........................................... 28
6.5 Agreements and Documents....................................... 28
6.6 Quotation...................................................... 28
6.7 No Restraints.................................................. 28
6.8 HSR Act........................................................ 29
6.9 Material Adverse Change........................................ 29
6.10 Compliance Certificate......................................... 29
Section 7. Conditions Precedent To Obligations Of The Company............ 29
7.1 Accuracy of Representations.................................... 29
7.2 Performance of Covenants....................................... 29
7.3 Effectiveness of Registration Statement........................ 29
7.4 Stockholder Approval........................................... 29
7.5 Agreements and Documents....................................... 29
7.6 Quotation...................................................... 30
7.7 No Restraints.................................................. 30
7.8 HSR Act........................................................ 30
7.9 Material Adverse Change........................................ 30
7.10 Compliance Certificate......................................... 30
Section 8. Termination................................................... 30
8.1 Termination.................................................... 30
8.2 Effect of Termination.......................................... 31
8.3 Termination Fee; Expenses...................................... 31
</TABLE>

ii
<PAGE>

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 9. Miscellaneous Provisions...................................... 32
9.1 Amendment...................................................... 32
9.2 Waiver......................................................... 32
9.3 No Survival of Representations and Warranties.................. 32
9.4 Entire Agreement; Counterparts; Applicable Law................. 32
9.5 Assignability.................................................. 33
9.6 Notices........................................................ 33
9.7 Cooperation.................................................... 34
9.8 Construction................................................... 34
9.9 Titles......................................................... 34
9.10 Sections and Exhibits.......................................... 34

EXHIBITS

Exhibit A--Certain Definitions...........................................
Exhibit B--Form of Affiliate Agreement...................................
Exhibit C--Form of Opinion of Cooley Godward LLP.........................
Exhibit D--Form of Opinion of Dechert Price & Rhoads.....................
Exhibit E--Form of Tax Representation Letters............................
</TABLE>

iii
<PAGE>

AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION

THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("Agreement") is made
and entered into as of February 4, 1998, by and among: PHARMACOPEIA, INC., a
Delaware corporation ("Parent"); MICRO ACQUISITION CORPORATION, a Delaware
corporation and a wholly owned subsidiary of Parent ("Merger Sub"); and
MOLECULAR SIMULATIONS INCORPORATED, a Delaware corporation (the "Company").
Certain capitalized terms used in this Agreement are defined in Exhibit A.

RECITALS

A. Parent, Merger Sub and the Company intend to effect a merger of Merger
Sub into the Company in accordance with this Agreement and the Delaware
General Corporation Law (the "Merger"). Upon consummation of the Merger,
Merger Sub will cease to exist, and the Company will become a wholly owned
subsidiary of Parent.

B. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). For accounting purposes, it is intended that the Merger
be treated as a "pooling of interests."

C. The respective boards of directors of Parent, Merger Sub and the Company
have approved this Agreement and the Merger.

AGREEMENT

The parties to this Agreement, intending to be legally bound, agree as
follows:

Section 1. Description of Transaction

1.1 Merger of Merger Sub Into the Company. Upon the terms and subject to the
conditions set forth in this Agreement and in accordance with the provisions
of applicable law, at the Effective Time (as defined in Section 1.3), Merger
Sub shall be merged with and into the Company, and the separate existence of
Merger Sub shall cease. The Company will continue as the surviving corporation
in the Merger (the "Surviving Corporation").

1.2 Effect of the Merger. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the Delaware General
Corporation Law (the "DGCL").

1.3 Closing; Effective Time. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, California
92121-2128 or at such other place as the parties may agree, at 10:00 a.m. on a
date to be specified by the parties (the "Closing Date"), which (subject to
the satisfaction or waiver of the conditions set forth in Sections 6 and 7)
shall be no later than the second business day after satisfaction of the
latest to occur of the conditions set forth in Sections 6.4, 6.6, 6.8, 7.4,
7.6 and 7.8. Contemporaneously with or as promptly as practicable after the
Closing, a properly executed certificate of merger conforming to the
requirements of the DGCL (the "Certificate of Merger") shall be filed with the
Secretary of State of the State of Delaware. The Merger shall take effect at
the time the Certificate of Merger is filed with the Secretary of State of the
State of Delaware (the "Effective Time").

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1.4 Certificate of Incorporation and Bylaws; Directors and Officers. Unless
otherwise determined by Parent and the Company prior to the Effective Time:

(a) the Certificate of Incorporation of the Surviving Corporation shall
be amended and restated as of the Effective Time to conform to the
Certificate of Incorporation of Merger Sub in the form filed with the
Secretary of State of the State of Delaware on January 9, 1998, except that
the name of the Surviving Corporation will be Molecular Simulations
Incorporated;

(b) the Bylaws of the Surviving Corporation shall be amended and restated
as of the Effective Time to conform to the Bylaws of Merger Sub as in
effect immediately prior to the Effective Time; and

(c) the directors and officers of the Surviving Corporation immediately
after the Effective Time shall be the respective individuals who are
directors and officers of Merger Sub immediately prior to the Effective
Time.

1.5 Conversion of Shares.

(a) Subject to Sections 1.5(c) and 1.8, at the Effective Time, by virtue of
the Merger and without any further action on the part of Parent, Merger Sub,
the Company or any stockholder of the Company:

(i) any shares of Company Capital Stock then held by the Company or any
subsidiary of the Company (or held in the Company's treasury) shall be
canceled;

(ii) any shares of Company Capital Stock then held by Parent, Merger Sub
or any other subsidiary of Parent shall be canceled;

(iii) except as provided in clauses "(i)" and "(ii)" above and subject to
Section 1.5(b), each share of Company Capital Stock then outstanding shall
be converted into .5292 of a share of Parent Common Stock (as adjusted
pursuant to Section 1.5(b), the "Exchange Ratio") upon surrender of the
certificate representing such share of Company Capital Stock in the manner
provided in Section 1.7 (or in the case of a lost, stolen or destroyed
certificate, upon delivery of an affidavit in the manner provided in
Section 1.7); and

(iv) each share of the common stock, par value $.01 per share, of Merger
Sub then outstanding shall be converted into one share of common stock of
the Surviving Corporation.

(b) Subject to Section 4.2, if, between the date of this Agreement and the
Effective Time, the outstanding shares of Company Capital Stock or Parent
Common Stock are changed into a different number or class of shares by reason
of any stock split, stock dividend, reverse stock split, reclassification,
recapitalization or other similar transaction, then the Exchange Ratio shall
be appropriately adjusted.

(c) No fractional shares of Parent Common Stock shall be issued in
connection with the Merger, and no certificates for any such fractional shares
shall be issued. In lieu of such fractional shares, any holder of Company
Capital Stock who would otherwise be entitled to receive a fraction of a share
of Parent Common Stock (after aggregating all fractional shares of Parent
Common Stock issuable to such holder) shall, upon surrender of such holder's
Company Stock Certificate(s), be paid in cash the dollar amount (rounded to
the nearest whole cent), without interest, determined by multiplying such
fraction by the last reported bid price of a share of Parent Common Stock on
the Nasdaq on the date the Merger becomes effective.

1.6 Closing of the Company's Transfer Books. At the Effective Time: (a) all
shares of Company Capital Stock outstanding immediately prior to the Effective
Time shall automatically be canceled and retired and shall cease to exist, and
all holders of certificates representing shares of Company Capital Stock that
were outstanding immediately prior to the Effective Time shall cease to have
any rights as stockholders of the Company; and (b) the stock transfer books of
the Company shall be closed with respect to all shares of Company Capital
Stock outstanding immediately prior to the Effective Time. No further transfer
of any such shares of Company Capital Stock shall be made on such stock
transfer books after the Effective Time. If, after the Effective Time, a valid
certificate previously representing any of such shares of Company Capital
Stock (a "Company Stock

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Certificate") is presented to the Exchange Agent (as defined in Section 1.7)
or to the Surviving Corporation or Parent, such Company Stock Certificate
shall be canceled and shall be exchanged as provided in Section 1.7.

1.7 Exchange of Certificates.

(a) Prior to the Closing Date, Parent shall select a reputable bank or trust
company to act as exchange agent in the Merger (the "Exchange Agent").
Promptly after the Effective Time, Parent shall deposit with the Exchange
Agent (i) certificates representing the shares of Parent Common Stock issuable
pursuant to this Section 1 and (ii) cash sufficient to make payments in lieu
of fractional shares in accordance with Section 1.5(c). The shares of Parent
Common Stock and cash amounts so deposited with the Exchange Agent, together
with any dividends or distributions received by the Exchange Agent with
respect to such shares, are referred to collectively as the "Exchange Fund."

(b) As soon as practicable after the Effective Time, the Exchange Agent will
mail to the holders of Company Stock Certificates (i) a letter of transmittal
in customary form and containing such provisions as Parent may reasonably
specify (including a provision confirming that delivery of Company Stock
Certificates shall be effected, and risk of loss and title to Company Stock
Certificates shall pass, only upon delivery of such Company Stock Certificates
to the Exchange Agent), and (ii) instructions for use in effecting the
surrender of Company Stock Certificates in exchange for certificates
representing Parent Common Stock. Subject to Section 1.5(c), upon surrender of
a Company Stock Certificate to the Exchange Agent for exchange, together with
a duly executed letter of transmittal and such other documents as may be
reasonably required by the Exchange Agent or Parent, (1) the holder of such
Company Stock Certificate shall be entitled to receive in exchange therefor a
certificate representing the number of shares of Parent Common Stock that such
holder has the right to receive pursuant to the provisions of Section
1.5(a)(iii), and (2) the Company Stock Certificate so surrendered shall be
canceled. Until surrendered as contemplated by this Section 1.7, each Company
Stock Certificate shall be deemed, from and after the Effective Time, to
represent only the right to receive shares of Parent Common Stock (and cash in
lieu of any fractional share of Parent Common Stock) as contemplated by this
Section 1. If any Company Stock Certificate shall have been lost, stolen or
destroyed, Parent may, in its discretion and as a condition precedent to the
issuance of any certificate representing Parent Common Stock, require the
owner of such lost, stolen or destroyed Company Stock Certificate to provide
an appropriate affidavit as indemnity against any claim that may be made
against the Exchange Agent, Parent or the Surviving Corporation with respect
to such Company Stock Certificate. Neither Parent nor the Exchange Agent shall
require the owner of such lost, stolen or destroyed Company Stock Certificate
to provide a bond as indemnity against any claim that may be made against the
Exchange Agent, Parent or the Surviving Corporation with respect to such
Company Stock Certificate. In the event of a transfer of ownership of Company
Capital Stock which is not registered in the transfer records of the Company,
a certificate representing the proper number of shares of Parent Common Stock
may be issued to a transferee if the certificate representing such Company
Capital Stock is presented to the Exchange Agent, accompanied by all documents
required to evidence and effect such transfer, and by evidence that any
applicable stock transfer taxes have been paid.

(c) Any portion of the Exchange Fund that remains undistributed to former
stockholders of the Company six months after the date on which the Merger
becomes effective shall be delivered to Parent upon demand, and any former
stockholders of the Company who have not theretofore surrendered their Company
Stock Certificates in accordance with this Section 1.7 shall thereafter look
only to Parent for satisfaction of their claims for Parent Common Stock, cash
in lieu of fractional shares of Parent Common Stock and any dividends or
distributions with respect to Parent Common Stock.

(d) Each of the Exchange Agent, Parent and the Surviving Corporation shall
be entitled to deduct and withhold from any consideration payable or otherwise
deliverable pursuant to this Agreement to any holder or former holder of
Company Capital Stock such amounts as may be required to be deducted or
withheld therefrom under the Code or under any provision of state, local or
foreign tax law. To the extent such amounts are so deducted or withheld, such
amounts shall be treated for all purposes under this Agreement as having been
paid to the Person to whom such amounts would otherwise have been paid.

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(e) Neither Parent nor the Surviving Corporation shall be liable to any
holder or former holder of Company Common Stock for any shares of Parent
Common Stock (or dividends or distributions with respect thereto), or for any
cash amounts, delivered to any public official pursuant to any applicable
abandoned property, escheat or similar law.

1.8 Appraisal Rights.

(a) Notwithstanding anything to the contrary contained in this Agreement,
Appraisal Shares (as defined in Section 1.8(c)) shall not be converted into or
represent the right to receive Parent Common Stock in accordance with Section
1.5(a) (or cash in lieu of fractional shares in accordance with Section
1.5(c)), and each holder of Appraisal Shares shall be entitled only to such
rights with respect to such Appraisal Shares as may be granted to such holder
in Section 262 of the DGCL. From and after the Effective Time, a holder of
Appraisal Shares shall not have and shall not be entitled to exercise any of
the voting rights or other rights of a stockholder of the Surviving
Corporation. If any holder of Appraisal Shares shall fail to perfect or shall
waive, rescind, withdraw or otherwise lose such holder's right of appraisal
under Section 262 of the DGCL, then (i) any right of such holder to require
the Company to purchase the Appraisal Shares for cash shall be extinguished
and (ii) such shares shall automatically be converted into and shall represent
only the right to receive (upon the surrender of the certificate or
certificates representing such shares) Parent Common Stock in accordance with
Section 1.5(a) (and cash in lieu of any fractional share in accordance with
Section 1.5(c)).

(b) The Company (i) shall give Parent prompt written notice of any demand by
any stockholder of the Company for appraisal of such stockholder's shares of
Company Capital Stock pursuant to the DGCL and of any other notice, demand or
instrument delivered to the Company pursuant to the DGCL, and (ii) shall give
Parent's Representatives the opportunity to participate in all negotiations
and proceedings with respect to any such notice, demand or instrument. The
Company shall not make any payment or settlement offer with respect to any
such notice or demand unless Parent shall have consented in writing to such
payment or settlement offer.

(c) For purposes of this Agreement, "Appraisal Shares" shall refer to any
shares of Company Capital Stock outstanding immediately prior to the Effective
Time that are held by stockholders who are entitled to demand and who properly
demand appraisal of such shares pursuant to, and who comply with the
applicable provisions of, Section 262 of the DGCL.

1.9 Tax Consequences. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of
the Code. The parties to this Agreement hereby adopt this Agreement as a "plan
of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of
the United States Treasury Regulations.

1.10 Accounting Consequences. For accounting purposes, the Merger is
intended to be treated as a "pooling of interests."

1.11 Further Action. If, at any time after the Effective Time, any further
action is determined by Parent to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full
right, title and possession of and to all rights and property of Merger Sub
and the Company, the officers and directors of the Surviving Corporation and
Parent shall be fully authorized (in the name of Merger Sub, in the name of
the Company and otherwise) to take such action.

Section 2. Representations and Warranties of the Company

The Company represents and warrants to Parent and Merger Sub that, except as
set forth in the disclosure schedule delivered by the Company to Parent on the
date of this Agreement (the "Company Disclosure Schedule"):

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<PAGE>

2.1 Due Organization; Subsidiaries; Etc.

(a) The Company owns no shares of capital stock of, or equity interest of
any nature in, any Entity, other than as set forth in Part 2.1(a)(i) of the
Company Disclosure Schedule (the "Subsidiaries") and as set forth in Part
2.1(a)(ii) of the Company Disclosure Schedule. (The Company and the
Subsidiaries are referred to collectively in this Agreement as the "Acquired
Corporations"). None of the Acquired Corporations has agreed or is obligated
to make any future investment in or capital contribution to any Entity other
than an Acquired Corporation.

(b) Each of the Acquired Corporations is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation and has the necessary corporate power and authority: (i) to
conduct its business in the manner in which its business is currently being
conducted; (ii) to own and use its assets in the manner in which its assets
are currently owned and used; and (iii) to perform its obligations under all
Contracts by which it is bound.

(c) Each of the Acquired Corporations is qualified to do business as a
foreign corporation, and is in good standing, under the laws of the
jurisdictions where the nature of its business requires such qualification and
where the failure to so qualify will have a Material Adverse Effect on the
Acquired Corporations. Each such jurisdiction is listed in Part 2.1(c) of the
Company Disclosure Schedule.

2.2 Certificate of Incorporation and Bylaws; Records. The Company has
delivered or made available to Parent accurate and complete copies of the
certificate of incorporation and bylaws of the Company, including all
amendments thereto. The Company has made available to Parent accurate and
complete copies in all material respects of the minutes and other records of
the meetings and other proceedings (including any actions taken by written
consent or otherwise without a meeting) of the stockholders of the Company and
the board of directors and all committees of the board of directors of the
Company.

2.3 Capitalization, Etc.

(a) The authorized capital stock of the Company consists of: (i) 25,000,000
shares of Company Common Stock, of which 9,805,135 shares have been issued and
are outstanding as of the date of this Agreement; (ii) 1,500,000 shares of
Company Class B Common Stock, of which 1,246,882 shares have been issued and
are outstanding as of the date of this Agreement; and (iii) 2,222,223 shares
of Company Preferred Stock, all of which have been designated "Series A
Convertible Preferred Stock," of which 2,222,223 shares have been issued and
are outstanding as of the date of this Agreement. All of the outstanding
shares of Company Capital Stock have been duly authorized and validly issued,
and are fully paid and non-assessable.

(b) As of the date of this Agreement: 3,188,587 shares of Company Common
Stock are reserved for future issuance pursuant to stock options granted and
outstanding. (Stock options granted by the Company pursuant to its stock
option plans are referred to in this Agreement as "Company Options.") The
Company has delivered or made available to Parent accurate and complete copies
of all stock option plans pursuant to which the Company (or any of its
predecessors) has ever granted stock options. Part 2.3(b) of the Company
Disclosure Schedule accurately sets forth as of February 3, 1998 the names of
all persons who held outstanding Company Options, and sets forth for each
person as of February 3, 1998 (i) the plans under which Company Options have
been issued to such person, (ii) the number of vested Company Options held by
such person and (iii) a vesting schedule for the unvested Company Options held
by such person.

(c) Except for the Company Options and as set forth in Part 2.3(c) of the
Company Disclosure Schedule, as of the date of this Agreement, there is no:
(i) outstanding subscription, option, call, warrant or right to acquire any
shares of the capital stock or other securities of the Company; (ii)
outstanding security, instrument or obligation that is or will become
convertible into or exchangeable for any shares of the capital stock or other
securities of the Company (except for the 1,246,882 shares of Company Class B
Common Stock outstanding as of the date of this Agreement, which are
convertible into 1,246,882 shares of Company Common Stock and the

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<PAGE>

2,222,223 shares of Company Preferred Stock outstanding as of the date of this
Agreement, which are convertible into 2,222,223 shares of Company Common
Stock); or (iii) Contract under which the Company is or will become obligated
to sell or otherwise issue any shares of its capital stock or any other
securities.

(d) The outstanding shares of capital stock of each Subsidiary are validly
issued, fully paid and nonassessable and are owned beneficially and of record
by the Company, free and clear of any Encumbrances.

(e) Except as set forth in Part 2.3(e) of the Company Disclosure Schedule,
none of the awards, grants or other agreements pursuant to which the Company
Options were issued have provisions which accelerate the vesting or right to
exercise such options upon the execution of this Agreement, the consummation
of the transactions contemplated hereby or any other change of control or
similar event.

(f) The Company is not party to any Acquired Corporation Contract that
obligates it to, and is not otherwise obligated to, repurchase or redeem any
of its issued securities. Except as set forth in Part 2.3(f) of the Company
Disclosure Schedule, there is no voting trust or other arrangement to which
the Company or any Subsidiary is a party with respect to the voting of the
Company Capital Stock.

2.4 Financial Statements.

(a) The Company has delivered to Parent the following financial statements
and notes (collectively, the "Company Financial Statements"):

(i) the audited consolidated balance sheets of the Company as of December
31, 1996 and 1995, and the related audited consolidated statements of
operations, statements of stockholders' equity and statements of cash flows
of the Company for the years ended December 31, 1996, 1995 and 1994,
together with the notes thereto and the unqualified report of Arthur
Andersen LLP relating thereto; and

(ii) the unaudited consolidated balance sheet of the Company as of
September 30, 1997 (the "Company Unaudited Interim Balance Sheet"), and the
related unaudited consolidated statement of operations and a statement of
cash flows of the Company for the nine months then ended.

(b) The Company Financial Statements present fairly, in all material
respects, the consolidated financial position of the Acquired Corporations as
of the respective dates thereof and the consolidated results of operations and
cash flows of the Acquired Corporations for the periods covered thereby. The
Company Financial Statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods covered (except that the financial statements referred to in Section
2.4(a)(ii) do not contain footnotes and are subject to normal and recurring
year-end audit adjustments, which will not, individually or in the aggregate,
be material in magnitude).

(c) Except for liabilities or obligations which are accrued or reserved in
the Company Financial Statements (or reflected in the Notes thereto) or which
were incurred after September 30, 1997 in the ordinary course of business, the
Company has no liabilities or obligations (accrued or contingent) of a nature
required by GAAP to be reflected in a balance sheet or that would be required
to be disclosed in footnotes that would be required pursuant to Article 10 of
Regulation S-X promulgated by the SEC in connection with the filing with the
SEC of a quarterly report on Form 10-Q.

(d) Part 2.4(d) of the Company Disclosure Schedule is an aged list of the
Company's accounts receivable as of September 30, 1997. The Company's accounts
receivable arose in the ordinary course of business for goods or services
delivered or rendered, constitute only valid, undisputed claims and are not
subject to counterclaims or setoffs.

2.5 Absence of Changes. Between September 30, 1997 and the date of this
Agreement, none of the Acquired Corporations has:

(a) sold or transferred any material portion of its assets or any
material portion of the interests in such portion other than sales of the
Company's products in the ordinary course of business;

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(b) suffered any material loss, or material interruption in use, of any
asset or property (whether or not covered by insurance), on account of
fire, flood, riot, strike or other hazard or Act of God;

(d) without limitation by the enumeration of any of the foregoing,
entered into any material transaction other than sales or licenses of the
Company's products and services;

(e) incurred any liabilities other than in the ordinary course of
business; or

(f) suffered any adverse change with respect to its business or financial
condition which has had a Material Adverse Effect on the Acquired
Corporations.

2.6 Title to Assets; Equipment; Real Property. The Acquired Corporations
own, and have good, valid and marketable title to, the assets purported to be
owned by them and which are material to the Acquired Corporations or to the
conduct of their business. Except as set forth in Part 2.6 of the Company
Disclosure Schedule, such assets are owned by the Acquired Corporations free
and clear of any Encumbrances, except for (x) any lien for current taxes not
yet due and payable and (y) liens that have arisen in the ordinary course of
business and that do not materially detract from the value of the assets
subject thereto or materially impair the operations of the Acquired
Corporations. The material items of equipment and other tangible assets owned
by or leased to the Acquired Corporations are adequate for the uses to which
they are being put and are in good condition and repair (ordinary wear and
tear excepted). None of the Acquired Corporations owns or leases any real
property or any material interest in real property, except for the leaseholds
created under the real property leases included in Part 2.8 of the Company
Disclosure Schedule.

2.7 Proprietary Assets.

(a) The Acquired Corporations own or have a valid right to use and exploit
the intellectual property in the Acquired Corporation Proprietary Assets.
Except as set forth in Part 2.7(a)(i) of the Company Disclosure Schedule, none
of the Acquired Corporations jointly owns with any other Person any Acquired
Corporation Proprietary Asset (i) that an Acquired Corporation purports to own
and (ii) that is material to the business of the Acquired Corporations. Except
as set forth in Part 2.7(a)(ii) of the Company Disclosure Schedule, as of
December 31, 1997, there is no Acquired Corporation Contract pursuant to which
any Acquired Corporation has granted any Person other than another Acquired
Corporation any right (whether or not currently exercisable) to sublicense,
commercially distribute or otherwise market any Acquired Corporation
Proprietary Asset.

(b) The Acquired Corporations have taken commercially reasonable measures
and precautions to protect and maintain the confidentiality, secrecy and value
of the Acquired Corporation Proprietary Assets (except Acquired Corporation
Proprietary Assets whose value would be unimpaired by public disclosure). No
current or former officer, director, stockholder, employee, consultant or
independent contractor has any ownership right with respect to any Acquired
Corporation Proprietary Asset.

(c) To the Knowledge of the Company: (i) all patents, trademarks, service
marks and copyrights that are registered with any Governmental Body and held
by any of the Acquired Corporations are valid and subsisting; (ii) none of the
Acquired Corporation Proprietary Assets, the use thereof in the Acquired
Corporations' business activities or the conduct of the Acquired Corporations'
business as presently conducted infringes any Proprietary Asset owned or used
by any other Person; and (iii) no other Person is infringing any Acquired
Corporation Proprietary Asset.

(d) The Acquired Corporation Proprietary Assets, together with agreements
for the license to an Acquired Corporation of software generally available to
the public, constitute all the material Proprietary Assets necessary to enable
the Acquired Corporations to conduct their business in the manner in which
such business is currently being conducted. None of the Acquired Corporations
has (i) licensed any of the Acquired Corporation Proprietary Assets to any
Person on an exclusive basis, or (ii) entered into any covenant not to compete
or Contract limiting its ability (A) to exploit fully any material Acquired
Corporation Proprietary Assets or (B) to transact business in any market or
geographical area or with any Person.

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(e) Except as otherwise provided in Part 2.7(e) of the Company Disclosure
Schedule, the Company has maintained the source code of the Acquired
Corporation Proprietary Assets and no third party has a copy of the source
code for any Acquired Corporation Proprietary Assets that the Company purports
to own.

(f) The Acquired Corporation Proprietary Assets are Year 2000 Compliant. For
purposes of this Agreement, "Year 2000 Compliant" means that the Acquired
Corporation Proprietary Assets which have an internal calendar or a
requirement to manipulate, store, compare or sequence dates (i) will
accurately manage, manipulate, input, accept, process, store and output dates
up to, including and following January 1, 2000 without adversely affecting the
operability of the Acquired Corporation Proprietary Assets or the utility of
the data produced therefrom and (ii) will accurately process date/time data
from the year 1999 into the year 2000.

(g) Part 2.7(g) of the Company Disclosure Schedule sets forth all patents
that have been issued to an Acquired Corporation, patent applications that
have been filed by an Acquired Corporation and trademarks that have been
registered by an Acquired Corporation and the jurisdictions in which such
patents have been issued, patent applications have been filed and trademarks
have been registered.

(h) With respect to the in-license agreements identified in Part 2.7(h) of
the Company Disclosure Schedule and the software licensed to an Acquired
Corporation pursuant thereto (the "Identified In-License Software"), such in-
license agreements provide an Acquired Corporation with sufficient rights for
such Acquired Corporation to license to its customers for their use the
Acquired Corporation's current commercially released products that incorporate
the Identified In-License Software.

2.8 Contracts.

(a) Part 2.8 of the Company Disclosure Schedule identifies each Acquired
Corporation Contract as of December 31, 1997.

(b) The Company has delivered or made available to Parent accurate and
complete copies of the written Contracts identified in Part 2.8 of the Company
Disclosure Schedule, including the amendments thereto. Each Contract
identified in Part 2.8 of the Company Disclosure Schedule is valid and in full
force and effect.

(i) none of the Acquired Corporations has violated or breached, or
committed any default under, any Material Contract, and, to the Knowledge
of the Company, no other Person has violated or breached, or committed any
default under, any Material Contract, except where such violations,
breaches or defaults have not had and will not have a Material Adverse
Effect on the Acquired Corporations;

(ii) none of the Acquired Corporations has executed any written
amendments of any Acquired Corporation Contract;

(iii) none of the Acquired Corporations has waived in writing any of its
material rights under any Material Contract; and

(iv) since September 30, 1997, none of the Acquired Corporations has
received any written cancellation or notice of non-renewal of any Material
Contract that in 1997 generated revenue for any of the Acquired
Corporations in an amount greater than $500,000.

2.9 Compliance With Legal Requirements. Each of the Acquired Corporations is
in compliance with applicable Legal Requirements, except where the failure to
comply with such Legal Requirements will not have a Material Adverse Effect on
the Acquired Corporations. Except as disclosed in Part 2.9 of the Company
Disclosure Schedule, none of the Acquired Corporations has received (i) at any
time since January 1, 1995, any notice or written communication from any
Governmental Body regarding any actual or possible violation of, or failure to
comply with, any Legal Requirement or (ii) prior to January 1, 1995 any such
notice or communication that remains pending. To the Knowledge of the Company,
no investigation or review of any of the Acquired

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Corporations by any Governmental Body is pending or threatened, other than
those which would not reasonably be expected to result in a Material Adverse
Effect on the Acquired Corporations.

2.10 Governmental Authorizations. The Acquired Corporations hold the
Governmental Authorizations necessary to enable the Acquired Corporations to
conduct their respective businesses in the manner in which such businesses are
currently being conducted and in compliance with applicable Legal
Requirements, except where failure to hold such Governmental Authorizations
will not have a Material Adverse Effect on the Acquired Corporations. Such
Governmental Authorizations are valid and in full force and effect. Each
Acquired Corporation is in compliance with the terms and requirements of such
Governmental Authorizations except where failure to be in compliance will not
have a Material Adverse Effect on the Acquired Corporations. None of the
Acquired Corporations has received (i) at any time since January 1, 1995 any
written notice or other written communication from any Governmental Body
regarding (a) any actual or possible violation of or failure to comply with
any term or requirement of any material Governmental Authorization or (b) any
actual or possible revocation, withdrawal, suspension, cancellation,
termination or modification of any material Governmental Authorization or (ii)
prior to January 1, 1995 any such notice or communication that remains
pending.

2.11 Tax Matters.

(a) The Tax Returns required to be filed by or on behalf of the respective
Acquired Corporations with any Governmental Body with respect to any taxable
period ending on or before the Closing Date (the "Acquired Corporation
Returns") (i) have been or will be filed on a timely basis on or before the
applicable due date (including any extensions of such due date) and (ii) have
been, or will be when filed, prepared in compliance with applicable Legal
Requirements, except where failure to be in such compliance would not have a
Material Adverse Effect on the Acquired Corporations. The amounts shown on the
Acquired Corporation Returns to be due on or before the Closing Date and on
all notices of assessment or demand for payment received by the Acquired
Corporations have been or will be paid on or before the Closing Date.

(b) The Company Financial Statements fully accrue the Company's liabilities
for Taxes with respect to all periods through the dates thereof in accordance
with generally accepted accounting principles. Each Acquired Corporation will
establish, in the ordinary course of business and consistent with its past
practices, appropriate reserves for the payment of Taxes due for the period
from September 30, 1997 through the Closing Date.

(c) There are no examinations or audits of any Acquired Corporation Return
currently underway, and no extension or waiver of the limitation period
applicable to any Acquired Corporation Return is in effect.

(d) No proposed adjustment, claim or Legal Proceeding is pending or, to the
Knowledge of the Company, has been threatened against or with respect to any
Acquired Corporation in respect of any material Tax. There are no unsatisfied
liabilities for material Taxes (including liabilities for interest, additions
to tax and penalties thereon and related expenses) with respect to any notice
of deficiency or similar document received by any Acquired Corporation with
respect to any material Tax. There are no liens for material Taxes upon any of
the assets of any of the Acquired Corporations except liens for current Taxes
not yet due and payable. None of the Acquired Corporations has entered into or
become bound by any agreement or consent pursuant to Section 341(f) of the
Code. None of the Acquired Corporations has been, and none of the Acquired
Corporations will be, required to include any adjustment in taxable income for
any tax period (or portion thereof) pursuant to Section 481 or 263A of the
Code or any comparable provision under state or foreign Tax laws as a result
of transactions or events occurring, or accounting methods employed, prior to
the Closing. None of the Acquired Corporations has been the subject of a Tax
ruling or closing agreement with a Governmental Body that has continuing
effect.

(e) There is no agreement, plan, arrangement or other Contract covering any
employee or independent contractor or former employee or independent
contractor of any of the Acquired Corporations that could reasonably be
expected to give rise directly or indirectly to the payment of any amount that
would not be deductible pursuant to Section 280G or Section 162 of the Code.
None of the Acquired Corporations is, or has ever been, a party to or bound by
any tax indemnity agreement, tax sharing agreement, tax allocation agreement

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or similar Contract. Except as set forth in Part 2.11(e) of the Company
Disclosure Schedule, none of the Acquired Corporations has ever been a member
of a consolidated group of corporations or analogous group under state or
local law for which it could be liable for the Taxes of any Person (other than
such Acquired Corporation) following the Effective Time.

2.12 Employee Benefit Plans.

(a) Set forth on Part 2.12 of the Company Disclosure Schedule is a true and
complete list of each (i) "employee benefit plan," as defined in Section 3(3)
of ERISA (including any "multiemployer plan" as defined in Section 3(37) of
ERISA), and (ii) all other pension, retirement, supplemental retirement,
deferred compensation, excess benefit, profit sharing, bonus, incentive, stock
purchase, stock ownership, stock option, stock appreciation right, severance,
salary continuation, termination, change-of-control, health, life, disability,
group insurance, vacation, holiday and fringe benefit plan, program or
arrangement (each such plan, program or arrangement described in the foregoing
clauses (i) and (ii), a "Plan") currently maintained, contributed to, or
required to be contributed to, by the Acquired Corporations or any ERISA
Affiliate of any Acquired Corporation or under which the Acquired Corporations
or any ERISA Affiliate of any Acquired Corporation have any liability
(collectively the "Company Plans").

(b) Each Company Plan which is intended to be qualified under Section 401(a)
of the Code has received a favorable determination from the IRS covering the
provisions of the Tax Reform Act of 1986 stating that such Company Plan is so
qualified.

(i) The Acquired Corporations and all ERISA Affiliates of the Acquired
Corporations are in compliance in all material respects with the provisions
of ERISA and the Code applicable to the Company Plans. Each Company Plan
has been maintained, operated and administered in compliance in all
material respects with its terms and any related documents or agreements
and the applicable provisions of ERISA and the Code.

(ii) No Company Plan is subject to Title IV of ERISA and no Company Plan
is a "multiemployer plan" as defined in Section 3(37) of ERISA.

(iii) The Company Plans which are "employee pension benefit plans" within
the meaning of Section 3(2) of ERISA and which are intended to meet the
qualification requirements of Section 401(a) of the Code now meet, and at
all times since their inception have met, the requirements for such
qualification, and the related trusts are now, and at all times since their
inception have been, exempt from taxation under Section 501(a) of the Code.

(iv) Except for claims for benefits in the normal operation of the
Company Plans, there is no pending or threatened audit, assessment,
complaint, proceeding or investigation of any kind in any court or
governmental agency with respect to any Company Plan.

(v) Neither a "prohibited transaction" within the meaning of Section 406
of ERISA or Section 4975 of the Code nor any breach of any duty imposed by
Title I of ERISA has occurred with respect to any Company Plan.

(vi) With respect to each Company Plan that is a "group health plan"
within the meaning of ERISA Section 607(l) and that is subject to Code
Section 4980B, the Acquired Corporations comply in all material respects
with the continuation coverage requirements of those provisions and Part 6
of Title I of ERISA.

(vii) No Company Plan provides benefits, including, without limitation,
death or medical benefits, beyond termination of service or retirement
other than (i) coverage mandated by law, or (ii) death or retirement
benefits under a Company Plan qualified under Code Section 401(a).

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2.13 Environmental Matters.

(a) None of the Acquired Corporations is liable or potentially liable for
any material response cost or natural resource damages under any so-called
"superfund" or "superlien" law or similar Legal Requirement, at or with
respect to any site.

(b) The Acquired Corporations are and have been in compliance with all
applicable Environmental Laws, except for failures to be in compliance that
would not reasonably be expected to have a Material Adverse Effect on the
Acquired Corporations. The Acquired Corporations possess all material permits
and other material Governmental Authorizations required under applicable
Environmental Laws, and the Acquired Corporations are and have been in
compliance with the terms and requirements of all such Governmental
Authorizations, except for failures to be in compliance that would not
reasonably be expected to have a Material Adverse Effect on the Acquired
Corporations. None of the Acquired Corporations has received or given, and to
the Knowledge of the Company, no current or prior owner of any property leased
or controlled by any of the Acquired Corporations has received or given any
notice, citation, summons, order, complaint, penalty, assessment, request for
information, demand or other communication (in writing) to or from any
Governmental Body or other Person regarding any actual, alleged, possible or
potential material liability or responsibility arising from or relating to the
presence, generation, manufacture, production, transportation, importation,
use, treatment, refinement, processing, handling, storage, discharge, release,
emission or disposal of any Material of Environmental Concern that has not
already been paid or fully resolved without any outstanding obligations. No
Person has ever commenced or threatened to commence any contribution action or
other Legal Proceeding against any of the Acquired Corporations in connection
with any such actual, alleged, possible or potential liability or
responsibility; and to the Knowledge of the Company, no event has occurred,
and no condition or circumstance exists, that would reasonably be expected to
directly or indirectly give rise to, or result in any of the Acquired
Corporations becoming subject to, any such liability or responsibility.

(c) To the Knowledge of the Company, none of the Acquired Corporations has
generated, manufactured, produced, transported, imported, used, treated,
refined, processed, handled, stored, discharged, released or disposed of any
Material of Environmental Concern. To the Knowledge of the Company, none of
the Acquired Corporations has permitted (knowingly or otherwise) any Material
of Environmental Concern to be generated, manufactured, produced, used,
treated, refined, processed, handled, stored, discharged, released or disposed
of (whether lawfully or unlawfully):

(i) on or beneath the surface of any real property that is, or that has
at any time been, owned by, leased to, controlled or used by any of the
Acquired Corporations;

(ii) in or into any surface water, groundwater, soil or air associated
with or adjacent to any such real property; or

(iii) in or into any well, pit, pond, lagoon, impoundment, ditch,
landfill, building, structure, facility, improvement, installation,
equipment, pipe, pipeline, vehicle or storage container that is or was
located on or beneath the surface of any such real property or that is or
has at any time been owned by, leased to, controlled by or used by any of
the Acquired Corporations.

(d) To the Knowledge of the Company, all property that is owned by, leased
to, controlled by or used by any of the Acquired Corporations, and all surface
water, groundwater, soil and air associated with or adjacent to such property:

(i) is free of any Material of Environmental Concern and any harmful
chemical or physical conditions; and

(ii) is free of any environmental contamination of any nature.

(e) To the Knowledge of the Company, there is no storage tank or other
storage container that is or has been owned by, leased to, controlled by or
used by any of the Acquired Corporations, or that is located on or

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<PAGE>

beneath the surface of any real property owned by, leased to, controlled by or
used by any of the Acquired Corporations.

(f) There have been no environmental inspections, investigations, studies,
audits, tests, reviews or other analyses conducted by, for or at the request
of the Company or the Acquired Corporations, or to the Knowledge of the
Company, by any other Person in relation to any property or business now or
previously owned, operated or leased by the Company or the Acquired
Corporations.

2.14 Insurance. The Company has delivered or made available to Parent a copy
of each material insurance policy relating to the business, assets or
operations of the Acquired Corporations. Each such insurance policy is in full
force and effect. Since December 31, 1995, none of the Acquired Corporations
has received any written notice or other written communication regarding any
actual or possible (a) cancellation or invalidation of any insurance policy
(b) refusal of any coverage or rejection of any material claim under any
insurance policy, or (c) material adjustment in the amount of the premiums
payable with respect to any insurance policy. There is no pending material
claim (including any workers' compensation claim) under or based upon any
insurance policy of any of the Acquired Corporations. Part 2.14 of the Company
Disclosure Schedule sets forth each material insurance policy relating to the
business, assets or operations of the Acquired Corporations, the coverage
provided thereunder and the premiums therefor.

2.15 Related Party Transactions. No Related Party has any direct or indirect
interest in any material asset used in or otherwise relating to the business
of any of the Acquired Corporations. No Related Party has any direct or
indirect financial interest in any Acquired Corporation Contract, transaction
or business dealing involving any of the Acquired Corporations. No Related
Party is competing directly or indirectly with any of the Acquired
Corporations. No Related Party has any claim or right against any of the
Acquired Corporations (other than rights under Company Options and rights to
receive compensation for services performed as an employee of an Acquired
Corporation). (For purposes of this Section 2.15 each of the following shall
be deemed to be a "Related Party": (i) each individual who is an officer of
any of the Acquired Corporations; (ii) each member of the immediate family of
each of the individuals referred to in clause "(i)" above; and (iii) any trust
or other Entity (other than an Acquired Corporation) in which any one of the
individuals referred to in clauses "(i)" and "(ii)" above holds (or in which
more than one of such individuals collectively hold), beneficially or
otherwise, a material voting, proprietary or equity interest.)

2.16 Legal Proceedings; Orders.

(a) There is no pending Legal Proceeding, and (to the Knowledge of the
Company) no Person has overtly threatened to commence any Legal Proceeding:
(i) that involves any of the Acquired Corporations or any assets owned or used
by any of the Acquired Corporations and that, if adversely decided, would have
a Material Adverse Effect on the Acquired Corporations; or (ii) that
challenges the Merger or any of the other transactions contemplated by this
Agreement.

(b) There is no order, writ, injunction, judgment or decree to which any of
the Acquired Corporations, or any assets owned or used by any of the Acquired
Corporations, is subject.

2.17 Authority; Binding Nature of Agreement. The Company has the corporate
right, power and authority to enter into and to perform its obligations under
this Agreement. The board of directors of the Company (at a meeting duly
called and held) has (a) determined by a unanimous vote of the directors
present that the Merger is advisable and fair and in the best interests of the
Company and its stockholders, (b) approved the execution, delivery and
performance of this Agreement by the Company, and (c) recommended the adoption
and approval of this Agreement by the holders of Company Capital Stock and
directed that this Agreement be submitted for consideration by the Company's
stockholders at the Company Stockholders' Meeting (as defined in Section 5.2).
Other than the Company Stockholders' Meeting, no other corporate proceedings
are necessary to authorize this Agreement and consummate the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
the Company and constitutes the legal, valid and binding obligation of the
Company,

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<PAGE>

enforceable against the Company in accordance with its terms, subject to (i)
laws of general application relating to bankruptcy, insolvency and the relief
of debtors, and (ii) rules of law governing specific performance, injunctive
relief and other equitable remedies.

2.18 Vote Required. The Company Required Vote (as hereinafter defined) is
the only vote of the holders of any class or series of the Company's capital
stock necessary to adopt and approve this Agreement, the Merger and the other
transactions contemplated by this Agreement. For purposes of this Agreement,
"Company Required Vote" shall mean the affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock and Company
Preferred Stock (voting together as a single class).

2.19 Non-contravention; Consents. Neither (1) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in
this Agreement, nor (2) the consummation of the Merger or any of the other
transactions contemplated by this Agreement, will directly or indirectly (with
or without notice or lapse of time):

(a) contravene, conflict with or result in a violation of any of the
provisions of the certificate of incorporation or bylaws of any of the
Acquired Corporations;

(b) contravene, conflict with or result in a violation of, any Legal
Requirement or any order, writ, injunction, judgment or decree to which any
of the Acquired Corporations, or any material assets owned or used by any
of the Acquired Corporations, is subject;

(c) contravene, conflict with or result in a violation of any of the
terms or requirements of any material Governmental Authorization that is
held by any of the Acquired Corporations or that otherwise relates to the
business of any of the Acquired Corporations or to any material assets
owned or used by any of the Acquired Corporations; or

(d) contravene, conflict with or result in a violation or breach of, or
result in a default under, or result in the creation of any lien with
respect to the assets of an Acquired Corporation pursuant to, any provision
of any Material Contract, except for any such violations, liens, breaches
or defaults, or failures to give notice that, individually or in the
aggregate, will not have a Material Adverse Effect on the Acquired
Corporations.

Except as contemplated by this Agreement or as may be required by the DGCL or
under the HSR Act, none of the Acquired Corporations is or will be required to
make any filing with or give any notice to, or to obtain any Consent from, any
Person in connection with (x) the execution, delivery or performance of this
Agreement or any of the other agreements referred to in this Agreement or (y)
the consummation of the Merger or any of the other transactions contemplated
by this Agreement, except where the failure to take such actions will not have
a Material Adverse Effect on the Acquired Corporations.

2.20 Financial Advisor. Except as set forth in Part 2.20 of the Company
Disclosure Schedule, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger
or any of the other transactions contemplated by this Agreement based upon
arrangements made by or on behalf of either of the Acquired Corporations.

2.21 Employees. Part 2.21 of the Company Disclosure Schedule contains an
accurate list of: (i) all written agreements providing for a term of
employment between any Acquired Corporation and any current or retired
employee; (ii) all collective bargaining agreements to which any Acquired
Corporation is a party; (iii) the name, office location and salary of all
full- and part-time employees of the Company as of December 31, 1997; and (iv)
a description of personal perquisites and other personal benefits paid to or
on behalf of any employee of the Company during 1997 to the extent that the
aggregate amount of such perquisites and other personal benefits exceeds the
lesser of $50,000 or 10% of the total of annual salary and bonus paid to such
employee (it being understood that such perquisites and benefits do not
include benefits made available under Company Plans). The Company does not
have a written severance pay policy. To the Knowledge of the Company, as of
the date of this Agreement, none of Michael J. Savage, Saiid Zarrabian, David
B. Hiatt, Steven Herbert, Thomas M. Carney, Christopher Herd and Michael
Stapleton has indicated to any other Person that he is considering terminating
his

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<PAGE>

employment with the Company. The Company does not know of any efforts within
the last three years to attempt to organize the Company's employees, and no
strike or labor dispute involving the Company and a group of its employees has
occurred during the last three years or, to the Knowledge of the Company, is
threatened. The Company has complied in all material respects with applicable
wage and hour, equal employment, safety and other legal requirements relating
to its employees, except where the failure to comply will not have a Material
Adverse Effect on the Acquired Corporations.

Section 3. Representations and Warranties of Parent and Merger Sub

Parent and Merger Sub represent and warrant to the Company that, except as
set forth in the disclosure schedule delivered by Parent to the Company on the
date of this Agreement (the "Parent Disclosure Schedule"):

3.1 Due Organization, Standing and Power.

(a) Parent is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Merger Sub is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. Each of Parent and Merger Sub has the necessary corporate
power and authority: (i) to conduct its business in the manner in which its
business is currently being conducted; (ii) to own and use its assets in the
manner in which its assets are currently owned and used; and (iii) to perform
its obligations under all Contracts by which it is bound.

(b) Each of the Parent, Merger Sub and its other subsidiaries is qualified
to do business as a foreign corporation, and is in good standing, under the
laws of the jurisdictions where the nature of its business requires such
qualification and where the failure to so qualify will have a Material Adverse
Effect on Parent. Each such jurisdiction is listed in Part 3.1(b) of the
Parent Disclosure Schedule.

(c) Parent has delivered or made available to the Company accurate and
complete copies of the certificate of incorporation and bylaws of Parent,
including all amendments thereto. Parent has made available to the Company
accurate and complete copies in all material respects of the minutes and other
records of the meetings and other proceedings (including any actions taken by
written consent or otherwise without a meeting) of the stockholders of Parent
and the board of directors and all committees of the board of directors of
Parent.

3.2 Capitalization, Etc.

(a) The authorized capital stock of Parent consists of: (i) 40,000,000
shares of Parent Common Stock, of which 11,795,486 shares have been issued and
are outstanding as of the date of this Agreement; and (ii) 2,000,000 shares of
preferred stock, of which no shares have been issued and are outstanding as of
the date of this Agreement. There are no shares of Parent Common Stock held in
treasury. All of the outstanding shares of capital stock of Parent have been
duly authorized and validly issued, and are fully paid and non-assessable.

(b) As of the date of this Agreement: 1,340,440 shares of Parent Common
Stock are reserved for future issuance pursuant to stock options granted and
outstanding.

(c) Except as described in Sections 3.2(a) and (b) above, and except as set
forth in Part 3.2(c) of the Parent Disclosure Schedule, as of the date of this
Agreement there is no: (i) outstanding subscription, option, call, warrant or
right to acquire any shares of the capital stock or other securities of
Parent; (ii) outstanding security, instrument or obligation that is or will
become convertible into or exchangeable for any shares of the capital stock or
other securities of Parent; (iii) Contract under which Parent is or will
become obligated to sell or otherwise issue any shares of its capital stock or
any other securities; or (iv) voting trust or other arrangement to which
Parent is a party with respect to the voting of the capital stock of Parent.
Parent is not party to any Contract that obligates it to, and is not otherwise
obligated to, repurchase or redeem any of its issued securities.

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<PAGE>

3.3 SEC Filings; Financial Statements.

(a) Parent has delivered or made available to the Company accurate and
complete copies of each report, registration statement (on a form other than
Form S-8) and definitive proxy statement filed by Parent with the SEC between
January 1, 1996 and the date of this Agreement (the "Parent SEC Documents").
As of the time it was filed with the SEC (or, if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing):
(i) each of the Parent SEC Documents complied in all material respects with
the applicable requirements of the Securities Act or the Exchange Act (as the
case may be); and (ii) none of the Parent SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. None of
the Parent SEC Documents, the representations made in this Agreement, and the
provisions of the Parent Disclosure Schedule, when read together, contains any
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.

(b) The consolidated financial statements contained in the Parent SEC
Documents: (i) complied as to form in all material respects with the published
rules and regulations of the SEC applicable thereto; (ii) were prepared in
accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods covered, except as may be indicated in
the notes to such financial statements and (in the case of unaudited
statements) as permitted by Form 10-Q of the SEC, and except that unaudited
financial statements may not contain footnotes and are subject to year-end
audit adjustments which will not, individually or in the aggregate, be
material in magnitude; and (iii) fairly present the consolidated financial
position of Parent and its subsidiaries as of the respective dates thereof and
the consolidated results of operations of Parent and its subsidiaries for the
periods covered thereby.

(c) Except for liabilities or obligations which are accrued or reserved in
the financial statements (or reflected in the Notes thereto) included in the
Parent SEC Documents or which were incurred after September 30, 1997 in the
ordinary course of business, Parent has no liabilities or obligations (accrued
or contingent) of a nature required by GAAP to be reflected in a balance sheet
or that would be required to be disclosed in footnotes that are required
pursuant to Article 10 of Regulation S-X promulgated by the SEC in connection
with the filing with the SEC of a quarterly report on Form 10-Q.

3.4 Absence of Changes. Between September 30, 1997 and the date of this
Agreement, and except as set forth in Part 3.4 of the Parent Disclosure
Schedule, neither Parent nor any of its subsidiaries has:

(a) sold or transferred any material portion of its assets or any
material portion of the interests in such portion other than sales of
Parent's products in the ordinary course of business;

(b) suffered any material loss, or material interruption in use, of any
asset or property (whether or not covered by insurance), on account of
fire, flood, riot, strike or other hazard or Act of God;

(d) without limitation by the enumeration of any of the foregoing,
entered into any material transaction other than sales of Parent's and its
subsidiaries' products;

(e) incurred any liabilities other than in the ordinary course of
business; or

(f) suffered any adverse change with respect to its business or financial
condition which has had a Material Adverse Effect on Parent.

3.5 Proprietary Assets.

(a) Each of Parent and its subsidiaries owns or has a valid right to use and
exploit the intellectual property in the Parent Proprietary Assets. Except as
set forth in Part 3.5(a) of the Parent Disclosure Schedule, neither Parent nor
any of its subsidiaries jointly owns with any other Person any Parent
Proprietary Asset (i) that Parent or any of its subsidiaries purports to own
and (ii) that is material to the business of Parent or its subsidiaries.

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<PAGE>

Except as set forth in Part 3.5(a) of the Parent Disclosure Schedule, as of
December 31, 1997 there is no Parent Contract pursuant to which Parent or any
of its subsidiaries has granted any Person any right (whether or not currently
exercisable) to use, sublicense, commercially distribute or otherwise exploit
any Parent Proprietary Asset.

(b) Parent and its subsidiaries have taken commercially reasonable measures
and precautions to protect and maintain the confidentiality, secrecy and value
of the Parent Proprietary Assets (except Parent Proprietary Assets whose value
would be unimpaired by public disclosure). No current or former officer,
director, stockholder, employee, consultant or independent contractor has any
ownership right with respect to any Parent Proprietary Asset.

(c) To the Knowledge of Parent: (i) all patents, trademarks, service marks
and copyrights that are registered with any Governmental Body and held by
Parent and its subsidiaries are valid and subsisting; (ii) except as set forth
in Part 3.5(c)(ii) of the Parent Disclosure Schedule, none of the Parent
Proprietary Assets, the use thereof in Parent's and its subsidiaries' business
activities or the conduct of Parent's and its subsidiaries' business as
presently conducted by Parent and its subsidiaries infringes any Proprietary
Asset owned or used by any other Person; and (iii) except as set forth in Part
3.5(c)(iii) of the Parent Disclosure Schedule, no other Person is infringing
any Parent Proprietary Asset.

(d) The Parent Proprietary Assets, together with agreements for the license
to Parent or any of its subsidiaries of software generally available to the
public, constitute all the material Proprietary Assets necessary to enable
Parent and its subsidiaries to conduct their business in the manner in which
such business is currently being conducted. Except as set forth in Part 3.5(a)
of the Parent Disclosure Schedule, none of Parent or its subsidiaries has (i)
licensed any of the Parent Proprietary Assets to any Person on an exclusive
basis, or (ii) entered into any covenant not to compete or Contract limiting
its ability (A) to exploit fully any material Parent Proprietary Asset or (B)
to transact business in any market or geographical area or with any Person.

3.6 Contracts.

(a) Parent has delivered or made available to the Company accurate and
complete copies of the Parent Contracts. Each Parent Contract is valid and in
full force and effect;

(b) Neither Parent nor any of its subsidiaries has violated or breached, or
committed any default under, any Parent Contract, and, to the Knowledge of the
Parent and Merger Sub, no other Person has violated or breached, or committed
any default under, any Parent Contract, except where such violations, breaches
or defaults and have not had and will not have a Material Adverse Effect on
Parent; and

(c) Neither Parent nor any of its subsidiaries has executed any written
amendments of, or waived in writing any of its material rights under, any
Parent Contract.

3.7 Compliance With Legal Requirements. Each of Parent and its subsidiaries
is in compliance with applicable Legal Requirements, except where the failure
to comply with such Legal Requirements will not have a Material Adverse Effect
on Parent. Neither Parent nor any of its subsidiaries has received (i) at any
time since January 1, 1995 any notice or written communication from any
Governmental Body regarding any actual or possible violation of, or failure to
comply with, any Legal Requirement or (ii) prior to January 1, 1995 any such
notice or communication that remains pending. To the Knowledge of Parent, no
investigation or review of Parent or any of its subsidiaries by any
Governmental Body is pending or threatened, other than those which would not
reasonably be expected to result in a Material Adverse Effect on Parent.

3.8 Governmental Authorizations. Parent and its subsidiaries hold the
Governmental Authorizations necessary to enable Parent and its subsidiaries to
conduct their respective businesses in the manner in which such businesses are
currently being conducted and in compliance with applicable Legal
Requirements, except where failure to hold such Governmental Authorizations
will not have a Material Adverse Effect on Parent. Such

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<PAGE>

Governmental Authorizations are valid and in full force and effect. Each of
Parent and its subsidiaries is in compliance with the terms and requirements
of such Governmental Authorizations except where failure to be in compliance
will not have a Material Adverse Effect on Parent. None of Parent or its
subsidiaries has received (i) at any time since January 1, 1995 any written
notice or other written communication from any Governmental Body regarding (a)
any actual or possible violation of or failure to comply with any term or
requirement of any material Governmental Authorization or (b) any actual or
possible revocation, withdrawal, suspension, cancellation, termination or
modification of any material Governmental Authorization or (ii) prior to
January 1, 1995 any such notice or communication that remains pending.

3.9 Employee Benefit Plans.

(a) Except as set forth in Part 3.9 of the Parent Disclosure Schedule, each
Plan currently maintained, contributed to, or required to be contributed to,
by Parent or any of its subsidiaries or any ERISA Affiliate of Parent or any
of its subsidiaries or under which Parent or any of its subsidiaries or any
ERISA Affiliate of Parent or any of its subsidiaries have any liability
(collectively, the "Parent Plans") which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination from the IRS
covering the provisions of the Tax Reform Act of 1986 stating that such Parent
Plan is so qualified.

(b) Except as otherwise disclosed in Part 3.9 of the Parent Disclosure
Schedule:

(i) Parent and its subsidiaries and all ERISA Affiliates of Parent and
its subsidiaries are in compliance in all material respects with the
provisions of ERISA and the Code applicable to the Parent Plans. Each
Parent Plan has been maintained, operated and administered in compliance in
all material respects with its terms and any related documents or
agreements and the applicable provisions of ERISA and the Code.

(ii) No Parent Plan is subject to Title IV of ERISA and no Parent Plan is
a "multiemployer plan" as defined in Section 3(37) of ERISA.

(iii) The Parent Plans which are "employee pension benefit plans" within
the meaning of Section 3(2) of ERISA and which are intended to meet the
qualification requirements of Section 401(a) of the Code now meet, and at
all times since their inception have met, the requirements for such
qualification, and the related trusts are now, and at all times since their
inception have been, exempt from taxation under Section 501(a) of the Code.

(iv) Except for claims for benefits in the normal operation of the Parent
Plans, there is no pending or threatened audit, assessment, complaint,
proceeding or investigation of any kind in any court or governmental agency
with respect to any Parent Plan.

(vi) With respect to each Parent Plan that is a "group health plan"
within the meaning of ERISA Section 607(l) and that is subject to Code
Section 4980B, such Parent Plan complies in all material respects with the
continuation coverage requirements of those provisions and Part 6 of Title
I of ERISA.

(vii) No Parent Plan provides benefits, including, without limitation,
death or medical benefits, beyond termination of service or retirement
other than (i) coverage mandated by law, or (ii) death or retirement
benefits under a Parent Plan qualified under Code Section 401(a).

3.10 Environmental Matters. Parent and its subsidiaries are and have been in
compliance with all applicable Environmental Laws, except for failures to be
in compliance that would not reasonably be expected to have a Material Adverse
Effect on Parent. Parent and its subsidiaries possess all material permits and
other material Governmental Authorizations required under applicable
Environmental Laws, and Parent and its subsidiaries are and have been in
compliance with the terms and requirements of all such Governmental
Authorizations, except for failures to be in compliance that would not
reasonably be expected to have a Material Adverse Effect on Parent. Neither
Parent nor any of its subsidiaries has received or given, and to the Knowledge

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of Parent, no current or prior owner of any property leased or controlled by
Parent or any of its subsidiaries has received or given any notice, citation,
summons, order, complaint, penalty, assessment, request for information,
demand or other communication (in writing) to or from any Governmental Body or
other Person regarding any actual, alleged, possible or potential material
liability or responsibility arising from or relating to the presence,
generation, manufacture, production, transportation, importation, use,
treatment, refinement, processing, handling, storage, discharge, release,
emission or disposal of any Material of Environmental Concern that has not
already been paid or fully resolved without any outstanding obligations. No
Person has ever commenced or threatened to commence any contribution action or
other Legal Proceeding against Parent or any of its subsidiaries in connection
with any such actual, alleged, possible or potential liability or
responsibility.

3.11 Insurance. Each material insurance policy relating to the business,
assets or operations of Parent or any of its subsidiaries is in full force and
effect. Since December 31, 1995, neither Parent nor any of its subsidiaries
has received any written notice or other written communication regarding any
actual or possible (a) cancellation or invalidation of any insurance policy,
(b) refusal of any coverage or rejection of any material claim under any
insurance policy or (c) material adjustment in the amount of the premiums
payable with respect to any insurance policy. There is no pending material
claim (including any workers' compensation claim) under or based upon any
insurance policy of any of Parent or any of its subsidiaries.

3.12 Legal Proceedings; Orders.

(a) There is no pending Legal Proceeding and (to the Knowledge of Parent) no
Person has overtly threatened to commence any Legal Proceeding: (i) that
involves Parent or its subsidiaries or any of the assets owned or used by
Parent or its subsidiaries and that, if adversely decided, would have a
Material Adverse Effect on Parent; or (ii) that challenges the Merger or any
of the other transactions contemplated by this Agreement.

(b) There is no order, writ, injunction, judgment or decree to which Parent
or any of its Subsidiaries, or any assets owned or used by Parent or any of
its Subsidiaries, is subject.

3.13 Authority; Binding Nature of Agreement. Parent and Merger Sub have the
corporate right, power and authority to enter into and perform their
respective obligations under this Agreement. The board of directors of Parent
(at a meeting duly called and held) has (a) determined by a unanimous vote of
the directors present that the Merger is advisable and fair and in the best
interests of Parent and its stockholders, (b) approved the execution, delivery
and performance of this Agreement by Parent (including the contemplated
issuance of Parent Common Stock in the Merger in accordance with this
Agreement) and (c) recommended the approval of the issuance of Parent Common
Stock in the Merger by the holders of Parent Common Stock and directed that
approval of such issuance be submitted for consideration by Parent's
stockholders at the Parent Stockholders' Meeting (as defined in Section 5.2).
The execution, delivery and performance by Merger Sub of this Agreement have
been duly authorized by all necessary action on the part of Merger Sub and its
board of directors. Other than the Parent Stockholders' Meeting, no other
corporate proceedings are necessary to authorize this Agreement or consummate
the transactions contemplated hereby. This Agreement has been duly executed
and delivered by Parent and Merger Sub and constitutes the legal, valid and
binding obligation of Parent and Merger Sub, enforceable against them in
accordance with its terms, subject to (i) laws of general application relating
to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable
remedies.

3.14 Vote Required. The Parent Required Vote (as hereinafter defined) is the
only vote of the holders of any class or series of Parent's capital stock
necessary to approve the issuance of the Parent Common Stock in the Merger.
For purposes of this Agreement, "Parent Required Vote" shall mean the
affirmative vote of the holders of a majority of the outstanding shares of
Parent Common Stock.

3.15 Non-contravention; Consents. Neither (1) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in
this Agreement, nor (2) the consummation of the Merger or any of

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the other transactions contemplated by this Agreement, will directly or
indirectly (with or without notice or lapse of time):

(a) contravene, conflict with or result in a violation of any of the
provisions of the certificate of incorporation or bylaws of Parent or any
of its subsidiaries;

(b) contravene, conflict with or result in a violation of, any Legal
Requirement or any order, writ, injunction, judgment or decree to which or
any material assets owned or used by Parent or any of its subsidiaries is
subject;

(c) contravene, conflict with or result in a violation of any of the
terms or requirements of any material Governmental Authorization that is
held by Parent or any of its subsidiaries or that otherwise relates to the
business of Parent or any of its subsidiaries or to any material assets
owned or used by Parent or any of its subsidiaries; or

(d) contravene, conflict with or result in a violation or breach of, or
result in a default under, or result in the creation of any lien with
respect to Parent's assets pursuant to, or require the giving of notice
under, any provision of any Parent Contract, except for any such
violations, liens, breaches or defaults, or failures to give notice that
will not, individually or in the aggregate, have a Material Adverse Effect
on the Parent.

Except as contemplated by this Agreement or as may be required by the DGCL,
federal and state securities laws, the By-laws of the National Association of
Securities Dealers or under the HSR Act, neither Parent nor Merger Sub is or
will be required to make any filing with or give any notice to, or to obtain
any Consent from, any Person in connection with (x) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in
this Agreement or (y) the consummation of the Merger or any of the other
transactions contemplated by this Agreement, except where the failure to take
such actions will not have a Material Adverse Effect on Parent.

3.16 Financial Advisor. Except as set forth in Part 3.16 of the Parent
Disclosure Schedule, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger
or any of the other transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Parent or Merger Sub.

3.17 Valid Issuance. The Parent Common Stock to be issued in the Merger
will, when issued in accordance with the provisions of this Agreement, be
validly issued, fully paid and nonassessable.

Section 4. Certain Covenants of the Parties

4.1 Access and Investigation.

(a) During the period from the date of this Agreement through the Effective
Time (the "Pre-Closing Period"), the Company shall, and shall cause its
Representatives and the Subsidiaries' Representatives to provide Parent and
Parent's Representatives with, reasonable access to the Acquired Corporations'
Representatives, personnel and assets and to all existing books, records, Tax
Returns, work papers and other documents and information relating to the
Acquired Corporations. All information obtained through such access shall be
treated as Evaluation Material under that certain letter agreement between the
Company and Parent dated September 24, 1997 (the "Company Confidentiality
Agreement").

(b) During the Pre-Closing Period, (i) Parent shall, and shall cause its
Representatives and its subsidiaries' Representatives to provide the Company
and the Company's Representatives with, reasonable access to the Parent's
Representatives, personnel and assets and to all existing books, records, Tax
Returns, work papers and other documents and information relating to Parent
and its subsidiaries and (ii) Parent shall consult with the Company in advance
of, and shall provide any information reasonably requested by the Company with
respect to, the sale, issuance or grant of shares of Parent Common Stock or
securities or rights exercisable for or convertible into shares of Parent
Common Stock (except stock options granted to employees, consultants or
directors) that, when aggregated with all such issuances since the date of
this Agreement (assuming conversion

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into, or exercise for, shares of Parent Common Stock of any such securities)
exceed 1,000,000 shares of Parent Common Stock (as appropriately adjusted for
any stock split, stock dividend, reverse stock split, reclassification,
recapitalization or other similar transaction). All information obtained
through such access or consultation shall be treated as Proprietary
Information under that certain letter agreement between the Company and Parent
dated November 14, 1997 (the "Parent Confidentiality Agreement").

4.2 Operation of the Company's Business.

(a) During the Pre-Closing Period: (i) the Company shall use reasonable
effort to cause each of the Acquired Corporations to conduct its business and
operations (A) in the ordinary course and (B) in material compliance with
applicable Legal Requirements and the requirements of the Acquired Corporation
Contracts; and (ii) the Company shall use reasonable efforts to cause each of
the Acquired Corporations to preserve intact its current business
organization, to keep available the services of its current officers and
employees and to maintain its relations and goodwill with all suppliers,
customers, landlords, creditors, licensors, licensees, employees and other
Persons having business relationships with the respective Acquired
Corporations.

(b) During the Pre-Closing Period, the Company shall not (without the prior
written consent of Parent, which consent shall not be unreasonably withheld or
delayed by Parent), and shall not permit the Subsidiaries to:

(i) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities (excluding transactions among the Company and the Subsidiaries);

(ii) sell, issue, grant or authorize the issuance or grant of (i) any
capital stock or other security, (ii) any option, call, warrant or right to
acquire, or relating to, any capital stock or other security, or (iii) any
instrument convertible into or exchangeable for any capital stock or other
security (except that the Company may (1) issue up to 3,469,105 shares of
Company Common Stock upon the valid conversion of shares of outstanding
Company Preferred Stock and Company Class B Common Stock, (2) issue Company
Common Stock upon the valid exercise of Company Options outstanding as of
the date of this Agreement, (3) grant the Company Options described in Part
2.3C of the Company Disclosure Schedule and issue shares of Company Common
Stock upon exercise of such Company Options and (4) in addition to the
Company Options described in Part 2.3C of the Company Disclosure Schedule,
grant Company Options (and issue shares of Company Common Stock upon
exercise of such Company Options) in accordance with past practices in
connection with the hiring of new employees, provided that, with respect to
this clause (4) only, the aggregate of the number of shares of Company
Capital Stock (A) outstanding as of the Effective Time, (B) issuable upon
exercise of Company Options outstanding as of the Effective Time and (C)
issuable upon exercise of the Company Options described in Part 2.3C of the
Company Disclosure Schedule does not exceed the aggregate of the number of
shares of Company Capital Stock (x) outstanding as of the date of this
Agreement, (y) issuable upon exercise of Company Options outstanding as of
the date of this Agreement and (z) issuable upon exercise of the Company
Options described in Part 2.3C of the Company Disclosure Schedule);
provided, however, that any Subsidiary may conduct such a transaction with
the Company;

(iii) amend or permit the adoption of any amendment to its certificate of
incorporation or bylaws or other charter or organizational documents, or
effect or become a party to any merger, consolidation, share exchange,
business combination, recapitalization, reclassification of shares, stock
split, reverse stock split or similar transaction;

(iv) enter into or become bound by, or permit any of the assets owned or
used by it to become bound by, any Acquired Corporation Contract outside
the ordinary course of business, or amend or prematurely terminate, or
waive any material right or remedy under, any Acquired Corporation Contract
outside the ordinary course of business;

(v) lend money to any Person other than travel advances to employees of
the Company not to exceed $10,000 to any individual employee, loans to
employees of the Company for the purchase of computers in accordance with
the Company's policy for such loans and in amounts not to exceed $5,000 to
any individual

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employee, and relocation advances to employees made in the ordinary course
of business and consistent with past practice; or incur or guarantee any
indebtedness (except that the Company may make routine borrowings in the
ordinary course of business and in accordance with prudent business
practices) or guarantee any other obligations of a third party;

(vi) establish, adopt or amend any Company Plan or other employee benefit
plan, pay any bonus or make any profit-sharing or similar payment (except
pursuant to existing Contracts, programs or Company Plan terms consistent
with past practice) to, or increase by more than 6% the amount of the
wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees;

(vii) change any of its methods of accounting or accounting practices in
any respect;

(viii) make any material Tax election;

(ix) enter into any settlement of any Legal Proceeding involving payments
by an Acquired Corporation in excess of $50,000 or involving any material
asset of either of the Acquired Corporations;

(x) hire any employee or consultant where the total annual compensation
payable to such person would exceed, or in the case of a person working on
a commission or similar performance basis, would reasonably be expected to
exceed, $125,000;

(xi) acquire any equity interest in or a substantial portion of the
assets of another Entity or otherwise acquire any assets outside the
ordinary course of business;

(xii) sell, lease, license, waive, release, transfer or encumber any of
its assets outside the ordinary course of business;

(xiii) make any capital contribution to, or investment in, a third
person;

(xiv) approve or propose any Stockholder Rights Plan that would affect
the consummation of the transactions contemplated hereby;

(xv) take any action to cause any insurance policy naming any of the
Acquired Corporations as a beneficiary or a loss payee to be canceled or
terminated;

(xvi) acquire or agree to acquire by merging or consolidating with, or by
purchasing or agreeing to purchase any assets or equity securities of, or
by any other manner, any business or any Entity or division thereof;

(xvii) terminate or amend the terms of any employment agreement with any
executive officer of the Company or terminate the employment of any such
executive officer (excluding terminations for "cause" as defined in an
employment agreement); or

(xviii) agree or commit to take any of the actions described in clauses
"(i)" through "(xvii)" of this Section 4.2(b).

(c) Notwithstanding anything to the contrary contained in this Section 4.2,
the Company shall not be required under this Section 4.2 to take any action,
or refrain from acting in a manner, that would cause the Company to violate
the HSR Act.

4.3 Operation of Parent's Business.

(a) During the Pre-Closing Period: (i) Parent shall use reasonable effort to
cause Parent and each of its subsidiaries to conduct its business and
operations (A) in the ordinary course and (B) in material compliance with
applicable Legal Requirements and the requirements of the Parent Contracts;
and (ii) Parent shall use reasonable efforts to cause Parent and each of its
subsidiaries to preserve intact its current business organization, to keep
available the services of its current officers and employees and to maintain
its relations and goodwill with all suppliers, customers, landlords,
creditors, licensors, licensees, employees and other Persons having business
relationships with Parent and its subsidiaries.

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<PAGE>

(b) During the Pre-Closing Period, Parent shall not (without the prior
written consent of the Company, which consent shall not be unreasonably
withheld or delayed by the Company), and shall not permit its subsidiaries to:

(ii) sell, issue or grant shares of Parent Common Stock or securities or
rights exercisable for or convertible into shares of Parent Common Stock
(except stock options to employees, consultants or directors) that, when
aggregated with all such issuances since the date of this Agreement
(assuming conversion into, or exercise for, shares of Parent Common Stock
of any such securities) exceed 2,500,000 shares of Parent Common Stock (as
appropriately adjusted for any stock split, stock dividend, reverse stock
split, reclassification, recapitalization or other similar transaction);

(iii) materially amend or permit the adoption of any material amendment
to its certificate of incorporation or bylaws;

(iv) change any of its methods of accounting or accounting practices in
any respect;

(v) expend more than $15,000,000 of funds in a single transaction, or
more than an aggregate of $25,000,000 of funds in a series of transactions,
in connection with any capital contribution to, investment in, or
acquisition of all or any portion of the equity securities or assets of any
Entity;

(vi) approve or propose any Stockholder Rights Plan that would affect the
consummation of the transactions contemplated hereby; or

(vii) agree or commit to take any of the actions described in clauses
"(i)" through "(vi)" of this Section 4.3(b).

(c) Notwithstanding anything to the contrary contained in this Section 4.3,
Parent shall not be required under this Section 4.3 to take any action, or
refrain from acting in a manner, that would cause Parent to violate the HSR
Act.

4.4 No Solicitation.

(a) The Acquired Corporations and the Acquired Corporations' Representatives
shall not directly or indirectly (i) solicit, initiate, encourage or induce
the making, submission or announcement of any Company Acquisition Proposal,
(ii) furnish any nonpublic information regarding any of the Acquired
Corporations to any Person in connection with or in response to a Company
Acquisition Proposal, (iii) negotiate or engage in discussions with any Person
with respect to any Company Acquisition Proposal, (iv) approve, endorse or
recommend any Company Acquisition Transaction or (v) enter into any letter of
intent or Contract contemplating or otherwise relating to any Company
Acquisition Proposal; provided, however, that notwithstanding any other
provision hereof, the Company may (i) at any time prior to the time the
Company's stockholders shall have voted to approve this Agreement, engage in
discussions or negotiations with a third party who (without any solicitation,
initiation, encouragement, discussion or negotiations, directly or indirectly,
by or with the Company or its Representatives after the date hereof) seeks to
initiate such discussions or negotiations and may furnish such third party
information concerning the Company and its business, properties and assets if,
and only to the extent that, (A)(x) the third party has first made a Company
Acquisition Proposal that is financially superior to the terms hereof and has
demonstrated that financing for the Company Acquisition Proposal is reasonably
likely to be obtained (as determined in good faith by the Company's Board of
Directors after consultation with its financial advisors) and (y) the
Company's Board of Directors shall conclude in good faith, after considering
applicable provisions of state law, on the basis of oral or written advice of
outside counsel that failing to take such action would result in substantial
likelihood of liability for breach of the Company's Board of Directors'
fiduciary duties under applicable law and (B) prior to furnishing such
information to or entering into discussions or negotiations with such person
or entity, the Company (x) provides prompt notice to Parent to the effect that
it is planning to furnish information to or enter into discussions or
negotiations with such person or entity and (y) receives from

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such Person an executed confidentiality agreement in reasonably customary form
on terms not in the aggregate materially more favorable to such Person than
the terms contained in the Company Confidentiality Agreement, and (ii) accept
a Company Acquisition Proposal from a third party, provided the Company first
terminates this Agreement pursuant to Section 8.1(f). Except as may be
restricted by the terms of Contracts entered into by the Company prior to the
date of this Agreement, the Company shall notify Parent orally and in writing
of any such inquiries, offers or proposals received after the date of this
Agreement (including, without limitation, the terms and conditions of any such
proposal and the identity of the person making it), within 24 hours of the
receipt thereof, shall keep Parent informed of the status and details of any
such inquiry, offer or proposal.

(b) The Company shall immediately cease and cause to be terminated any
existing discussions or negotiations with any Person that relate to any
Company Acquisition Proposal. Notwithstanding anything to the contrary
contained in this Agreement, the Company may give a copy of Sections 4.4(a),
4.4(b) and 5.2 to any Person who submits an unsolicited bona fide written
Company Acquisition Proposal to the Company.

(c) Parent its subsidiaries and Parents' and its subsidiaries'
Representatives shall not directly or indirectly (i) solicit, initiate,
encourage or induce the making, submission or announcement of any Parent
Acquisition Proposal, (ii) furnish any nonpublic information regarding Parent
or any of its subsidiaries to any Person in connection with or in response to
a Parent Acquisition Proposal, (iii) negotiate or engage in discussions with
any Person with respect to any Parent Acquisition Proposal, (iv) approve,
endorse or recommend any Parent Acquisition Transaction or (v) enter into any
letter of intent or Contract contemplating or otherwise relating to any Parent
Acquisition Proposal; provided, however, that notwithstanding any other
provision hereof, Parent may take such actions if (A) Parent's Board of
Directors shall conclude in good faith, after considering applicable
provisions of state law, on the basis of oral or written advice of outside
counsel that failing to take such action would result in substantial
likelihood of liability for breach of Parent's Board of Directors' fiduciary
duties under applicable law and (B) prior to furnishing such information to or
entering into discussions or negotiations with such person or entity, Parent
(x) provides prompt notice to the Company to the effect that it is planning to
furnish information to or enter into discussions or negotiations with such
person or entity and (y) receives from such Person an executed confidentiality
agreement in reasonably customary form on terms not in the aggregate
materially more favorable to such Person than the terms contained in Parent
Confidentiality Agreement. Except as may be restricted by the terms of
contracts entered into by Parent prior to the date of this Agreement, Parent
shall notify the Company orally and in writing of any such inquiries, offers
or proposals received after the date of this Agreement (including, without
limitation, the terms and conditions of any such proposal and the identity of
the person making it), within 24 hours of the receipt thereof, shall keep the
Company informed of the status and details of any such inquiry, offer or
proposal.

(d) Parent shall immediately cease and cause to be terminated any existing
discussions or negotiations with any Person that relate to any Parent
Acquisition Proposal. Notwithstanding anything to the contrary contained in
this Agreement, Parent may give a copy of Sections 4.4(c), 4.4(d) and 5.2 to
any Person who submits an unsolicited bona fide written Parent Acquisition
Proposal to Parent.

Section 5. Additional Covenants of the Parties

5.1 Registration Statement; Joint Proxy Statement.

(a) As promptly as practicable after the date of this Agreement, the Company
and Parent shall prepare and cause to be filed with the SEC the Form S-4
Registration Statement, together with the Joint Proxy Statement and any other
documents required by the Securities Act or the Exchange Act in connection
with the Merger. Each of Parent and the Company shall use all reasonable
efforts to cause the Form S-4 Registration Statement (including the Joint
Proxy Statement) to comply with the rules and regulations promulgated by the
SEC, to respond promptly to any comments of the SEC or its staff and to have
the Form S-4 Registration Statement declared effective under the Securities
Act as promptly as practicable after it is filed with the SEC. Parent will use
all reasonable efforts to cause the Joint Proxy Statement to be mailed to
Parent's stockholders, and the Company will use all reasonable efforts to
cause the Joint Proxy Statement to be mailed to the Company's stockholders, as

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promptly as practicable after the Form S-4 Registration Statement is declared
effective under the Securities Act. Each of the Company and Parent shall
promptly furnish to the other all information that may be required or
reasonably requested in connection with any action contemplated by this
Section 5.1. Each of the Company and Parent shall notify the other promptly of
the receipt of any comments from the SEC or its staff and of any request by
the SEC or its staff for any amendment or supplement to the Form S-4
Registration Statement or Joint Proxy Statement or for any other information
and shall supply the other with copies of all correspondence between such
party and the SEC or its staff or other governmental officials with respect to
the Form S-4 Registration Statement or Joint Proxy Statement. The information
supplied by each of Parent and the Company for inclusion in the Form S-4
Registration Statement and the Joint Proxy Statement shall not (i) at the time
the Form S-4 Registration Statement is declared effective, (ii) at the time
the Joint Proxy Statement is first mailed to the stockholders of Parent and
the Company, (iii) at the time of the Company Stockholders' Meeting and at the
time of the Parent Stockholders' Meeting, and (iv) at the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. If Parent or the Company becomes aware of any information that
should be disclosed in an amendment or supplement to the Form S-4 Registration
Statement or the Joint Proxy Statement, then Parent or the Company, as the
case may be, shall promptly inform the Company or Parent thereof and shall
cooperate with the other in filing such amendment or supplement with the SEC
and, if appropriate, in mailing such amendment or supplement to the
stockholders of the Company and Parent.

(b) Prior to the Effective Time, Parent shall use reasonable efforts to
obtain all regulatory approvals needed to ensure that the Parent Common Stock
to be issued in the Merger will be qualified under the securities law of every
jurisdiction of the United States in which any registered holder of Company
Capital Stock has an address of record on the record date for determining the
stockholders entitled to notice of and to vote on the Merger.

5.2 Stockholders' Meetings.

(a) Subject to the fiduciary duties of the directors of Company, (i) the
Company shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and hold a meeting of the
holders of Company Common Stock and Company Preferred Stock (the "Company
Stockholders' Meeting") to consider, act upon and vote upon the adoption of
this Agreement and approval of the Merger and (ii) the Board of Directors of
the Company shall recommend that the Company's stockholders vote in favor of
and adopt and approve this Agreement and the Merger at the Company
Stockholders' Meeting.

(b) Subject to the fiduciary duties of the directors of Parent, (i) Parent
shall take all action necessary under all applicable Legal Requirements to
call, give notice of, convene and hold a meeting of the holders of Parent
Common Stock (the "Parent Stockholders' Meeting") to consider, act upon and
vote upon the issuance of Parent Common Stock in the Merger and (ii) the Board
of Directors of Parent shall recommend that Parent's stockholders vote in
favor of the issuance of Parent Common Stock in the Merger at the Parent
Stockholders' Meeting.

(c) The Company and Parent shall coordinate the timing of the Company
Stockholders' Meeting and the Parent Stockholders' Meeting and shall use their
best efforts to hold such meetings on the same day and within forty-five (45)
days after the Form S-4 Registration Statement is declared effective under the
Securities Act.

5.3 Regulatory Approvals. The Company and Parent shall use all reasonable
efforts to file as soon as practicable after the date of this Agreement all
notices, reports and other documents required by law to be filed with any
Governmental Body with respect to the Merger and the other transactions
contemplated by this Agreement and to submit promptly any additional
information requested by any such Governmental Body. Without limiting the
generality of the foregoing, the Company and Parent shall, promptly after the
date of this Agreement, prepare and file the notifications required under the
HSR Act in connection with the Merger. The Company and Parent shall respond as
promptly as practicable to (i) any inquiries or requests received from the
Federal Trade Commission or the Department of Justice for additional
information or documentation and (ii) any

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inquiries or requests received from any state attorney general or other
Governmental Body in connection with antitrust or related matters. Each of the
Company and Parent shall (i) give the other party prompt notice of the
commencement of any material Legal Proceeding by or before any court or other
Governmental Body with respect to the Merger or any of the other transactions
contemplated by this Agreement, (ii) keep the other party informed as to the
status of any such Legal Proceeding and (iii) except as may be prohibited by
any Governmental Body or by any Legal Requirement, permit the other party to
be present at each meeting or conference relating to any such Legal Proceeding
and to have access to and be consulted in connection with any document filed
with or provided to any Governmental Body in connection with any such Legal
Proceeding.

5.4 Stock Options. At the Effective Time, all rights with respect to Company
Common Stock under each Company Option then outstanding shall be converted
into and become rights with respect to Parent Common Stock, and Parent shall
assume each such Company Option in accordance with the terms (as in effect as
of the date of this Agreement) of the stock option plan under which it was
issued and the stock option agreement by which it is evidenced. From and after
the Effective Time, (i) each Company Option assumed by Parent may be exercised
solely for shares of Parent Common Stock, (ii) the number of shares of Parent
Common Stock subject to each such Company Option shall be equal to the number
of shares of Company Common Stock subject to such Company Option immediately
prior to the Effective Time multiplied by the Exchange Ratio, rounding down to
the nearest whole share (with cash, less the applicable exercise price (as
adjusted as set forth in clause "(iii)" of this sentence), being payable for
any fraction of a share), (iii) the per share exercise price under each such
Company Option shall be adjusted by dividing the per share exercise price
under such Company Option by the Exchange Ratio and rounding up to the nearest
hundredth of a cent and (iv) any restriction on the exercise of any such
Company Option shall continue in full force and effect and the term,
exercisability, vesting schedule and other provisions of such Company Option
shall otherwise remain unchanged; provided, however, that each Company Option
assumed pursuant to this Section 5.4(a) shall, in accordance with its terms,
be subject to further adjustment as appropriate to reflect any stock split,
stock dividend, reverse stock split, reclassification, recapitalization or
other similar transaction subsequent to the Effective Time. After the
Effective Time, Parent will deliver to each holder of an outstanding Company
Option a notice describing the assumption of such Company Option. Parent
agrees to file with the SEC a Registration Statement on Form S-8 relating to
the shares of Parent Common Stock issuable with respect to the assumed Company
Options no later than the business day immediately following the Closing Date.

5.5 Indemnification of Officers and Directors.

(a) From and after the Effective Time and for a period of six years
thereafter, (i) Parent shall, and shall cause the Surviving Corporation to,
fulfill and honor in all respects the rights of present and former directors,
officers and employees of Parent and the Company (the "Indemnified Parties"),
respectively, to be indemnified and held harmless as provided for in the
Certificate of Incorporation, By-laws and indemnity agreements of Parent and
the Company as in effect on the date of this Agreement, with respect to acts
and omissions occurring prior to the Effective Time, and (ii) Parent shall,
and shall cause the Surviving Corporation to, indemnify the directors and
officers of Parent and the Surviving Corporation, respectively, to the fullest
extent permitted by their respective certificates of incorporation and by-laws
and by applicable law.

(b) For six years after the Effective Time, Parent shall cause to be
maintained the current policies of the officers' and directors' liability
insurance maintained by the Company and Parent covering persons who are
presently covered by the Company's and Parent's officers' and directors'
liability insurance policies with respect to actions and omissions occurring
prior to the Effective Time to the extent available; provided, that policies
with third party insurers of similar or better A.M. Best rating of at least
the same coverage containing terms and conditions that are not less
advantageous to the insured may be substituted therefor; provided, further,
that in no event shall Parent be required to maintain or procure insurance
coverage pursuant to this Section 5.5 for an amount per annum in excess of
150% of the current annual premiums with respect to each such policy;
provided, however, that if the annual premiums of such insurance coverage
exceed such amount, Parent shall obtain or cause to be obtained policies with
the best coverage available for a cost not exceeding such amount.

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(c) Parent shall bear and pay, and shall reimburse the Indemnified Parties
for, all costs and expenses, including attorneys' fees, that may be incurred
by the Indemnified Parties in seeking to enforce their rights against Parent
and the Surviving Corporation under this Section 5.5.

(d) This Section 5.5 shall survive the consummation of the Merger and the
Effective Time, is intended to benefit and may be enforced by the Indemnified
Parties and their respective heirs, successors and assigns and shall be
binding on Parent and the Surviving Corporation and their respective
successors and assigns.

5.6 Pooling of Interests; Tax Free Reorganization. Each of the Company and
Parent agrees (i) not to take any action during the Pre-Closing Period that
would adversely affect the ability of Parent to account for the Merger as a
"pooling of interests," and (ii) to use commercially reasonable efforts to
attempt to ensure that none of its "affiliates" (as that term is used in Rule
145 promulgated under the Securities Act) takes any action that could
adversely affect the ability of Parent to account for the Merger as a "pooling
of interests." Parent and the Company shall use all commercially reasonable
efforts prior to the Effective Time to cause the Merger to qualify as a tax
free reorganization under Section 368(a)(1) of the Code.

5.7 Additional Agreements. Each party to this Agreement (i) shall make all
filings (if any) and give all notices (if any) required to be made and given
by such party in connection with the Merger and the other transactions
contemplated by this Agreement, and (ii) shall use reasonable efforts to
obtain each Consent (if any) required to be obtained (pursuant to any
applicable Legal Requirement or Contract, or otherwise) by such party in
connection with the Merger or any of the other transactions contemplated by
this Agreement. Each party shall promptly deliver to the other party a copy of
each such filing made, each such notice given and each such Consent obtained
during the Pre-Closing Period.

5.8 Disclosure.

(a) The Company shall not, and shall not permit any of its Representatives
to, issue any press release or otherwise publicly disseminate any document or
other written material relating to the Merger or any of the other transactions
contemplated by this Agreement unless (i) Parent shall have approved such
press release or written material (it being understood that Parent shall not
unreasonably withhold its approval of any such press release or written
material), or (ii) the Company shall have been advised by its outside legal
counsel that the issuance of such press release or the dissemination of such
written material is required or advisable by any applicable law or regulation,
and the Company shall have consulted with Parent prior to issuing such press
release or disseminating such written material. The Company shall use
reasonable efforts to ensure that none of its Representatives makes any public
statement that is materially inconsistent with any press release issued or any
written material publicly disseminated by the Company with respect to the
Merger or with respect to any of the other transactions contemplated by this
Agreement.

(b) Parent shall not, and shall not permit any of its Representatives to,
issue any press release or otherwise publicly disseminate any document or
other written material relating to the Merger or any of the other transactions
contemplated by this Agreement unless (i) the Company shall have approved such
press release or written material (it being understood that the Company shall
not unreasonably withhold its approval of any such press release or written
material), or (ii) Parent shall have been advised by its outside legal counsel
that the issuance of such press release or the dissemination of such written
material is required or advisable by any applicable law or regulation, and
Parent shall have consulted with the Company prior to issuing such press
release or disseminating such written material; provided, however, that Parent
shall be entitled to file with the SEC, after the execution and delivery of
this Agreement, a Report on Form 8-K, together with a copy of this Agreement
(including the exhibits hereto) and the press release (which shall have been
approved by the Company) announcing this Agreement. Parent shall use
reasonable efforts to ensure that none of its Representatives makes any public
statement that is materially inconsistent with any press release issued or any
written material publicly disseminated by Parent with respect to the Merger or
with respect to any of the other transactions contemplated by this Agreement.

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5.9 Affiliate Agreements. The Company shall use reasonable efforts to cause
each Person who is or becomes an "affiliate" (as that term is used in Rule 145
promulgated under the Securities Act) of the Company to execute and deliver to
Parent, prior to the date of the mailing of the Proxy Statement to the
Company's stockholders, an Affiliate Agreement in the form of Exhibit B.
Parent shall use reasonable efforts to cause each of Parent's "affiliates" (as
that term is used in Rule 145 promulgated under the Securities Act) to execute
and deliver to Parent, at least 30 days prior to the date on which the Merger
becomes effective, an "affiliate letter" in customary form relating to
"pooling of interests" accounting requirements.

5.10 Tax Matters. At or prior to the Closing, the Company and Parent shall
execute and deliver to Dechert Price & Rhoads and to Cooley Godward LLP
appropriate tax representation letters in the form of Exhibit E (which will be
used in connection with the legal opinions contemplated by Sections 6.5(f) and
7.5(e)). Parent and the Company shall use all reasonable efforts to cause the
Merger to qualify as a tax free reorganization under Section 368(a)(1) of the
Code.

5.11 Parent Plans and Benefit Arrangements. Any pre-existing condition
limitations contained in any Parent Plans under which any Continuing Employee
otherwise becomes eligible to receive benefits and who would be deemed under
such Parent Plans to have a disqualifying pre-existing condition will be
waived, to the extent such condition was covered by a Company Plan immediately
prior to the Effective Time. For purposes of determining the eligibility and
vesting of Continuing Employees under the Parent Plans, each Continuing
Employee (who otherwise becomes eligible under the Parent Plans) shall be
given full credit under the Parent Plans for such Continuing Employee's period
of service with the Company prior to the Effective Time which was recognized
under the Company Plans prior to the Effective Time. For purposes of this
Section 5.11 "Continuing Employee" shall mean any employee of the Company who
continues as an employee of the Surviving Corporation or Parent after the
Effective Time.

5.12 NASDAQ Quotation. Parent shall use reasonable efforts to cause the
shares of Parent Common Stock being issued in the Merger to be approved for
quotation on Nasdaq.

5.13 Resignation of Directors. The Company shall use reasonable efforts to
obtain and deliver to Parent prior to the Closing the resignation of each
director of the Company.

5.14 Election to Board of Directors. At the Effective Time, the Parent's
board of directors shall consist of not more than nine members and Michael
Savage and one other director of the Company that is reasonably acceptable to
Parent will be elected to the Parent's board of directors. One of the two
individuals shall be a Class I director of Parent and the other shall be a
Class II director of Parent.

5.15 FIRPTA Matters. At the Closing, (a) the Company shall deliver to Parent
a statement (in such form as may be reasonably requested by counsel to Parent)
conforming to the requirements of Section 1.897--2(h)(1)(i) of the United
States Treasury Regulations, and (b) the Company shall deliver to the Internal
Revenue Service the notification required under Section 1.897--2(h)(2) of the
United States Treasury Regulations.

Section 6. Conditions Precedent to Obligations of Parent and Merger Sub

The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:

6.1 Accuracy of Representations. The representations and warranties of the
Company set forth in this Agreement shall have been accurate when made and
shall be accurate as of the Closing Date as if made on and as of the Closing
Date, except, in any and all respects under this Section 6.1, for
representations and warranties that expressly speak only as of a specific date
or time which need only be accurate as of such date or time (it being
understood that, for purposes of determining the accuracy of such
representations and warranties in any and all respects under this Section 6.1,
inaccuracies that would not, individually or in the aggregate, have a Material
Adverse Effect on the Acquired Corporations shall be disregarded).

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6.2 Performance of Covenants. All of the covenants that the Company is
required to comply with or to perform under this Agreement at or prior to the
Closing shall have been complied with and performed in all material respects.

6.3 Effectiveness of Registration Statement. The Form S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with
respect to the Form S-4 Registration Statement.

6.4 Stockholder Approval. This Agreement shall have been duly adopted and
the Merger shall have been duly approved by the Company Required Vote and the
issuance of Parent Common Stock in the Merger shall have been approved by the
Parent Required Vote.

6.5 Agreements and Documents. Parent shall have received the following
documents, each of which shall be in full force and effect:

(a) Affiliate Agreements in the form of Exhibit B, executed by each
Person who is reasonably determined by the Company to be an "affiliate" of
the Company (as that term is used in Rule 145 promulgated under the
Securities Act);

(b) the statement referred to in Section 5.15(a), executed by the
Company;

(c) a letter from Arthur Andersen LLP, dated as of the Closing Date and
addressed to the Company, reasonably satisfactory in form and substance to
Parent and Ernst & Young LLP, to the effect that, after reasonable
investigation, Arthur Andersen LLP concurs with Company's management's
conclusion that the Company could be a combining entity in a transaction
accounted for as a "pooling of interests" in accordance with generally
accepted accounting principles, Accounting Principles Board Opinion No. 16
and all published rules, regulations and policies of the SEC;

(d) a letter from Ernst & Young LLP, dated as of the Closing Date and
addressed to Parent, reasonably satisfactory in form and substance to
Parent and Arthur Andersen LLP, regarding such firm's concurrence with
Parent's management's conclusions as to the appropriateness of "pooling of
interests" in accordance with generally accepted accounting principles,
Accounting Principles Board Opinion No. 16 and all published rules,
regulations and policies of the SEC;

(e) a legal opinion of Cooley Godward LLP, dated as of the Closing Date,
in the form attached hereto as Exhibit C; provided, however, that such
opinion may reflect changes or exceptions that, considered collectively,
would not have a material adverse effect on the consummation of the
transactions contemplated hereby and have not had and would not reasonably
be expected to have a Material Adverse Effect on the Acquired Corporations
taken as a whole.

(f) a legal opinion of Dechert Price & Rhoads, dated as of the Closing
Date, to the effect that the Merger will constitute a reorganization within
the meaning of Section 368 of the Code. In rendering such opinion, such
firm may rely on such representations, warranties and certificates as it
deems reasonable or appropriate under the circumstances.

6.6 Quotation. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for quotation on Nasdaq.

6.7 No Restraints. No temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger shall have
been issued by any court of competent jurisdiction and remain in effect, and
there shall not be any U.S. federal or state law or regulation enacted or
deemed applicable to the Merger that makes consummation of the Merger illegal.
Other than the filing of a Certificate of Merger with the Secretary of State
of the State of Delaware, all authorizations, consents, waivers, orders or
approvals of, or declarations or filing with, any Governmental Body, the
failure of which to obtain or make would have a Material Adverse Effect on
Parent or the Surviving Corporation, shall have been obtained or made. Parent
shall have received all state securities or "blue sky" permits and other
authorizations, if any, necessary to issue the shares of Parent Common Stock
pursuant to this Agreement.

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6.8 HSR Act. The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.

6.9 Material Adverse Change. No Material Adverse Change shall have occurred
with respect to the Company.

6.10 Compliance Certificate. Parent shall have received a certificate, duly
executed by an executive officer of the Company, certifying that the
conditions set forth in Sections 6.1 and 6.2 have been satisfied.

Section 7. Conditions Precedent to Obligations of the Company

The obligations of the Company to effect the Merger and otherwise consummate
the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of the following conditions:

7.1 Accuracy of Representations. The representations and warranties of
Parent and Merger Sub set forth in this Agreement shall have been accurate
when made and shall be accurate as of the Closing Date as if made on and as of
the Closing Date, except, in any and all respects under this Section 7.1, for
representations and warranties that expressly speak only as of a specific date
or time which need only be true and correct as of such date or time (it being
understood that, for purposes of determining the accuracy of such
representations and warranties in any and all respects under this Section 7.1,
inaccuracies that would not, individually or in the aggregate, have a Material
Adverse Effect on Parent shall be disregarded).

7.2 Performance of Covenants. All of the covenants that Parent or Merger Sub
is required to comply with or to perform under this Agreement at or prior to
the Closing shall have been complied with and performed in all material
respects.

7.3 Effectiveness of Registration Statement. The Form S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with
respect to the Form S-4 Registration Statement.

7.4 Stockholder Approval. This Agreement shall have been duly adopted and
the Merger shall have been duly approved by the Company Required Vote and the
issuance of Parent Common Stock in the Merger shall have been approved by the
Parent Required Vote.

7.5 Agreements and Documents. The Company shall have received the following
documents, each of which shall be in full force and effect:

(a) Affiliate letters as described in Section 5.9 of this Agreement,
executed by each Person who is reasonably determined by Parent to be an
"affiliate" of Parent (as that term is used in Rule 145 promulgated under
the Securities Act);

(b) a letter from Arthur Andersen LLP, dated as of the Closing Date and
addressed to the Company, reasonably satisfactory in form and substance to
the Company and Ernst & Young LLP, to the effect that, after reasonable
investigation, Arthur Andersen LLP concurs with Company's management's
conclusion that the Company could be a combining entity in a transaction
accounted for as a "pooling of interests" in accordance with generally
accepted accounting principles, Accounting Principles Board Opinion No. 16
and all published rules, regulations and policies of the SEC;

(c) a letter from Ernst & Young LLP, dated as of the Closing Date and
addressed to Parent, reasonably satisfactory in form and substance to the
Company and Arthur Andersen LLP, regarding such firm's concurrence with
Parent's management's conclusions as to the appropriateness of a "pooling
of interests" in accordance with generally accepted accounting principles,
Accounting Principles Board Opinion No. 16 and all published rules,
regulations and policies of the SEC;

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(d) a legal opinion of Dechert Price & Rhoads, dated as of the Closing
Date, in the form attached hereto as Exhibit D; provided, however, that
such opinion may reflect changes or exceptions that, considered
collectively, would not have a material adverse effect on the consummation
of the transactions contemplated hereby and have not had and would not
reasonably be expected to have a Material Adverse Effect on Parent; and

(e) a legal opinion of Cooley Godward LLP, dated as of the Closing Date,
to the effect that the Merger will constitute a reorganization within the
meaning of Section 368 of the Code. In rendering such opinion, such firm
may rely on such representations, warranties and certificates as it deems
reasonable or appropriate under the circumstances.

7.6 Quotation. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for quotation on Nasdaq.

7.7 No Restraints. No temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger by the
Company shall have been issued by any court of competent jurisdiction and
remain in effect, and there shall not be any U.S. federal or state law or
regulation enacted or deemed applicable to the Merger that makes consummation
of the Merger by the Company illegal. Other than the filing of a Certificate
of Merger with the Secretary of State of the State of Delaware, all
authorizations, consents, waivers, orders or approvals of, or declarations or
filing with, any Governmental Body, the failure of which to obtain or make
would have a Material Adverse Effect on Parent or the Surviving Corporation
shall have been obtained or made.

7.8 HSR Act. The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.

7.9 Material Adverse Change. No Material Adverse Change shall have occurred
with respect to Parent.

7.10 Compliance Certificate. The Company shall have received a certificate,
duly executed by an executive officer of Parent, certifying that the
conditions set forth in Sections 7.1 and 7.2 have been satisfied.

Section 8. Termination

8.1 Termination. This Agreement may be terminated prior to the Effective
Time, whether before or after approval of the Merger by the stockholders of
the Company:

(a) by mutual written consent of Parent and the Company;

(b) by either Parent or the Company if the Merger shall not have been
consummated by July 1, 1998 (unless the failure to consummate the Merger is
attributable to a failure on the part of the party seeking to terminate
this Agreement to perform any material obligation required to be performed
by such party at or prior to the Effective Time);

(c) by either Parent or the Company if a court of competent jurisdiction
or other Governmental Body shall have issued a final and nonappealable
order, decree or ruling, or shall have taken any other action, having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger;

(d) by either Parent or the Company if the Company Stockholders' Meeting
shall have been held and this Agreement and the Merger shall not have been
adopted and approved at such meeting by the Company Required Vote;
provided, however, that (1) Parent shall not be permitted to terminate this
Agreement pursuant to this Section 8.1(d) if the failure of the Company's
stockholders to adopt and approve this Agreement and the Merger at the
Company Stockholders' Meeting is attributable to a failure on the part of
Parent to perform any material obligation required to have been performed
by Parent under this Agreement and (2) the Company shall not be permitted
to terminate this Agreement pursuant to this Section 8.1(d) if the failure
of the Company's stockholders to adopt and approve this Agreement and the
Merger at the Company Stockholders' Meeting is attributable to a failure on
the part of the Company to perform any material obligation required to have
been performed by the Company under this Agreement;

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(e) by either Parent or the Company if the Parent Stockholders' Meeting
shall have been held and the issuance of Parent Common Stock in the Merger
shall not have been approved at such meeting by the Parent Required Vote;
provided, however, that (1) the Company shall not be permitted to terminate
this Agreement pursuant to this Section 8.1(e) if the failure of the
Parent's stockholders to approve the issuance of Parent Common Stock in the
Merger at the Parent Stockholders' Meeting is attributable to a failure on
the part of the Company to perform any material obligation required to have
been performed by the Company under this Agreement and (2) Parent shall not
be permitted to terminate this Agreement pursuant to this Section 8.1(e) if
the failure of Parent's stockholders to approve the issuance of Parent
Common Stock in the Merger at the Parent Stockholders' Meeting is
attributable to a failure on the part of Parent to perform any material
obligation required to have been performed by Parent under this Agreement;

(f) by either Parent or the Company if the Company or any committee of
the Company's Board of Directors (1) shall withdraw or modify in any
adverse manner its approval or recommendation of this Agreement or the
transactions contemplated hereby, (2) shall approve or recommend any merger
or acquisition of the Company or a material portion of its assets, or any
tender offer for shares of Company Capital Stock, in each case, other than
by Parent or an affiliate of Parent or (3) shall resolve to take any of the
actions specified in the foregoing clauses (1) or (2);

(g) by either Parent or the Company if Parent or any committee of
Parent's Board of Directors (1) shall withdraw or modify in any adverse
manner its approval or recommendation of this Agreement or the transactions
contemplated hereby, (2) shall approve or recommend any merger or
acquisition of the Parent or a material portion of its assets, or any
tender offer for shares of Parent Common Stock, or (3) shall resolve to
take any of the actions specified in the foregoing clauses (1) or (2);

(h) by Parent, following a breach of any representation, warranty or
covenant of the Company set forth in this Agreement, in any such case such
that the condition set forth in Section 6.1 or Section 6.2 would not be
satisfied as of the time of such breach, provided, that if such breach in
such representation, warranty or covenant is curable by the Company through
the exercise of reasonable efforts within 45 days after the time of such
breach, then Parent may not terminate this Agreement under this Section
8.1(h) during such 45-day period provided the Company continues to exercise
such reasonable efforts and Parent may not, in any event, terminate this
Agreement under this Section 8.1(h) as a result of such breach if such
breach shall have been cured in all material respects; and provided
further, that Parent may not terminate this Agreement pursuant to this
Section 8.1(h) if it shall have willfully and materially breached this
Agreement; or

(i) by the Company, following a breach of any representation, warranty or
covenant of Parent set forth in this Agreement, in any such case such that
the condition set forth in Section 7.1 or Section 7.2 would not be
satisfied as of the time of such breach, provided that if such breach in
such representation, warranty or covenant is curable by Parent through the
exercise of reasonable efforts within 45 days after the time of such
breach, then the Company may not terminate this Agreement under this
Section 8.1(i) during such 45-day period provided Parent continues to
exercise such reasonable efforts and the Company may not, in any event,
terminate this Agreement under this Section 8.1(i) as a result of such
breach if such breach shall have been cured in all material respects; and,
provided further, that the Company may not terminate this Agreement
pursuant to this Section 8.1(i) if it shall have willfully and materially
breached this Agreement.

8.2 Effect of Termination. In the event of the termination of this Agreement
as provided in Section 8.1, this Agreement shall be of no further force or
effect; provided, however, that (i) this Section 8.2, Section 8.3, Section 4.1
and Section 9 shall survive the termination of this Agreement and shall remain
in full force and effect, and (ii) the termination of this Agreement shall not
relieve any party from any liability for any willful and knowing breach of
this Agreement.

8.3 Termination Fee; Expenses.

(a) If this Agreement is terminated by Parent or the Company pursuant to
Section 8.1(d), then the Company shall pay to Parent, in cash, a nonrefundable
fee in the amount of $1,750,000. If this Agreement is terminated by Parent or
the Company pursuant to Section 8.1(e), then Parent shall pay to the Company,
in cash, a

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nonrefundable fee in the amount of $1,750,000. If this Agreement is terminated
by Parent or the Company pursuant to Section 8.1(f), then the Company shall
pay to Parent, in cash, a nonrefundable fee in the amount of $3,000,000. If
this Agreement is terminated by Parent or the Company pursuant to Section
8.1(g), then Parent shall pay to the Company, in cash, a nonrefundable fee in
the amount of $3,000,000.

(b) If this Agreement is terminated by Parent pursuant to Section 8.1(h),
then the Company shall pay Parent, in cash, a nonrefundable fee equal to 120%
of Parent's out-of-pocket legal and accounting costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby. If
this Agreement is terminated by the Company pursuant to Section 8.1(i), then
Parent shall pay the Company, in cash, a nonrefundable fee equal to 120% of
the Company's out-of-pocket legal and accounting costs and expenses incurred
in connection with this Agreement and the transactions contemplated hereby.

(c) Any termination payment required under Section 8.3 shall be made within
three (3) business days after termination of this Agreement.

(d) The payments called for by this Section 8.3 shall not be deemed to be
liquidated damages, and shall be in addition to any rights or remedies at law
or equity arising out of a breach of the obligations set forth in this
Agreement.

(e) The Company and Parent shall each bear and pay 50% of all filing fees
required to be paid to a Governmental Body under the HSR Act in connection
with the transactions contemplated by this Agreement, if any, and all filing
fees required to be paid to the SEC in connection with the filing of the Form
S- 4 Registration Statement.

(f) Except as otherwise provided by this Section 8.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
by this Agreement shall be paid by the party incurring such expenses, whether
or not the Merger is consummated.

Section 9. Miscellaneous Provisions

9.1 Amendment. This Agreement may be amended with the approval of the
respective Boards of Directors of the Company and Parent at any time before or
after approval of this Agreement by the stockholders of the Company; provided,
however, that after any such stockholder approval, no amendment shall be made
which by law requires further approval of the stockholders of the Company
without the further approval of such stockholders. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.

9.2 Waiver.

(a) No failure on the part of any party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any
party in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right, privilege
or remedy shall preclude any other or further exercise thereof or of any other
power, right, privilege or remedy.

(b) No party shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement,
unless the waiver of such claim, power, right, privilege or remedy is
expressly set forth in a written instrument duly executed and delivered on
behalf of such party; and any such waiver shall not be applicable or have any
effect except in the specific instance in which it is given.

9.3 No Survival of Representations and Warranties. None of the
representations and warranties contained in this Agreement or in any
certificate delivered pursuant to this Agreement shall survive the Merger.

9.4 Entire Agreement; Counterparts; Applicable Law. This Agreement and the
other agreements referred to herein constitute the entire agreement and
supersede all prior agreements and understandings, both written

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and oral, among or between any of the parties with respect to the subject
matter hereof and thereof. This Agreement may be executed in several
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same instrument, and shall be governed in all respects
by the laws of the State of Delaware as applied to contracts entered into and
to be performed entirely within Delaware.

9.5 Assignability. This Agreement shall be binding upon, and shall be
enforceable by and inure solely to the benefit of, the parties hereto and
their respective permitted successors and assigns; provided, however, that
neither this Agreement nor any of any party's rights or obligations hereunder
may be assigned by any party without the prior written consent of the other
parties hereto, and any attempted assignment of this Agreement or any of such
rights or obligations without such consent shall be void and of no effect.
Except as set forth in Section 5.5 with respect to directors and officers of
the Company and as otherwise provided in this Agreement, nothing in this
Agreement is intended to or shall confer upon any Person any right, benefit or
remedy of any nature whatsoever under or by reason of this Agreement.

9.6 Notices. All notices and other communications pursuant to this Agreement
shall be in writing and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized, overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to
the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):

To Parent or Merger Sub:

Pharmacopeia, Inc.
101 College Road East
Princeton Forrestal Center
Princeton, NJ 08540
Attention: Lewis Shuster
Telephone: (609) 452-3600
Fax: (609) 452-2434

with a copy to:

Dechert Price & Rhoads
Princeton Pike Corporate Center
997 Lenox Drive
Building 3, Suite 210
Lawrenceville, NJ 08648
Attention: James J. Marino, Esq.
Telephone: (609) 520-3230
Fax: (609) 520-3259

To the Company:

Molecular Simulations Incorporated
9685 Scranton Road
San Diego, CA 92121
Attention: President
Telephone: (619) 458-9990
Fax: (619) 597-9799

with a copy to:

Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Attention: James R. Jones, Esq.
Telephone: (650) 843-5000
Fax: (650) 857-0663

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<PAGE>

All such notices and other communications shall be deemed to have been
received (a) in the case of personal delivery, on the date of such delivery,
(b) in the case of a telecopy, when the party receiving such telecopy shall
have confirmed receipt of the communication, (c) in the case of delivery by
nationally- recognized, overnight courier, on the business day following
dispatch and (d) in the case of mailing, on the fifth business day following
such mailing.

9.7 Cooperation. Each of the Company and Parent agrees to cooperate fully
with the other party and to execute and deliver such further documents,
certificates, agreements and instruments and to take such other actions as may
be reasonably requested by the other party to evidence or reflect the
transactions contemplated by this Agreement and to carry out the intent and
purposes of this Agreement.

9.8 Construction.

(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
the masculine and feminine genders.

(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.

(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."

9.9 Titles. The titles and captions of the Sections of this Agreement are
included for convenience of reference only and shall have no effect on the
construction or meaning of this Agreement.

9.10 Sections and Exhibits. Except as otherwise indicated, all references in
this Agreement to "Sections" and "Exhibits" are intended to refer to Sections
of this Agreement and Exhibits to this Agreement.

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<PAGE>

In Witness Whereof, the parties have caused this Agreement to be executed as
of the date first above written.

Pharmacopeia, Inc.

/s/ Joseph A. Mollica
By: _________________________________
Name: Joseph A. Mollica, Ph.D.
Title: Chairman of the Board,
President and Chief
Executive Officer

Micro Acquisition Corporation

/s/ Joseph A. Mollica
By: _________________________________
Name: Joseph A. Mollica, Ph.D.
Title: Chairman of the Board,
President and Chief
Executive Officer

Molecular Simulations Incorporated

/s/ Michael Savage
By: _________________________________
Name: Michael Savage
Title: President and Chief
Executive Officer

1-35
<PAGE>

EXHIBIT A TO ANNEX 1

EXHIBIT A

CERTAIN DEFINITIONS

For purposes of the Agreement (including this Exhibit A):

Acquired Corporation Contract. "Acquired Corporation Contract" shall mean
any Contract that is material to any of the Acquired Corporations, to the
business or operations of any of the Acquired Corporations or to any of the
transactions contemplated by the Agreement: (a) to which any of the Acquired
Corporations is a party; or (b) by which any of the Acquired Corporations or
any asset of any of the Acquired Corporations is bound or under which any of
the Acquired Corporations has, any obligation, except for (1) end user license
agreements entered into by the Company in the ordinary course of business, (2)
agreements for the license to an Acquired Corporation of software generally
available to the public and (3) customer contracts entered into in the
ordinary course of business.

Acquired Corporation Proprietary Asset. "Acquired Corporation Proprietary
Asset" shall mean any material Proprietary Asset owned by or exclusively
licensed to any of the Acquired Corporations, except for (1) end user license
agreements entered into by the Company in the ordinary course of business and
(2) agreements for the license to an Acquired Corporation of software
generally available to the public. As used herein, "exclusively licensed"
means exclusively licensed for commercial use subject to certain retentions,
exceptions and license-backs.

Agreement. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached, as it may be amended from
time to time.

Company Acquisition Proposal. "Company Acquisition Proposal" shall mean any
offer or proposal (other than an offer or proposal by Parent) contemplating or
otherwise relating to any Company Acquisition Transaction.

Company Acquisition Transaction. "Company Acquisition Transaction" shall
mean any transaction or series of related transactions involving:

(a) any merger, consolidation, share exchange, business combination,
issuance of securities, acquisition of securities, tender offer, exchange
offer or other similar transaction (i) in which an Acquired Corporation is
a constituent corporation, (ii) in which a Person or "group" (as defined in
the Exchange Act and the rules promulgated thereunder) of Persons acquires
beneficial or record ownership of securities representing more than 50% of
the outstanding securities of any class of voting securities of an Acquired
Corporation, or (iii) in which an Acquired Corporation issues securities
representing more than 50% of the outstanding securities of any class of
voting securities of an Acquired Corporation; or

(b) any sale, lease (other than in the ordinary course of business),
exchange, transfer, license (other than in the ordinary course of
business), acquisition or disposition of more than 50% of the assets of an
Acquired Corporation.

Company Capital Stock. "Company Capital Stock" shall mean Company Common
Stock, Company Class B Common Stock and Company Preferred Stock.

Company Class B Common Stock. "Company Class B Common Stock" shall mean the
Class B, nonvoting common stock, $.001 par value per share, of the Company.

Company Common Stock. "Company Common Stock" shall mean the common stock,
$.001 par value per share, of the Company.

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<PAGE>

Company Preferred Stock. "Company Preferred Stock" shall mean the Series A
Convertible Preferred Stock, $.01 par value per share, of the Company.

Consent. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental
Authorization).

Contract. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, option,
warranty, purchase order, license, sublicense, insurance policy, benefit plan
or legally binding commitment or undertaking of any nature.

Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest or encumbrance.

Entity. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.

Environmental Law. "Environmental Law" shall mean any federal, state, local
or foreign Legal Requirement relating to pollution or protection of human
health or the environment (including ambient air, surface water, ground water,
land surface or subsurface strata), including any law or regulation relating
to emissions, discharges, releases or threatened releases of Materials of
Environmental Concern, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern.

ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

ERISA Affiliate. With respect to any Entity, "ERISA Affiliate" shall mean
(i) any corporation included with such Entity in a controlled group of
corporations within the meaning of Section 414(b) of the Code; (ii) any trade
or business (whether or not incorporated) which is under common control with
such Entity within the meaning of Section 414(c) of the Code; (iii) any member
of an affiliate service group of which such Entity is a member within the
meaning of Section 414(m) of the Code; or (iv) any other person or entity
treated as an affiliate of such Entity under Section 414(o) of the Code.

Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.

Form S-4 Registration Statement. "Form S-4 Registration Statement" shall
mean the registration statement on Form S-4 to be filed with the SEC by Parent
in connection with issuance of Parent Common Stock in the Merger, as said
registration statement may be amended prior to the time it is declared
effective by the SEC.

Governmental Authorization. "Governmental Authorization" shall mean any:
permit, license, certificate, franchise, permission, clearance, registration,
qualification or authorization issued, granted, given or otherwise made
available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement.

Governmental Body. "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).

HSR Act. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.

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<PAGE>

Joint Proxy Statement. "Joint Proxy Statement" shall mean the joint proxy
statement to be sent to the Company's stockholders in connection with the
Company Stockholder's Meeting and to Parent's stockholders in connection with
the Parent Stockholders' Meeting.

Knowledge. "Knowledge" shall mean the actual knowledge of the Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, General
Counsel, Vice President of Sales and Vice President of Research and
Development of any entity to which such term applies.

Legal Proceeding. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding or hearing conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.

Legal Requirement. "Legal Requirement" shall mean any federal, state, local,
municipal, foreign or other law, statute, constitution, ordinance, code, rule
or regulation, issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.

Material Adverse Change. An event, circumstance or other matter will be
deemed to constitute a "Material Adverse Change" with respect to the Acquired
Corporations if such event, circumstance or other matter would have a material
adverse effect on the business, condition, assets, liabilities, operations or
financial performance of the Acquired Corporations taken as a whole; provided,
however, that (i) any event, circumstance or other matter occurring after the
date of the Agreement that results from or relates to general economic or
industry conditions, after giving due consideration to the performance of the
Acquired Corporation's competition and the effect of such conditions on the
Acquired Corporation's customer base, shall be disregarded; (ii) any event,
circumstance or other matter occurring after the date of this Agreement that
results from or relates to the taking of any action contemplated or permitted
by this Agreement or the announcement or pendency of the Merger shall be
disregarded; and (iii) any change that results from or relates to quarterly or
monthly fluctuations in the financial condition, business or results of
operations of the Acquired Corporations similar in nature to those experienced
by the Acquired Corporations in prior years shall be disregarded. An event,
circumstance or other matter will be deemed to constitute a "Material Adverse
Change" with respect to Parent if such event, circumstance or other matter
would have a material adverse effect on the business, condition, assets,
liabilities, operations or financial performance of Parent and its
subsidiaries taken as a whole; provided, however, that (i) any event,
circumstance or other matter occurring after the date of the Agreement that
results from or relates to general economic or industry conditions, after
giving due consideration to the performance of Parent and its subsidiaries'
competition and the effect of such conditions on Parent's and its
subsidiaries' customer base, shall be disregarded; (ii) any event,
circumstance or other matter occurring after the date of this Agreement that
results from or relates to the taking of any action contemplated or permitted
by this Agreement or the announcement or pendency of the Merger shall be
disregarded; and (iii) any change that results from or relates to quarterly or
monthly fluctuations in the financial condition, business or results of
operations of Parent and its subsidiaries similar in nature to those
experienced by Parent and its subsidiaries in prior years shall be
disregarded.

Material Adverse Effect. An event, violation, inaccuracy, circumstance or
other matter will be deemed to have a "Material Adverse Effect" on the
Acquired Corporations if such event, violation, inaccuracy, circumstance or
other matter would have a material adverse effect on the business, condition,
assets, liabilities, operations or financial performance of the Acquired
Corporations taken as a whole. An event, violation, inaccuracy, circumstance
or other matter will be deemed to constitute a "Material Adverse Effect" on
Parent if such event, violation, inaccuracy, circumstance or other matter
would have a material adverse effect on the business, condition, assets,
liabilities, operations or financial performance of Parent and its
subsidiaries taken as a whole.

Material Contract. "Material Contract" shall mean any Contract that is
material to any of the Acquired Corporations, to the business or operations of
any of the Acquired Corporations or to any of the transactions contemplated by
this Agreement: (a) to which any of the Acquired Corporations is a party; or
(b) by which any

1-A-3
<PAGE>

of the Acquired Corporations or any asset of any of the Acquired Corporations
is bound or under which any of the Acquired Corporations has any obligation.

Materials of Environmental Concern. "Materials of Environmental Concern"
shall mean chemicals, pollutants, contaminants, wastes, toxic or hazardous
substances, petroleum and petroleum products and any other toxic or hazardous
substance, waste or material that is now regulated by any Environmental Law.

Nasdaq. "Nasdaq" shall mean the Nasdaq National Market.

Parent Acquisition Proposal. "Parent Acquisition Proposal" shall mean any
offer or proposal contemplating or otherwise relating to any Parent
Acquisition Transaction.

Parent Acquisition Transaction. "Parent Acquisition Transaction" shall mean
any transaction or series of related transactions involving:

(a) any merger, consolidation, share exchange, business combination,
issuance of securities, acquisition of securities, tender offer, exchange
offer or other similar transaction (i) in which Parent or any of its
subsidiaries is a constituent corporation, (ii) in which a Person or
"group" (as defined in the Exchange Act and the rules promulgated
thereunder) of Persons acquires beneficial or record ownership of
securities representing more than 50% of the outstanding securities of any
class of voting securities of Parent, or (iii) in which Parent or any of
its subsidiaries issues securities representing more than 50% of the
outstanding securities of any class of voting securities of Parent or any
of its subsidiaries; or

(c) any sale, lease (other than in the ordinary course of business),
exchange, transfer, license (other than in the ordinary course of
business), acquisition or disposition of more than 50% of the assets of
Parent or any of its subsidiaries.

Parent Common Stock. "Parent Common Stock" shall mean the Common Stock,
$.0001 par value per share, of Parent.

Parent Contract. "Parent Contract" shall mean any Contract that has been
filed by Parent as an exhibit to a registration statement or report filed by
Parent with the SEC.

Parent Proprietary Asset. "Parent Proprietary Asset" shall mean any material
Proprietary Asset owned by or exclusively licensed to Parent or its
subsidiaries except for agreements for the license to Parent or its
subsidiaries of software generally available to the public.

Parent Financial Statements. "Parent Financial Statements" shall mean: (i)
the audited and unaudited consolidated financial statements of Parent
contained in the Parent SEC Documents; and (ii) the Parent Unaudited Interim
Balance Sheet.

Parent Unaudited Interim Balance Sheet. "Parent Unaudited Interim Balance
Sheet" means the unaudited consolidated balance sheet of Parent and its
subsidiaries as of September 30, 1997.

Person. "Person" shall mean any individual, Entity or Governmental Body.

Proprietary Asset. "Proprietary Asset" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, computer software, computer program,
source code, algorithm, invention, proprietary product, technology,
proprietary right or other intellectual property right or intangible asset; or
(b) right to use or exploit any of the foregoing.

Representatives. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.

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<PAGE>

SEC. "SEC" shall mean the United States Securities and Exchange Commission.

Securities Act. "Securities Act" shall mean the Securities Act of 1933, as
amended.

Tax. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax,
business tax, withholding tax or payroll tax), levy, assessment, imposed,
assessed or collected by or under the authority of any Governmental Body.

Tax Return. "Tax Return" shall mean any return (including any information
return) filed with or submitted to, or required to be filed with or submitted
to, any Governmental Body in connection with the determination, assessment,
collection or payment of any Tax or in connection with the administration,
implementation or enforcement of or compliance with any Legal Requirement
relating to any Tax.

1-A-5
<PAGE>

ANNEX 2

[LETTERHEAD OF BT ALEX. BROWN INCORPORATED]

February 4, 1998

Board of Directors
Pharmacopeia, Inc.
Princeton Forrestal Center
101 College Road East
Princeton, NJ 08540

Members of the Board:

Pharmacopeia, Inc. ("Pharmacopeia"), Micro Acquisition Corporation, a wholly
owned subsidiary of Pharmacopeia ("Merger Sub"), and Molecular Simulations
Incorporated ("MSI") have proposed to enter into an Agreement and Plan of
Merger and Reorganization, dated as of February 4, 1998 (the "Merger
Agreement"). Pursuant to the Merger Agreement, the implementation of which is
contingent on approval by the stockholders of Pharmacopeia and MSI, Merger Sub
will be merged with and into MSI (the "Merger") and each outstanding share of
the common stock, par value $0.001 per share, of MSI, Class B non-voting
common stock, par value $0.001 per share, of MSI and Series A convertible
preferred stock, par value $0.01 per share, of MSI will be converted into
0.5292 (the "Exchange Ratio") of a share of the common stock, par value
$0.0001 per share, of Pharmacopeia (the "Pharmacopeia Common Stock"). You have
requested our opinion as to whether the Exchange Ratio is fair, from a
financial point of view, to Pharmacopeia.

BT Alex. Brown Incorporated ("BT Alex. Brown"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and
other purposes. We have acted as financial advisor to the Board of Directors
of Pharmacopeia in connection with the Merger and will receive a fee for our
services, a significant portion of which is contingent upon the consummation
of the Merger and a portion of which is payable upon delivery of this opinion.
We previously have provided investment banking services to Pharmacopeia in
connection with matters unrelated to the proposed Merger, for which services
we have received compensation. BT Alex. Brown maintains a market in
Pharmacopeia Common Stock and regularly publishes research reports regarding
the pharmaceutical and biotechnology industries and the businesses and
securities of Pharmacopeia and other publicly owned companies in such
industries. In the ordinary course of business, BT Alex. Brown may actively
trade the securities of Pharmacopeia for our own account and the account of
our customers and, accordingly, may at any time hold a long or short position
in securities of Pharmacopeia.

In connection with this opinion, we have reviewed certain publicly available
financial information and other information concerning Pharmacopeia, certain
available financial information and other information concerning MSI and
certain internal analyses and other information furnished to us by
Pharmacopeia and MSI. We have also held discussions with the members of the
senior management of Pharmacopeia and MSI regarding the business and prospects
of Pharmacopeia and MSI and the joint prospects of a combined company. In
addition, we have (i) reviewed the reported prices and trading activity for
Pharmacopeia Common Stock, (ii) compared certain financial and stock market
information for Pharmacopeia and certain financial information for MSI with
similar information for certain publicly traded companies, (iii) reviewed the
financial terms of certain recent business combinations which we deemed
comparable in whole or in part, (iv) reviewed the terms of the Merger
Agreement, and (v) performed such other studies and analyses and considered
such other factors as we deemed appropriate.

We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy, completeness and fairness
thereof. With respect to the information relating to the

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<PAGE>

prospects of Pharmacopeia, MSI and the combined company, we have assumed that
such information reflects the best currently available judgments and estimates
of the management of Pharmacopeia and MSI as to the likely future financial
performance of their respective companies and of the combined company. In
addition, we have not made an independent evaluation or appraisal of the
assets or liabilities of Pharmacopeia or MSI, nor have we been furnished with
any such evaluations or appraisals. We are expressing no opinion as to the
price at which the Pharmacopeia Common Stock actually may trade at any time.
We have assumed, with your consent, that the Merger will qualify for pooling-
of-interests accounting treatment. Our opinion is based on market, economic
and other conditions as they exist and can be evaluated as of the date of this
letter.

Our advisory services and the opinion expressed herein are for the use of
the Board of Directors of Pharmacopeia and do not constitute a recommendation
to any stockholder as to how such stockholder should vote with respect to
matters relating to the proposed Merger. We hereby consent, however, to the
inclusion of this opinion in its entirety as an exhibit to the proxy or
registration statement of Pharmacopeia relating to the proposed Merger.

Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the Exchange Ratio is fair, from a financial point of
view, to Pharmacopeia.

Very truly yours,

BT ALEX. BROWN INCORPORATED

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<PAGE>

ANNEX 3

[LETTERHEAD OF GOLDMAN, SACHS & CO.]

PERSONAL AND CONFIDENTIAL

February 4, 1998

Board of Directors
Molecular Simulations Incorporated
9685 Scranton Road
San Diego, CA 92121-3752

Gentlemen:

You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of (i) Common Stock, par value
$0.001 per share (the "Common Shares") and (ii) Class B Common Stock, par
value $0.001 per share (the "Class B Common Shares and together with the
Common Shares, the "Shares"), of Molecular Simulations Incorporated (the
"Company") of the exchange ratio of 0.5292 shares of Common Stock, par value
$0.0001 per share (the "Pharmacopeia Shares"), of Pharmacopeia Inc.
("Pharmacopeia") to be received for each Share (the "Exchange Ratio") pursuant
to the Agreement and Plan of Merger and Reorganization, dated as of February
4, 1998, among Pharmacopeia, Micro Acquisition Corporation, a wholly-owned
subsidiary of Pharmacopeia, and the Company (the "Agreement").
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. We are familiar with the Company having acted as its financial
advisor in connection with, and having participated in certain of the
negotiations leading to, the Agreement. In addition, we have provided certain
investment banking services to Corning Incorporated ("Corning"), the largest
shareholder of the Company, from time to time including having acted as its
financial advisor in connection with its spinoff of Quest Diagnostics in
January 1997 and acting as its financial advisor in connection with the
pending divestiture of its consumer products business, and we may provide
investment banking services to Corning in the future.
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Registration Statement on Form S-1, dated February 10, 1997, of
the Company with respect to its previously proposed initial public offering;
audited financial statements of the Company for the three years ended December
31, 1996; unaudited financial statements of the Company for the year ended
December 31, 1997; and certain internal financial analyses and forecasts for
the Company prepared by its management. We have also reviewed the Registration
Statement on Form S-1, dated December 5, 1995, of Pharmacopeia with respect to
an initial public offering of the Pharmacopeia Shares; Annual Reports to
Stockholders and Annual Reports on Form 10-K of Pharmacopeia for the two years
ended December 31, 1996; certain interim reports to stockholders and Quarterly
Reports on Form 10-Q of Pharmacopeia; certain other communications from
Pharmacopeia to its stockholders; and certain internal financial analyses and
forecasts for Pharmacopeia prepared by its management and certain

3-1
<PAGE>

financial analyses and forecasts for Pharmacopeia reviewed by us with the
respective managements of Pharmacopeia and the Company (the "Forecasts"). We
have also held discussions with members of the senior management of the
Company and Pharmacopeia regarding the strategic rationale for, and the
potential benefits of, the transaction contemplated by the Agreement and the
past and current business operations, financial condition and future prospects
of their respective companies. In addition, we have reviewed the reported
price and trading activity for the Pharmacopeia Shares, compared certain
financial information for the Company and Pharmacopeia with similar
information for certain other companies the securities of which are publicly
traded, compared certain stock market information for Pharmacopeia with
similar information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the software industry specifically and in other industries
generally and performed such other studies and analyses as we considered
appropriate.
We have relied upon the accuracy and completeness of all of the financial
and other information reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. We have also assumed with
your consent that the transaction contemplated by the Agreement will be
accounted for as a pooling-of-interests under generally accepted accounting
principles. You are aware that Pharmacopeia has a limited operating history
with a record of operating losses and there is no assurance of future
profitability due, among other factors, to its dependence on patents and
proprietary rights, competition, the risk of obsolescence of its technology,
its dependence upon third party suppliers, collaborators and key employees,
and the need for future capital and the uncertainty of funding therefor.
Notwithstanding the various risks and uncertainties inherent in achieving the
Forecasts because of the nature of Pharmacopeia's business and lack of
demonstrated profitability, for purposes of our opinion, you have instructed
us to assume, and we have assumed, that the Forecasts have been reasonably
prepared on a basis reflecting the best currently available judgments and
estimates of Pharmacopeia and the Company and it is the best currently
available judgment of the Company that the Forecasts will be realized in the
amounts and at the times contemplated thereby. We have not made an independent
evaluation or appraisal of the assets and liabilities of the Company or
Pharmacopeia or any of their respective subsidiaries and we have not been
furnished with any such evaluation or appraisal. Our advisory services and the
opinion expressed herein are provided for the information and assistance of
the Board of Directors of the Company in connection with its consideration of
the transaction contemplated by the Agreement and such opinion does not
constitute a recommendation as to how any holder of Shares should vote with
respect to such transaction. In addition, we are not expressing any opinion
herein as to the prices at which the Pharmacopeia Shares may trade in the
future.
Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion that as of the date hereof the
Exchange Ratio pursuant to the Agreement is fair from a financial point of
view to the holders of Shares.

Very truly yours,

/s/ Goldman Sachs & Co.
_____________________________________
(GOLDMAN SACHS & CO.)

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<PAGE>

ANNEX 4

SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW

262 APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to sec. 228 of this title shall be entitled to an appraisal
by the Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.

(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to sec. 251 (other than a merger effected pursuant to
subsection (g) of sec. 251), 252, 254, 257, 258, 263 or 264 of this title:

(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsections (f) of sec. 251 of this title.

(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to sec.
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:

a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;

b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on
a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;

c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or

d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.

(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.

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(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.

(d) Appraisal rights shall be perfected as follows:

(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or

(2) If the merger or consolidation was approved pursuant to sec. 228 or
sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that is such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.

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(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger
or consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which
demands for appraisal have been received and the aggregate number of holders
of such shares. Such written statement shall be mailed to the stockholder
within 10 days after his written request for such a statement is received by
the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.

(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.

(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.

(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.

(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be enforced
as other decrees in the Court of

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Chancery may be enforced, whether such surviving or resulting corporation be a
corporation of this State or of any state.

(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.

(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.

(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (Last amended by Ch. 299, L.
'96, eff. 2-1-96 and Ch. 349, L. '96, eff. 7-1-96.)

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ANNEX 5

DESCRIPTION OF THE 1994 PHARMACOPEIA INCENTIVE STOCK PLAN

General. Pharmacopeia's 1994 Incentive Stock Plan (the "Incentive Plan") was
initially adopted by the Board of Directors on April 20, 1994 and initially
approved by the stockholders on February 25, 1995. The Incentive Plan
authorizes the grant of stock options, stock appreciation rights and stock
purchase rights. Options granted under the Incentive Plan may be either
"incentive stock options" as defined in Section 422 of the Code, or
nonstatutory stock options, as determined by the Administrator (defined
below). A total of 750,000 shares of Pharmacopeia Common Stock was initially
reserved for issuance under the Incentive Plan. In 1996 and 1997, the Board of
Directors and stockholders approved cumulative increases of 1,000,000 shares
authorized for issuance under the Incentive Plan, increasing the number of
shares of Pharmacopeia Common Stock authorized for issuance thereunder from
750,000 to 1,750,000 shares. Stockholder approval is now being sought for
amendments of the Incentive Plan to increase by 500,000 the number of shares
authorized for issuance under the Incentive Plan to 2,250,000, and to further
increase the number of shares authorized for issuance to 2,750,000 effective
upon consummation of the merger of a wholly-owned subsidiary of Pharmacopeia
with and into Molecular Simulations Incorporated (the "Merger"). The Board of
Directors believes that the proposed amendments increasing the number of
shares reserved for issuance under the Incentive Plan are in the best
interests of Pharmacopeia. The proposed increases will provide an adequate
reserve of shares for issuance under the Incentive Plan, which is necessary to
enable Pharmacopeia to compete successfully with other companies to attract
and retain valuable employees. The reason for having two proposals regarding
the Incentive Plan is that Pharmacopeia cannot be certain that the Merger will
be approved and consummated. Therefore, Pharmacopeia cannot be certain how
many employees it will have or how many shares of Pharmacopeia Common Stock
should be authorized for issuance under the Incentive Plan. Pharmacopeia is
seeking authority for an increase in the number of shares authorized for
issuance under the Incentive Plan to 2,225,000, which Pharmacopeia believes
would be a sufficient amount if Pharmacopeia does not acquire MSI.
Pharmacopeia is also seeking authority for an additional increase in the
number of shares authorized for issuance under the Incentive Plan to
2,750,000. This increase would be necessary, and would take effect, only if
the Merger is consummated.

Purpose. The general purpose of the Incentive Plan is to attract and retain
the best available personnel, to provide additional incentive to employees and
consultants and to promote the success of Pharmacopeia's business.

Administration. The "Primary Committee" administers the Incentive Plan for
all employees subject to Section 16 of the Securities and Exchange Act of 1934
(the "Exchange Act"). The Primary Committee consists of two or more non-
employee directors appointed by the Board of Directors. With respect to all
other participants in the Incentive Plan, the Board of Directors may either
administer the Incentive Plan or appoint a committee (the "Secondary
Committee") from among its members, including the Primary Committee, to
administer the Incentive Plan. A subcommittee of the Primary Committee or the
Secondary Committee which has been approved by the Board of Directors may be
delegated those administrative functions under the Incentive Plan which have
been authorized to be performed by the Primary or Secondary Committee, as the
case may be. The Board of Directors, Primary Committee, Secondary Committee or
an approved subcommittee thereof, as applicable, are collectively referred to
herein as the "Administrator". Subject to the other provisions of the
Incentive Plan, the Administrator has the authority to: (i) grant options and
rights; (ii) interpret the Incentive Plan; (iii) select the persons to whom
options and rights are to be granted; (iv) determine the number of shares to
be made subject to each option and right; (v) prescribe, amend and rescind
rules and regulations relating to the Incentive Plan; (vi) prescribe the terms
and conditions of each option and right (including the exercise price, whether
an option will be classified as an incentive stock option or a nonstatutory
stock option and the provisions of the stock option or stock purchase
agreement to be entered into between Pharmacopeia and the grantee); and (vii)
to make all other determinations deemed necessary or advisable for the
administration of the Incentive Plan. All decisions, interpretations and other
actions of the Administrator shall be final and binding on all holders of
options and on all persons deriving their rights therefrom.

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Eligibility. The Incentive Plan provides that options and rights may be
granted to Pharmacopeia's employees and consultants (as such terms are defined
in the Incentive Plan). Incentive stock options may be granted only to
employees. At January 31, 1998, approximately 197 employees of Pharmacopeia
were eligible to participate in the Incentive Plan, as proposed to be amended.
It is not possible to state at this time whether a particular executive
officer, all current executive officers as a group, a particular nominee for
director or all non-executive officers as a group will be granted Options
under the Incentive Plan or the benefit or value of such Options, since these
matters will be determined by the Administrator based on each participant's
level of responsibility, compensation and contribution to Pharmacopeia's
success. As of January 31, 1998, Pharmacopeia had granted options pursuant to
the Incentive Plan to purchase an aggregate of 1,510,300 shares at exercise
prices ranging from $.48 to $26.75 per share. (For information regarding
options granted under the Incentive Plan to certain Pharmacopeia Named
Executive Officers of Pharmacopeia, see "Executive Compensation" in the Joint
Proxy Statement/Prospectus). As of that date, Pharmacopeia had also granted
options pursuant to the Incentive Plan to the following groups or persons: all
current executive officers as a group had received options to purchase 417,500
shares at exercise prices ranging from $.48 to $21.50 per share and all
current employees, including all current officers who are not executive
officers, as a group, had received options under the Incentive Plan to
purchase 553,725 shares at exercise prices ranging from $.48 to $26.75 per
share. The closing price of Pharmacopeia Common Stock as reported on the
Nasdaq National Market for January 31, 1998 was $16.625.

Section 162(m) Limitations. Section 162(m) of the Code limits the
deductibility of compensation paid to certain executive officers of
Pharmacopeia. To maximize Pharmacopeia's deduction attributable to options
granted to such persons, the Incentive Plan requires that no participant may
receive options, separately exercisable stock appreciation rights and stock
purchase rights for more than 400,000 shares of Pharmacopeia Common Stock in
any one year.

Terms and Conditions of Options. Each option granted under the Incentive
Plan is evidenced by a written stock agreement between the optionee and
Pharmacopeia and is subject to the following terms and conditions:

(a) Exercise Price. The Administrator determines the exercise price of an
option to purchase shares of Pharmacopeia Common Stock at the time the
option is granted. The exercise price under an incentive stock option must
not be less than 100% of the fair market value of the Pharmacopeia Common
Stock on the date the option is granted and the exercise price of a
nonstatutory stock option must not be less than 85% of the fair market
value of the Pharmacopeia Common Stock on the date the option is granted.
However, any optionee who owns more than 10% of the combined voting power
of all classes of outstanding stock of Pharmacopeia (a "10% Stockholder")
is not eligible for the grant of an option unless the exercise price of the
option is at least 110% of the fair market value of the Pharmacopeia Common
Stock on the date of grant. Generally, the fair market value shall be the
closing sale price for such stock on the date of determination (or the mean
of the bid and asked prices, if no sales were reported) as quoted on the
Nasdaq National Market as reported in The Wall Street Journal.

(b) Form of Consideration. The means of payment for shares issued upon
exercise of an option is specified in each option agreement and generally
may be made by cash, check, money order, promissory note, certain other
shares of Pharmacopeia Common Stock of Pharmacopeia owned by the optionee,
delivery of an exercise notice together with irrevocable instructions to a
broker to deliver the exercise price to Pharmacopeia from the sale or loan
proceeds (a "cashless exercise"), delivery of an irrevocable subscription
agreement which requires full payment within twelve months, any combination
of the foregoing methods, or any other consideration to the extent
permitted under applicable law.

(c) Term of the Option. Each stock option agreement will specify the type
of option, the term of the option and the date when the option is to become
exercisable. However, the term of an option granted under the Incentive
Plan will be no longer than ten years from the date of grant in the case of
an incentive stock option and ten years and one day in the case of a
nonstatutory stock option. Moreover, in the case of an option granted to a
10% Stockholder, the term of an incentive stock option will be for no more
than five years from the date of grant and the term of a nonstatutory stock
option will be no more than five years and one day from the date of grant.

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(d) Termination of Employment or Consulting Relationship. If an
optionee's employment or consulting relationship terminates for any reason
(other than death or permanent disability), the optionee may exercise his
or her option, but only within thirty days (or such other period of time as
is determined by the Administrator) from the date of such termination, and
only to the extent that the optionee was entitled to exercise it at the
date of such termination (and in no event later than the expiration of the
term of such option as set forth in the option agreement). To the extent
that the optionee was not entitled to exercise an option at the date of
such termination, and to the extent that the optionee does not exercise
such option (to the extent otherwise so entitled) within the time
permitted, the option shall terminate.

(e) Permanent Disability and Death. If an optionee is unable to continue
employment or consulting with Pharmacopeia as a result of disability (as
defined in Section 22(e)(3) of the Code) or death, then all his or her
options under the Incentive Plan shall expire within six months after the
date of termination of the optionee's employment or consulting relationship
(or such other period of time determined by the Administrator) but in no
event later than the expiration of the term of such option as set forth in
the option agreement. The optionee, executor or other legal representative
of the optionee may exercise all or part of his or her option at any time
before such expiration date to the extent that such option was exercisable
at the time of termination of employment. To the extent that the options
were not exercisable at the date of such termination, and to the extent
that the options are not exercised (to the extent otherwise permissible)
within the time permitted, the options shall terminate.

(f) Misconduct. If an optionee's employment or consultancy terminates due
to misconduct, all outstanding options terminate immediately. Misconduct as
defined in the Incentive Plan includes, but is not limited to, (i) acts of
fraud, embezzlement or dishonesty, (ii) unauthorized use or disclosure of
confidential information or trade secrets of Pharmacopeia or (iii) other
intentional acts of misconduct by the optionee that harm Pharmacopeia.

(g) Value Limitation. If the aggregate fair market value of all shares of
Pharmacopeia Common Stock subject to an optionee's incentive stock options
which are exercisable for the first time during any calendar year exceeds
$100,000, the excess options shall be treated as nonstatutory stock
options.

Nontransferability of Options and Stock Purchase Rights. During a
participant's lifetime, his or her options and rights shall be exercisable
only by the participant and shall not be transferable other than by will or
laws of descent and distribution.

Stock Appreciation Rights. A stock appreciation right granted in connection
with an option entitles the optionee to exercise the stock appreciation right
by surrendering to Pharmacopeia unexercised the corresponding portion of the
related option. In exchange, the optionee receives from Pharmacopeia an amount
equal to the excess of the fair market value of the Pharmacopeia Common Stock
covered by the surrendered portion of the related option on the date of
surrender of the related option over the exercise price of the related option.
When a stock appreciation right granted in connection with an option is
exercised, the related option, to the extent surrendered, ceases to be
exercisable. A stock appreciation right granted in connection with an option
remains exercisable until, and expires no later than, the date on which the
related option ceases to be exercisable or expires.

With respect to employees subject to Section 16 of the Exchange Act, the
Administrator may grant limited stock appreciation rights in connection with
an option. The limited stock appreciation rights may only be exercised upon
the occurrence of a hostile take-over (as defined by the Incentive Plan). In
the event of a hostile take-over, each limited stock appreciation right that
has been held for at least six months may be exercised for thirty days after
the hostile take-over for a cash distribution equal to the excess of (i) the
take-over price for the shares subject to the related option over (ii) the
aggregate exercise price payable for such shares.

Pharmacopeia's obligation arising upon the exercise of a stock appreciation
right may be paid in Pharmacopeia Common Stock or in cash, or any combination
thereof, as the Administrator may determine.

Stock Purchase Rights. A stock purchase right gives the purchaser a period
of no longer than six months from the date of grant to purchase Pharmacopeia
Common Stock. A stock purchase right is accepted by the execution of a
restricted stock purchase agreement between Pharmacopeia and the purchaser,
accompanied by

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the payment of the purchase price for the shares. Unless the Administrator
determines otherwise, the restricted stock purchase agreement shall give
Pharmacopeia a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment or consulting relationship with
Pharmacopeia for any reason (including death or disability). The purchase
price for any shares repurchased by Pharmacopeia shall be the original price
paid by the purchaser. The repurchase option lapses at a rate determined by
the Administrator.

Stock Withholding. The Administrator may allow participants in the Incentive
Plan to satisfy their withholding obligations, if applicable, by either
electing to have a certain number of shares of stock which would then be
received pursuant to the exercise of the option or the vesting of such shares
withheld by Pharmacopeia or by delivering to Pharmacopeia the number of shares
of stock required to be withheld.

Adjustment Upon Change in Capitalization. Subject to any required action by
the stockholders of Pharmacopeia, in the event that the stock of Pharmacopeia
is changed by reason of any stock split, reverse stock split, stock dividend,
combination, reclassification or other increase or decrease in the number of
issued shares of Pharmacopeia Common Stock effected without receipt of
consideration by Pharmacopeia, appropriate proportional adjustments will be
made in the number and class of shares of stock under the Incentive Plan, the
number of shares of stock subject to any option or right outstanding under the
Incentive Plan, and the exercise price of any such outstanding option or
right. Any such adjustment will be made by the Administrator, whose
determination shall be conclusive.

Merger or Asset Sale. In connection with any merger, or sale of all or
substantially all of the assets of Pharmacopeia, each outstanding option may
be assumed or an equivalent option substituted by a successor corporation. If
the successor corporation does not assume the option or substitute a
substantially equivalent option, each option will become fully exercisable for
a period of time determined by the Administrator. All options not exercised
before the merger or asset sale will terminate, if not substituted for or
assumed. Any option assumed or substituted for will automatically become fully
exercisable if an optionee's employment or consultancy ends within eighteen
months after the merger or asset sale. Such option will expire at the end of
its term or one year after the involuntary termination, whichever is earlier.
In addition, any repurchase option on Pharmacopeia Common Stock will terminate
and the stock will fully vest upon a merger or asset sale unless the
repurchase options are assigned to the successor corporation. Any such
repurchase option assigned in the merger or asset sale will end and the shares
subject to the repurchase option will immediately vest in full if the
optionee's employment or consultancy ends within eighteen months of the merger
or asset sale.

Change in Control. The Administrator has the discretion to make any
outstanding option fully or partially exercisable upon a change in control, or
condition making any outstanding option fully exercisable on the involuntary
termination of an optionee's employment or consultancy within eighteen months
of the date of the change in control. In addition, the Administrator has the
discretion with respect to stock purchase rights to terminate any repurchase
option and vest the Pharmacopeia Common Stock to which the repurchase option
relates upon a change in control or upon the involuntary termination of an
optionee's employment or consultancy within eighteen months of the date of the
change in control. A change in control means (i) certain changes in the
composition of Pharmacopeia's Board of Directors over a three year period, or
(ii) the acquisition of more than half of the beneficial ownership of
Pharmacopeia by any person or group accomplished by a tender offer which the
Board of Directors does not recommend the stockholders accept.

Amendments, Suspensions and Termination of the Incentive Plan. The Board of
Directors may amend, suspend or terminate the Incentive Plan at any time;
provided, however, that stockholder approval is required for any amendment
which (i) materially increases the number of shares under the Incentive Plan,
(ii) materially increases the maximum number of shares allowed for grants to
any participant, (iii) materially changes the class of persons eligible to
receive grants of options or rights, or (iv) materially increases the benefits
to participants under the Incentive Plan. In any event, the Incentive Plan
will terminate automatically in 2004.

FEDERAL INCOME TAX CONSEQUENCES

Incentive Stock Options. An optionee who is granted an incentive stock
option does not recognize taxable income at the time the option is granted or
upon its exercise, although the exercise may subject the optionee to

5-4
<PAGE>

the alternative minimum tax. Upon a disposition of the shares more than two
years after grant of the option and one year after exercise of the option, any
gain or loss is treated as long-term capital gain or loss. If these holding
periods are not satisfied, the optionee recognizes ordinary income at the time
of disposition equal to the difference between the exercise price and the
lower of (i) the fair market value of the shares at the date of the option
exercise or (ii) the sale price of the shares. Any gain or loss recognized on
such a premature disposition of the shares in excess of the amount treated as
ordinary income is treated as long-term or short-term capital gain or loss,
depending on the holding period. A different rule for measuring ordinary
income upon such a premature disposition may apply if the optionee is also an
officer, director, or 10% stockholder of Pharmacopeia. Pharmacopeia is
entitled to a deduction in the same amount as the ordinary income recognized
by the optionee.

Nonstatutory Stock Options. An optionee does not recognize any taxable
income at the time he or she is granted a nonstatutory stock option. Upon
exercise, the optionee recognizes ordinary taxable income generally measured
by the excess of the then fair market value of the shares over the exercise
price. Any taxable income recognized in connection with an option exercise by
an employee of Pharmacopeia is subject to tax withholding by Pharmacopeia.
Pharmacopeia is entitled to a deduction in the same amount as the ordinary
income recognized by the optionee. Upon a disposition of such shares by the
optionee, any difference between the sale price and the optionee's exercise
price, to the extent not recognized as taxable income as provided above, is
treated as long-term or short-term capital gain or loss, depending on the
holding period.

Stock Appreciation Rights. No income will be recognized by a recipient in
connection with the grant of a stock appreciation right. When the stock
appreciation right is exercised, the recipient generally will be required to
include as taxable ordinary income in the year of exercise an amount equal to
the sum of the amount of cash received and the fair market value of any
Pharmacopeia Common Stock received on the exercise. In the case of a recipient
who is also an employee, any income recognized on exercise of a stock
appreciation right will constitute wages for which withholding will be
required. Pharmacopeia will be entitled to a tax deduction in the same amount.
If the optionee receives Pharmacopeia Common Stock upon the exercise of a
stock appreciation right, any gain or loss on the subsequent sale of such
stock will be treated in the same manner as discussed above under
"Nonstatutory Stock Options."

Stock Purchase Rights. Stock purchase rights will generally be taxed in the
same manner as discussed above under "Nonstatutory Stock Options." However,
restricted stock is generally purchased upon the exercise of a stock purchase
right. At the time of purchase, restricted stock is subject to a "substantial
risk of forfeiture" within the meaning of Section 83 of the Code. As a result,
the purchaser will not recognize ordinary income at the time of purchase.
Instead, the purchaser will recognize ordinary income on the dates when a
stock ceases to be subject to a substantial risk of forfeiture. The stock will
generally cease to be subject to a substantial risk of forfeiture when it is
no longer subject to Pharmacopeia's right to repurchase the stock. At such
times, the purchaser will recognize ordinary income measured as the difference
between the purchase price and the fair market value of the stock on the date
the stock is no longer subject to a substantial risk of forfeiture.

The purchaser may accelerate to the date of purchase his or her recognition
of ordinary income, if any, and the beginning of any capital gain holding
period by timely filing an election with the Internal Revenue Service pursuant
to Section 83(b) of the Code. In such event, the ordinary income recognized,
if any, is measured as the difference between the purchase price and the fair
market value of the stock on the date of purchase, and the capital gain
holding period commences on such date. The ordinary income recognized by a
purchaser who is an employee will be subject to tax withholding by
Pharmacopeia. Different rules may apply if the purchaser is also an officer,
director, or 10% stockholder of Pharmacopeia.

The foregoing is only a summary of the effect of federal income taxation
upon optionees, holders of stock purchase rights, and Pharmacopeia with
respect to the grant and exercise of options and stock purchase rights under
the Incentive Plan. It does not purport to be complete, and does not discuss
the tax consequences of the employee's or consultant's death or the provisions
of the income tax laws of any municipality, state or foreign country in which
the employee or consultant may reside.

5-5
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 ("Section 145") of the Delaware General Corporation Law (the
"DGCL") provides generally and in pertinent part that a Delaware corporation
may indemnify its directors, officers, employees and agents against expenses
(including attorneys' fees), judgments, fines and settlements actually and
reasonably incurred by them in connection with any civil, criminal,
administrative or investigative action, suit or proceeding (except actions by
or in the right of the corporation), if, they acted in good faith and in a
manner they reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, with respect to any criminal suit or
proceeding, they had no reasonable cause to believe their conduct was
unlawful. Section 145 further provides that, in connection with the defense or
settlement of any action by or in the right of the corporation, a Delaware
corporation may indemnify its directors, officers, employees and agents
against expenses actually and reasonably incurred by them if they acted in
good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interests of the corporation, except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation, absent a
determination by a court that such indemnity is proper. Section 145 further
permits a Delaware corporation to grant its directors, officers, employees and
agents additional rights of indemnification through bylaw provisions and
otherwise.

Section 145 further permits a Delaware corporation to purchase and maintain
insurance on behalf of any persons who are or were directors, officers,
employees or agents of the corporation, or are or were serving at the request
of the corporation as directors, officers, employees or agents of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against them and incurred by them in any such capacity, or
arising out of their status as such, whether or not the corporation would have
the power to indemnify them against such liability under the other provisions
of Section 145.

Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL (relating to
liability for unauthorized acquisitions or redemptions of, or dividends on,
capital stock) or (iv) for any transaction from which the director derived an
improper personal benefit.

The Restated Certificate of Incorporation of Pharmacopeia provides for the
indemnification of its directors and officers to the fullest extent provided
by the DGCL. The Restated Certificate of Incorporation further states that
Pharmacopeia may, in the sole discretion of its Board of Directors, indemnify
any other person to the extent the Board of Directors deems advisable, as
permitted by Section 145. Pharmacopeia's By-laws provide that Pharmacopeia
shall indemnify its directors, officers, employees and agents, subject to
certain exceptions regarding such persons' standard of conduct.

In addition, Article IX, Section (b) of Pharmacopeia's Restated Certificate
of Incorporation provides, in part, as follows:

"No person shall be personally liable to the corporation or its
stockholders for monetary damages for beach of fiduciary duty as a
director, provided, however, that the foregoing shall not eliminate or
limit the liability of a director (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit."

II-1
<PAGE>

In addition, Pharmacopeia's By-laws provide that it has the power to
purchase liability insurance policies covering its directors, officers,
employees and agents, whether or not Pharmacopeia would have the power to
indemnify such person under the DGCL. Pharmacopeia currently maintains such
insurance.

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger and Reorganization dated as of February
4, 1998, among Pharmacopeia, Inc., Micro Acquisition Corporation and
Molecular Simulations Incorporated.(1)
4.1 Restated Certificate of Incorporation of the Registrant.(2)
4.2 Bylaws of the Registrant, as amended.(3)
4.2(a) Amendment to Bylaws of the Registrant dated July 31, 1997.(4)
4.3 Stockholder Rights Agreement, dated February 15, 1995.(5)
5.1 Opinion of Dechert Price & Rhoads regarding the legality of the
securities being registered.
8.1 Opinion of Dechert Price & Rhoads as to federal tax matters.
8.2 Opinion of Cooley Godward LLP as to federal tax matters.
21 Subsidiaries of the Registrant.(6)
23.1 Consent of Dechert Price & Rhoads.*
23.2 Consent of Cooley Godward LLP.*
23.3 Consent of Ernst & Young LLP.
23.4 Consent of Arthur Andersen LLP.
24 Power of Attorney.*
99.1 Consent of BT Alex. Brown Incorporated.*
99.2 Consent of Goldman Sachs & Co.
99.3 Form of Proxy Card of Pharmacopeia.
99.4 Consent of Michael J. Savage.*
99.5 Consent of C. Peter W. Booth.*
</TABLE>
- --------
*Previously filed.
(1) Filed as an Annex to the Joint Proxy Statement/Prospectus of which this
Registration Statement forms a part and incorporated herein by reference.
(2) Incorporated by reference to exhibit 3.1 filed with the Registrant's Form
10-K for the year ended December 31, 1996.
(3) Incorporated by reference to exhibit 3.3 filed with the Registrant's Form
10-K for the year ended December 31, 1996.
(4) Incorporated by reference to exhibit 3.3(a) filed with the Registrant's
Form 10-Q for the quarter ended September 30, 1997.
(5) Incorporated by reference to exhibit 4.3 filed with the Registrant's
Registration Statement on Form S-1 No. 33-93460.

(6) Incorporated by reference to exhibit 21.0 filed with the Registrant's Form
10-K for the year ended December 31, 1997.

(b) Financial Statement Schedules.

Financial Statement Schedules are omitted because they are not applicable or
are not required or because the requested information is immaterial or the
required information is included in the financial statements or notes thereto.

II-2
<PAGE>

The opinions of BT Alex. Brown Incorporated and Goldman Sachs & Co. are
included as Annexes 2 and 3, respectively, to the Joint Proxy
Statement/Prospectus included in Part I of this Registration Statement.

ITEM 22. UNDERTAKINGS.

(1) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the undersigned registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.

(2) The undersigned registrant hereby undertakes:

(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective Registration Statement.

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement:

Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) immediately
above do not apply if the registration statement is on Form S-3, Form S-8
or Form F-3 and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with
or furnished to the Commission by the registrant pursuant to Section 13 or
Section 15(d) of the Exchange Act that are incorporated by reference in the
registration statement.

(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(3) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in this Registration Statement shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

II-3
<PAGE>

(4) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the registrant undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.

(5) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (4) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to this Registration Statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

(6) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.

(7) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
Company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.

II-4
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWN OF PRINCETON, STATE OF NEW
JERSEY ON THE SIXTH DAY OF MAY, 1998.

Pharmacopeia, Inc.

/s/ Joseph A. Mollica
By:__________________________________
JOSEPH A. MOLLICA, PH.D. CHAIRMAN
OF THE BOARD OF
DIRECTORS,PRESIDENT AND CHIEF
EXECUTIVE OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Joseph A. Mollica Chairman of the Board May 6, 1998
_____________________________________ of Directors,
JOSEPH A. MOLLICA, PH.D. President and Chief
Executive Officer
(Principal Executive
Officer)

/s/ Lewis J. Shuster Executive Vice May 6, 1998
_____________________________________ President, Corporate
LEWIS J. SHUSTER Development, Chief
Financial Officer and
Secretary (Principal
Financial and
Accounting Officer)

* Director May 6, 1998
_____________________________________
FRANK BALDINO, JR., PH.D.

* Director May 6, 1998
_____________________________________
SAMUEL D. COLELLA
</TABLE>

II-5
<PAGE>

<TABLE>
SIGNATURE TITLE DATE
<S> <C> <C>
* Director May 6, 1998
_____________________________________
GARY E. COSTLEY, PH.D.

* Director May 6, 1998
_____________________________________
EDITH W. MARTIN, PH.D.

* Director May 6, 1998
_____________________________________
EILEEN M. MORE

* Director May 6, 1998
_____________________________________
CHARLES A. SANDERS, M.D.

* Director May 6, 1998
_____________________________________
PAUL A. BARTLETT, PH.D.

/s/ Joseph A. Mollica
*By: ________________________________
JOSEPH A. MOLLICA
ATTORNEY-IN-FACT
</TABLE>

II-6

<PAGE>

Exhibit 5.1

[Letterhead of Dechert Price & Rhoads]

May 6, 1998

Pharmacopeia, Inc.
101 College Road East
Princeton, New Jersey 08540

Re: Registration Statement on Form S-4
----------------------------------

Gentlemen and Ladies:

We have acted as counsel to Pharmacopeia, Inc. (the "Company"), in
connection with the preparation of a Registration Statement on Form S-4
(including the proxy statement and prospectus forming a part thereof, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the issuance of an aggregate of up to 8,726,020
shares of common stock, par value $.0001 per share, of the Company ("Company
Common Stock") in connection with the merger (the "Merger") of Micro Acquisition
Corporation ("Merger Subsidiary") with and into Molecular Simulations
Incorporated ("MSI") pursuant to an Agreement and Plan of Merger and
Reorganization, dated as of February 4, 1998 (the "Merger Agreement") among the
Company, MSI and Merger Subsidiary, pursuant to which each holder of Common
Stock, par value $.001 per share, of MSI ("MSI Common Stock"), Class B Common
Stock, par value $.001 per share, of MSI ("MSI Class B Common Stock") and Series
A Convertible Preferred Stock, $.01 par value per share, of MSI ("MSI Preferred
Stock," and with the MSI Common Stock and MSI Class B Common Stock, the "MSI
Capital Stock"), will be entitled to convert each such share of MSI Capital
Stock into 0.5292 of a share of Company Common Stock.

We have examined such corporate records and documents and other
matters as we have deemed necessary in order to render this opinion.

Based upon the foregoing, it is our opinion that, when issued in the
Merger pursuant to the Merger Agreement, the Company Common Stock will be
validly issued, fully paid and non-assessable.

We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name in respect thereof under the
caption "LEGAL OPINIONS" in the Joint Proxy Statement/Prospectus constituting a
part of the Registration Statement. In
<PAGE>

giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act.

Very truly yours,

/s/ Dechert Price & Rhoads

DECHERT PRICE & RHOADS

<PAGE>

Exhibit 8.1

[Letterhead of Dechert Price & Rhoads]

May 6, 1998

Board of Directors
Pharmacopeia, Inc.
101 College Road East
Princeton, NJ 08540

Re: Merger of Micro Acquisition Corporation with and into
Molecular Simulations Incorporated
-----------------------------------------------------

Ladies and Gentlemen:

This opinion is being delivered to you in connection with the filing
of the Joint Proxy Statement/Prospectus for the merger (the "Merger") of Micro
Acquisition Corporation ("Merger Sub"), a Delaware corporation and wholly-owned
subsidiary of Pharmacopeia, Inc. ("Parent"), a Delaware corporation, with and
into Molecular Simulations Incorporated (the "Company"), a Delaware corporation.
The Joint Proxy Statement/Prospectus is included in the Registration Statement
on Form S-4 of Pharmacopeia as originally filed with the Securities and Exchange
Commission on March 6, 1998 and as amended thereafter (the "Registration
Statement"). The terms and conditions of the Merger are set forth in that
Agreement and Plan of Merger and Reorganization, dated as of February 4,1998
(the "Reorganization Agreement"), by and among Parent, Merger Sub and the
Company.

Except as otherwise provided, capitalized terms used but not defined
herein shall have the meanings set forth in the Reorganization Agreement. All
section references, unless otherwise indicated, are to the Internal Revenue Code
of 1986, as amended (the "Code").

We have acted as counsel to the Parent and Merger Sub in connection
with the Merger. As such, and for the purpose of rendering this opinion, we
have examined, and are relying upon (without any independent investigation or
review thereof) the truth and accuracy, at all relevant times, of the
statements, covenants, representations and warranties contained in the following
documents (including all exhibits and schedules attached thereto):

(a) the Reorganization Agreement;

(b) those certain tax representation letters dated May 6, 1998
delivered to us by Parent, Merger Sub and the Company containing certain
representations of Parent, Merger Sub and the Company (the "Tax Representation
Letters"); and
<PAGE>

Board of Directors
Pharmacopeia, Inc.
May 6, 1998
Page 2

(c) such other instruments and documents related to the formation,
organization and operation of Parent, Merger Sub and the Company and related to
the consummation of the Merger and the other transactions contemplated by the
Reorganization Agreement as we have deemed necessary or appropriate.

In connection with rendering this opinion, we have assumed (without
any independent investigation or review thereof) that:

1. Original documents submitted to us (including signatures thereto)
are authentic, documents submitted to us as copies conform to the original
documents, and that all such documents have been (or will be by the Effective
Time) duly and validly executed and delivered where due execution and delivery
are a prerequisite to the effectiveness thereof;

2. All representations, warranties and statements made or agreed to by
Parent, Merger Sub and the Company, their managements, employees, officers,
directors and stockholders in connection with the Merger, including, but not
limited to, those set forth in the Reorganization Agreement (including the
exhibits thereto) and the Tax Representation Letters are true and accurate at
all relevant times;

3. All covenants contained in the Reorganization Agreement (including
exhibits thereto) and the Tax Representation Letters have been or will be
performed without waiver or breach of any material provision thereof; and

4. Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.

Based on our examination of the foregoing items and subject to the
limitations, qualifications, assumptions and caveats set forth herein, we are of
the opinion that, provided the Merger is consummated in accordance with the
terms and conditions of the Reorganization Agreement and as set forth in the
Registration Statement, for federal income tax purposes:

(i) the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code;

(ii) Parent, the Company and Merger Sub will not recognize any gain or
loss as a result of the Merger;

(iii) No gain or loss will be recognized by holders of Company
Capital Stock who exchange their Company Capital Stock for Parent Common Stock,
except with respect to any cash received by Company stockholders in lieu of
fractional shares of Parent Common Stock;
<PAGE>

Board of Directors
Pharmacopeia, Inc.
May 6, 1998
Page 3

(iv) A holder of Company Capital Stock who receives cash in lieu of a
fractional share of Parent Common Stock will be treated as if the fractional
share had been distributed to such holder as part of the Merger (with an
appropriate amount of tax basis in the holder's Company Capital Stock allocated
to such fractional share) and then redeemed by Parent in exchange for the cash
distributed in lieu of the fractional share in a transaction governed by Section
302;

(v) Each holder's aggregate tax basis in Parent Common Stock received
in the Merger will equal his or her aggregate tax basis in the Company Capital
Stock exchanged therefor, decreased by the amount of any tax basis allocable to
any fractional share interest for which cash is received;

(vi) Provided that the Company Capital Stock is held as a capital
asset at the Effective Time, the holding period of Parent Common Stock received
in the Merger in exchange therefor will include the holding period of such
Company Capital Stock; and

(vii) There will be no federal income tax consequences to holders of
Parent Common Stock as a result of the Merger.

No opinion is expressed as to any transaction other than the Merger as
described in the Reorganization Agreement, or as to any other transaction
whatsoever, including the Merger, if all of the transactions described in the
Reorganization Agreement are not consummated in accordance with the terms of the
Reorganization Agreement and without waiver of any material provision thereof.
To the extent that any of the representations, warranties, statements and
assumptions material to our opinion and upon which we have relied are not
accurate and complete in all material respects at all relevant times, our
opinion would be adversely affected and should not be relied upon.

This opinion only represents our best judgment as to the federal
income tax consequences of the Merger and is not binding on the Internal Revenue
Service or any court of law, tribunal, administrative agency or other
governmental body. The conclusions are based on the Code, existing judicial
decisions, administration regulations and published rulings. No assurance can
be given that future legislative, judicial or administrative changes or
interpretations would not adversely affect the accuracy of the conclusions
stated herein. Nevertheless, by
<PAGE>

Board of Directors
Pharmacopeia, Inc.
May 6, 1998
Page 4

rendering this opinion, we undertake no responsibility to advise you of any new
developments in the application or interpretation of the federal income tax
laws.

This opinion is being delivered solely in connection with the filing
of the Joint Proxy Statement/Prospectus contained in the Registration Statement.
It is intended for your benefit and may not be relied upon or utilized for any
other purpose or by any other person and may not be made available to any other
person without our prior written consent.

Very truly yours,

/s/ Dechert Price & Rhoads

DECHERT PRICE & RHOADS

<PAGE>

Exhibit 8.2

[Letterhead of Cooley Godward LLP]

May 6, 1998

The Stockholders of Molecular Simulations, Inc.
9685 Scranton Road
San Diego, California 92121-3752

Ladies and Gentlemen:

This opinion is being delivered to you in connection with the Form S-4
Registration Statement (the "Registration Statement") filed pursuant to the
Agreement and Plan of Merger and Reorganization dated as of February 4, 1998
(the "Reorganization Agreement") by and among Pharmacopeia, Inc., a Delaware
corporation ("Parent"), Micro Acquisition Corporation, a Delaware corporation
and wholly owned subsidiary of Parent ("Merger Sub"), and Molecular Simulations,
Inc., a Delaware corporation (the "Company").

Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Reorganization Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").

We have acted as counsel to the Company in connection with the Merger. As such,
and for the purpose of rendering this opinion, we have examined, and are relying
upon (without any independent investigation or review thereof) the truth and
accuracy, at all relevant times, of the statements, covenants, representations
and warranties contained in the following documents (including all exhibits and
schedules attached thereto):

(a) the Reorganization Agreement;

(b) those certain tax representation letters dated May 6, 1998, delivered
to us by Parent, Merger Sub and the Company containing certain representations
of Parent, Merger Sub and the Company (the "Tax Representation Letters"); and

In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:

1. Original documents submitted to us (including signatures thereto) are
authentic, documents submitted to us as copies conform to the original
documents, and that all such
<PAGE>

documents have been (or will be by the Effective Time) duly and validly executed
and delivered where due execution and delivery are a prerequisite to the
effectiveness thereof;

3. All covenants contained in the Reorganization Agreement (including
exhibits thereto) and the Tax Representation Letters are performed without
waiver or breach of any material provision thereof;

4. The Merger will be reported by Parent and the Company on their
respective federal income tax returns in a manner consistent with the opinion
set forth below; and

5. Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.

Based on our examination of the foregoing items and subject to the limitations,
qualifications, assumptions and caveats set forth herein, we are of the opinion
that, provided the Merger is consummated in accordance with the terms and
conditions of the Reorganization Agreement and as set forth in the Registration
Statement, for federal income tax purposes:

(i) The Merger will constitute a reorganization within the meaning of
Section 368(a)(1) of the Code;

(ii) Parent, the Company and Merger Sub will not recognize any gain or loss
as a result of the Merger;

(iii) No gain or loss will be recognized by holders of Company Capital
Stock who exchange their Company Capital Stock for Parent Common Stock, except
with respect to any cash received by Company stockholders in lieu of fractional
shares of parent Common Stock;

(v) Each holder's aggregate tax basis in Parent Common Stock received in
the Merger will equal his or her aggregate tax basis in the Company Capital
Stock exchanged therefor,
<PAGE>

decreased by the amount of any tax basis allocable to any fractional share
interest for which cash is received;

(vi) Provided that the Company Capital Stock is held as a capital asset at
the Effective Time, the holding period of Parent Common Stock received in the
Merger in exchange therefor will include the holding period of such Company
Capital Stock; and

(vii) There will be no federal income tax consequences to holders of
Parent Common Stock as a result of the Merger.

In addition to your request for our opinion on this specific matter of federal
income tax law, you have asked us to review the discussion of federal income tax
issues contained in the Registration Statement. We have reviewed the discussion
entitled "Certain Federal Income Tax Consequences" contained in the Registration
Statement and believe that, insofar as it relates to statements of law and legal
conclusions, it is correct in all material respects.

We consent to the reference to our firm under the caption "Certain Federal
Income Tax Consequences" in the Proxy Statement included in the Registration
Statement and to the filing of this opinion as an exhibit to the Proxy Statement
and to the Registration Statement.

This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Merger or the other
transactions contemplated by the Reorganization Agreement except as specifically
set forth herein, and this opinion may not be relied upon except with respect to
the consequences specifically discussed herein. Furthermore, this opinion only
relates to the holders of Company Capital Stock who hold such stock as a capital
asset. No opinion is expressed as to the federal income tax treatment that may
be relevant to a particular investor in light of personal circumstances or to
certain types of investors subject to special treatment under the federal income
tax laws (for example, life insurance companies, dealers in securities,
taxpayers subject to the alternative minimum tax, banks, tax-exempt
organizations, non-United States persons, and stockholders who acquired their
shares of Company Capital Stock pursuant to the exercise of options or otherwise
as compensation or who hold their Company capital stock as a hedge or as part of
a hedging, straddle, conversion or other risk reduction transaction).

No opinion is expressed as to any transaction other than the Merger as described
in the Reorganization Agreement, or as to any other transaction whatsoever,
including the Merger, if all of the transactions described in the Reorganization
Agreement are not consummated in accordance with the terms of the Reorganization
Agreement and without waiver of any material provision thereof. To the extent
that any of the representations, warranties, statements and assumptions material
to our opinion and upon which we have relied are not accurate and complete in
all material respects at all relevant times, our opinion would be adversely
affected and should not be relied upon.
<PAGE>

This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service or
any court of law, tribunal, administrative agency or other governmental body.
The conclusions are based on the Code, existing judicial decisions,
administrative regulations and published rulings. No assurance can be given
that future legislative, judicial or administrative changes or interpretations
would not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, by rendering this opinion, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.

This opinion is being delivered in connection with the Registration Statement.
It is intended for the benefit of the stockholders of the Company and may not be
relied upon or utilized for any other purpose or by any other person and may not
be made available to any other person without our prior written consent.

Sincerely,

Cooley Godward LLP

/s/ Susan Cooper Philpot
Susan Cooper Philpot

SCP:dp

<PAGE>

Exhibit 23.3

CONSENT OF INDEPENDENT AUDITORS
-------------------------------

We consent to the reference to our firm under the captions "Selected Historical
Financial Data of Pharmacopeia, Inc." and "Experts" in Amendment No. 3 to the
Registration Statement (Form S-4 No. 333-47475) and related Joint Proxy
Statement/Prospectus of Pharmacopeia, Inc. for the registration of 8,726,020
shares of its common stock and to the incorporation by reference therein of our
report dated January 27, 1998, except for Note 13 as to which the date is
February 4, 1998, with respect to the financial statements of Pharmacopeia, Inc.
included in its Annual Report (Form 10-K/A-2) for the year ended December 31,
1997, filed with the Securities and Exchange Commission.

/s/ Ernst & Young LLP

Princeton, New Jersey
May 6, 1998

<PAGE>

Exhibit 23.4

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
Registration Statement.

/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP

San Diego, California
May 6, 1998

<PAGE>

Exhibit 99.2

May 6, 1998

Board of Directors
Molecular Simulations Incorporated
9685 Scranton Road
San Diego, CA 92121-3752

Re: Amendment No. 3 to Registration Statement on Form S-4 of Pharmacopeia,
Inc. File No. 333-47475
----------------------------------------------------------------------

Gentlemen:

Reference is made to our opinion letter dated February 4, 1998 with respect to
the fairness from a financial point of view to the holders of the outstanding
shares of (i) Common Stock, par value $0.001 per share (the "Common Shares"),
and (ii) Class B Common Stock, par value $0.001 per share (the "Class B Common
Shares" and together with the Common Shares, the "Shares"), of Molecular
Simulations Incorporated (the "Company") of the exchange ratio of 0.5292 shares
of Common Stock, par value $0.0001 per share, of Pharmacopeia, Inc.
("Pharmacopeia") to be received for each Share pursuant to the Agreement and
Plan of Merger and Reorganization, dated as of February 4, 1998, among
Pharmacopeia, Micro Acquisition Corporation, a wholly-owned subsidiary of
Pharmacopeia, and the Company.

The foregoing opinion letter is provided for the information and assistance of
the Board of Directors of the Company in connection with its consideration of
the transaction contemplated therein and is not to be used, circulated, quoted
or otherwise referred to for any other purpose, nor is it to be filed with,
included in or referred to in whole or in part in any registration statement,
proxy statement or any other document, except in accordance with our prior
written consent. We understand that the Company has determined to include our
opinion in the above-referenced Registration Statement.

In that regard, we hereby consent to the reference to the opinion of our Firm
under the captions "THE SUMMARY--Opinions of Financial Advisors" and "THE
MERGER--Opinion of MSI's Financial Advisor" and to the inclusion of the
foregoing opinion in
<PAGE>

Molecular Simulations Incorporated
May 6, 1998
Page Two

Amendment No. 3 to the above-mentioned Registration Statement. It is understood
that our consent is being delivered solely in connection with the filing of
Amendment No. 3 to the above-mentioned Registration Statement and that our
opinion is not to be used, circulated, quoted or otherwise referred to for any
other purpose, nor is it to be filed with, included in or referred to in whole
or in part in any registration statement (including any further amendments to
the above-mentioned Registration Statement), proxy statement or any other
document, except in accordance with our prior written consent. In giving such
consent, we do not thereby admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933 or the
rules and regulations of the Securities and Exchange Commission thereunder.

Very truly yours,

/s/ Goldman, Sachs & Co.

<PAGE>

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

PHARMACOPEIA, INC.

1998 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 12, 1998

The undersigned stockholder of PHARMACOPEIA, INC., a Delaware corporation,
hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders and
Joint Proxy Statement/Prospectus, each dated May 13, 1998, and hereby appoints
Joseph A. Mollica and Lewis J. Shuster, and each of them, proxies and
attorneys-in-fact, with full power to each of substitution, on behalf and in
the name of the undersigned, to represent the undersigned at the 1998 Annual
Meeting of Stockholders of PHARMACOPEIA, INC. to be held on June 12, 1998 at
9:00 a.m., local time, at The Forrestal at Princeton, 100 College Road East,
Princeton, New Jersey and at any adjournment or adjournments thereof, and to
vote all shares of Pharmacopeia Common Stock which the undersigned would be
entitled to vote if then and there personally present, on the matters set forth
on this card.

SEE
REVERSE
SIDE
<PAGE>
X PLEASE MARK YOUR
VOTES AS IN THIS EXAMPLE.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2, 3, 4 AND 5.

1. APPROVAL OF ISSUANCE OF UP TO 8,726,020 SHARES OF COMMON STOCK IN CONNECTION
WITH THE ACQUISITION OF MOLECULAR SIMULATIONS INCORPORATED THROUGH THE MERGER
OF A WHOLLY-OWNED SUBSIDIARY OF PHARMACOPEIA, INC. WITH AND INTO MOLECULAR
SIMULATIONS INCORPORATED:
FOR AGAINST ABSTAIN
[_] [_] [_]

2. ELECTION OF DIRECTORS: [_] FOR ALL NOMINEES LISTED BELOW (EXCEPT AS
INDICATED)
If you wish to withhold authority to vote for any individual nominee, strike a
line through that nominee's name in the list below:
Paul A. Bartlett, Charles A. Sanders

3. APPROVAL OF AMENDMENT TO 1994 INCENTIVE STOCK PLAN TO INCREASE THE NUMBER OF
SHARES AUTHORIZED FOR ISSUANCE THEREUNDER TO 2,225,000 SHARES:
FOR AGAINST ABSTAIN
[_] [_] [_]

4. APPROVAL OF AMENDMENT TO 1994 INCENTIVE STOCK PLAN TO INCREASE THE NUMBER OF
SHARES AUTHORIZED FOR ISSUANCE THEREUNDER TO 2,750,000 SHARES EFFECTIVE UPON
CONSUMMATION OF THE ACQUISITION OF MOLECULAR SIMULATIONS INCORPORATED THROUGH
THE MERGER OF A WHOLLY-OWNED SUBSIDIARY OF PHARMACOPEIA, INC. WITH AND INTO
MOLECULAR SIMULATIONS INCORPORATED:
FOR AGAINST ABSTAIN
[_] [_] [_]

5. RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE INDEPENDENT
AUDITORS OF THE COMPANY FOR THE FISCAL YEAR ENDING DECEMBER 31, 1998:
and, in their discretion, upon such other matter or matters which may properly
come before the meeting or any adjournment or adjournments thereof.
FOR AGAINST ABSTAIN
[_] [_] [_]

THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS INDICATED,
WILL BE VOTED FOR EACH OF THE PROPOSALS SET FORTH ABOVE AND AS SAID PROXIES
DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.

Signature: _______________________ Dated:____, 1998
Signature (if held jointly or as community property): _______________________

THIS PROXY SHOULD BE MARKED, DATED AND SIGNED BY THE STOCKHOLDER(S) EXACTLY AS
HIS OR HER NAME APPEARS HEREON, AND RETURNED PROMPTLY IN THE ENCLOSED ENVELOPE.
PERSONS SIGNING IN A FIDUCIARY CAPACITY SHOULD SO INDICATE. IF SHARES ARE HELD
BY JOINT TENANTS OR AS COMMUNITY PROPERTY, BOTH SHOULD SIGN.)