
<PAGE>

      As filed with the Securities and Exchange Commission on May 23, 2000
                                            Registration Statement No. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                               ----------------
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     Under
                           The Securities Act of 1933
                               ----------------
                      3-Dimensional Pharmaceuticals, Inc.
             (Exact name of Registrant as specified in its charter)
        Delaware                     2834                    23-2716487
                               (Primary Standard            (IRS Employer
     (State or other              Industrial           Identification Number)
     jurisdiction of       Classification Code No.)
    incorporation or
      organization)
                     Eagleview Corporate Center, Suite 104
                               665 Stockton Drive
                                Exton, PA 19341
                                  610-458-8959
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)
                               ----------------
                           David C. U'Prichard, Ph.D.
                            Chief Executive Officer
                      3-Dimensional Pharmaceuticals, Inc.
                     Eagleview Corporate Center, Suite 104
                               665 Stockton Drive
                                Exton, PA 19341
                                  610-458-8959
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)
                               ----------------
                                   Copies to:
         Randall B. Sunberg                         Jeffrey E. Cohen
     Morgan, Lewis & Bockius LLP                    Coudert Brothers
         1701 Market Street                    1114 Avenue of the Americas
       Philadelphia, PA 19103                    New York, NY 10036-7703
           (215) 963-5000                            (212) 626-4400
  Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
  If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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, please 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(c)
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. [_]
  If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

                        CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                          Proposed
 Title of Each Class of                   Maximum         Proposed      Amount of the
    Securities to Be      Amount to be Offering Price Maximum Aggregate Registration
       Registered          Registered   Per Share(1)  Offering Price(1)      Fee
-------------------------------------------------------------------------------------
<S>                       <C>          <C>            <C>               <C>
Common Stock, $0.001 par
 value(2)..............                                  $70,000,000       $18,480
-------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee in
    accordance with Rule 457 under the Securities Act of 1933, as amended.
(2) Includes     shares that the underwriters have the option to purchase to
    cover over-allotments, if any.

                               ----------------
  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, as amended or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.

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

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be     +
+changed. We may not sell these securities until the registration statement    +
+filed with the Securities and Exchange Commission becomes effective. This     +
+preliminary prospectus is not an offer to sell these securities nor a         +
+solicitation of an offer to buy these securities in any jurisdiction where    +
+the offer or sale is not permitted.                                           +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                   SUBJECT TO COMPLETION, DATED MAY 23, 2000

PRELIMINARY PROSPECTUS

                                       Shares

                                 [LOGO OF 3DP]

                                  Common Stock

                                  -----------

This is an initial public offering of     shares of common stock of 3-
Dimensional Pharmaceuticals, Inc. We are selling all of the shares of common
stock offered under this prospectus.

We expect the public offering price for our common stock to be between $   and
$   per share. There is currently no public market for our common stock. We
have applied to have our common stock approved for listing on the Nasdaq
National Market under the symbol "DDDP".

See "Risk Factors" beginning on page 7 to read about risks that you should
consider before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved these securities or passed on the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.


                                  -----------

<TABLE>
<CAPTION>
                                                                      Per
                                                                     Share Total
                                                                     ----- -----
<S>                                                                  <C>   <C>
Public offering price............................................... $     $
Underwriting discounts and commissions.............................. $     $
Proceeds to 3-Dimensional Pharmaceuticals, Inc...................... $     $
</TABLE>

                                  -----------

We have granted the underwriters a 30-day option to purchase up to an
additional     shares of common stock from us at the initial public offering
price less the underwriting discount.

The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares in New York, New York, on      ,
2000.

                                  -----------

Bear, Stearns & Co. Inc.

            Chase H&Q

                                                      U.S. Bancorp Piper Jaffray

                  The date of this prospectus is      , 2000.
<PAGE>

                                    SUMMARY

  Because this is only a summary, it does not contain all the information that
may be important to you. You should read the entire prospectus, especially the
section entitled "Risk Factors", and the financial statements and notes, before
deciding to invest in shares of our common stock.

                                    Overview

  We are a post-genomics drug discovery company that has developed a unique
integration of proprietary technologies to provide an accelerated and improved
methodology for "gene-to-clinic" small molecule drug discovery. We designed our
DiscoverWorks technologies to capitalize on the opportunities for drug
discovery presented by the thousands of new therapeutic targets being revealed
from the sequencing of the human genome. Our technologies also facilitate drug
discovery for well-characterized therapeutic targets that have historically
proven difficult using traditional discovery methods. We believe that our
technologies, which are applicable to virtually any disease target or
therapeutic indication, produce development compounds in a more timely and
cost-effective manner and with a higher probability of success than that
currently achieved using conventional methods. We are using our technologies
both to assist collaborators in discovering drug candidates, and to discover
and develop an internal pipeline of orally active drug candidates, initially
targeted at cardiovascular disease and oncology, which we currently intend to
out-license at the pre-clinical or early clinical stage.

                               Market Opportunity

  Drug discovery has traditionally been a costly and time-consuming process in
which the failure rate remains very high. During the past decade,
pharmaceutical research and development has become more complex and expensive,
with the average cost of bringing a new drug to market now estimated to be in
excess of $500 million. Despite a more than three-fold increase in research and
development expenditure in the last ten years by the pharmaceutical industry,
there has been only a modest increase in the number of new chemical entities,
or NCEs, approved by the U.S. Food and Drug Administration or FDA.

  The challenges to timely and cost-effective drug discovery faced by
pharmaceutical companies will grow as continuing advances are made in genomics
research. While there are approximately 500 currently known biological targets
for human therapeutics, it is estimated that an additional 5,000 to 10,000
potential targets will be identified through genomics research over the next
five years. Consequently, we expect bottlenecks in the discovery process to
become increasingly severe and impede exploitation of the wealth of
opportunities presented by genomics research. Accordingly, we believe that
pharmaceutical companies will increasingly outsource aspects of discovery to
companies with advanced technology capabilities, and in-license drug candidates
developed by others.

                                  Our Solution

  The major steps in the drug discovery process involve producing a target
protein; identifying compounds which interact with the particular target
protein; synthesis and testing of structurally similar compounds, or "analogs",
in order to produce "lead" compounds with increased suitability as potential
drugs; and additional chemical modification, or "optimization", of such lead
compounds to produce candidates for pre-clinical and clinical development. In
addition, parallel testing seeks to confirm, or "validate", the link between
the target protein and a specific disease.


                                       1
<PAGE>

  We believe that our DiscoverWorks technologies offer a solution to the post-
genomics drug discovery challenge by integrating the following technologies and
capabilities:

  . Proprietary protein production technology, which permits us to produce
    large quantities of target proteins rapidly and cost-efficiently.

  . Proprietary ThermoFluor high-throughput screening technology which
    permits us to set up in less than one week a screen for virtually any
    target protein and quantitatively assess within one month the binding of
    a large library of compounds to such target. We believe the industry norm
    for setting up and running a high-throughput screen is two to six months.

  . A collection, or "library", of over 200,000 chemical compounds, together
    with a virtual library of approximately 2.5 billion novel analogs, stored
    in our computer database, all of which analogs can be synthesized using
    automated procedures.

  . Proprietary DirectedDiversity technology which links combinatorial
    chemistry with our patented software and drug property databases to
    enable synthesis and testing of successive libraries of compounds
    intelligently selected by our software to optimize desired drug-like
    characteristics.

  . Three-dimensional target protein structure analysis using X-ray
    crystallography, which we combine with our DirectedDiversity technology
    to incorporate structural knowledge of the protein in the intelligent
    design of libraries of compounds for testing.

  . Chemistry-driven target validation technology, based on ThermoFluor
    screening of novel target proteins to establish their biochemical and
    pharmacological properties, together with rapid production of lead
    compounds to confirm the therapeutic significance of a given target
    protein early in the discovery process.

  We believe that using our DiscoverWorks technology creates the following
advantages:

  . Time Compression. Our ThermoFluor screening process and our ability to
    rapidly select and synthesize compounds from our libraries compress an
    important segment of the R&D process, from assay set-up to the generation
    of a series of lead compounds with potential in vivo efficacy, from
    fourteen to thirty months at many pharmaceutical companies to as little
    as seven to ten months. This is expected to reduce resources required and
    development costs per target, allow more targets to be discovered with a
    given set of resources and accelerate time to market of successful drugs.

  . Improved Compound Characteristics. DiscoverWorks enhances the
    incorporation of drug-like characteristics into development compounds,
    thereby increasing the likelihood of commercial success, through the high
    quality of our compound libraries and our lead optimization and
    structure-based drug design capabilities.

  . Broad Target Applicability. DiscoverWorks can be used for virtually any
    target protein, through the flexible capabilities of ThermoFluor, the
    breadth of our compound libraries and our protein expression
    capabilities.

  In summary, we believe DiscoverWorks has the potential to make better drug
candidates, in a faster and more efficient manner, for almost any given target
protein.

                         GPCR Drug Discovery Technology

  G-Protein Coupled Receptors, or GPCRs, comprise a class of drug targets
estimated to account for over $20 billion in annual drug sales. While current
drugs target less than 100 of these receptors, there are at least an equal
number of other well-characterized but unexploited GPCRs, and genomic
sequencing has revealed an

                                       2
<PAGE>

estimated 1,000 previously unknown GPCRs that are potential new drug targets.
To date, while there are computer derived model 3-D structures of GPCRs, there
are no experimentally derived 3-D structures of any GPCR, and therefore
rational structure-based drug design based on the actual 3-D molecular
structure of target GPCRs has not been possible. Recently, we successfully
produced high-quality crystals which we believe will enable us to
experimentally determine the first 3-D molecular structure of a GPCR. We
believe that this and other 3-D structures expected to emerge from our
laboratories, together with our supporting technology in protein production,
will be key to unlocking the potential of GPCR genomics data for new drug
discovery.

                       Collaborative Discovery Agreements

  We currently have collaborative discovery agreements with DuPont
Pharmaceuticals Company, Boehringer Ingelheim Pharmaceuticals, Inc., Aventis
Crop Protection GmbH, E.I. DuPont de Nemours, Heska Corporation, Inc. and
BioCryst Pharmaceuticals, Inc.

                             Internal Drug Pipeline

  We have also leveraged our technologies to develop a promising internal
pipeline of cardiovascular and oncology drug candidates, which we currently
intend to out-license at the pre-clinical or early clinical stage to
pharmaceutical companies for clinical development and marketing. This pipeline
includes one clinical and eight preclinical programs. Our most advanced
cardiovascular product candidate, an orally acting antithrombotic agent
designed to inhibit the formation of blood clots, is currently in Phase 1
clinical trials. Our most advanced oncology product candidate, which may also
be useful for cardiovascular indications, is an orally active urokinase
inhibitor designed to inhibit the supply of blood to and growth of tumors. We
have recently out-licensed our urokinase development program to Schering AG,
Germany.

                                  Our Strategy

  Our objective is to be an industry leader in the post-genomics era in the
discovery and optimization of novel drug candidates by:

  . further developing our DiscoverWorks technologies;

  . developing and commercializing our unique GPCR discovery technology;

  . developing and expanding our internal drug discovery pipeline to produce
    drug candidates for out-licensing; and

  . entering into additional "gene-to-clinic" discovery collaborations.

  We also intend to continue to apply our technologies to applications in the
agricultural and veterinary medicine industries.

                             Additional Information

  We were incorporated in the State of Delaware in March 1993. Our executive
offices are located in the Eagleview Corporate Center, 665 Stockton Drive,
Exton, Pennsylvania 19341, and our telephone number is (610) 458-8959. Our web
site is http://www.3dp.com. The information found on our web site is not part
of this prospectus.

                                       3
<PAGE>

                                  THE OFFERING

Common stock offered by           shares
us........................

Common stock to be
outstanding after the
offering..................
                                  shares

Use of proceeds...........  We intend to use the net proceeds from this
                            offering for research and development, acquisition
                            or licensing of targets or technologies; expansion
                            of our facilities; general corporate and working
                            capital purposes; and possible future acquisitions.

Proposed Nasdaq National
Market symbol.............
                            DDDP

  The number of shares outstanding after this offering excludes, as of May 23,
2000:

  . 6,691,093 shares of our common stock reserved for issuance under our
    equity compensation plan, of which 5,757,124 shares are issuable upon
    exercise of outstanding options at a weighted average exercise price of
    $1.14 per share;

  . warrants to purchase 4,920,626 shares of common stock at a weighted
    average exercise price of $0.90 per share; and

  . warrants to purchase 239,475 shares of series A-1 preferred stock, which
    will either be exercised prior to the closing of this offering (and
    therefore be automatically converted into shares of common stock at the
    closing of this offering) or become exercisable for 239,475 shares of
    common stock upon the closing of this offering at an exercise price of
    $1.00 per share.

  Generally, the information in this prospectus, unless otherwise noted:

  . assumes that the over-allotment option is not exercised;

  . reflects the automatic conversion of all outstanding shares of preferred
    stock into an aggregate of shares of common stock upon the closing of
    this offering; and

  . assumes the issuance of an estimated     shares of our common stock upon
    the automatic conversion at the initial public offering price, at the
    closing of this offering, of $979,000 of convertible promissory notes,
    plus accrued interest, issued in lieu of cash payment of dividends to the
    holders of our series A-1 preferred stock.

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

  DirectedDiversity and ThermoFluor are federally registered trademarks of 3-
Dimensional Pharmaceuticals, Inc. or "3DP." We have also applied for a
federally registered trademark for DiscoverWorks. This prospectus also refers
to trade names and trademarks of other organizations.

                                       4
<PAGE>

                             SUMMARY FINANCIAL DATA
                       (in thousands and per share data)

  The following financial information should be read together with the
financial statements and notes thereto and the "Selected Financial Information"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections included elsewhere in this prospectus.

<TABLE>
<CAPTION>
                                                                          Three Months Ended
                                  Year ended December 31,                     March 31,
                          --------------------------------------------  -----------------------
                           1995     1996     1997     1998      1999     1999         2000
                          -------  -------  -------  -------  --------  -------  --------------
                                                                                 (consolidated)
                                                                             (unaudited)
<S>                       <C>      <C>      <C>      <C>      <C>       <C>      <C>
Statements of Operations
 Data:
Grant and research
 revenue................  $   463  $   967  $ 3,580  $ 5,095  $  4,489  $ 1,379     $ 1,484
                          -------  -------  -------  -------  --------  -------     -------
Costs and expenses
 Research and
  development...........    3,414    4,556    6,517   10,984    12,136    2,975       3,425
 General and
  administrative........    1,122    1,708    3,000    4,458     6,525    1,155       1,537
 Litigation settlement..      --       --       --       --      1,500      --          --
                          -------  -------  -------  -------  --------  -------     -------
 Total costs and
  expenses..............    4,536    6,264    9,517   15,442    20,161    4,130       4,962
                          -------  -------  -------  -------  --------  -------     -------
Loss from operations....   (4,073)  (5,297)  (5,937) (10,347)  (15,672)  (2,751)     (3,478)
Interest income.........       16       14      521      868       328      125          87
Interest expense........     (401)    (580)    (149)    (232)     (625)    (114)       (351)
                          -------  -------  -------  -------  --------  -------     -------
Net loss................  $(4,458) $(5,862) $(5,565) $(9,711) $(15,969) $(2,740)    $(3,742)
Declared and accrued
 cumulative dividends on
 preferred stock........      --       --       --      (144)     (669)    (167)       (167)
                          -------  -------  -------  -------  --------  -------     -------
Net loss applicable to
 common stock...........  $(4,458) $(5,862) $(5,565) $(9,855) $(16,638) $(2,907)    $(3,909)
                          =======  =======  =======  =======  ========  =======     =======
Basic and diluted net
 loss per common share--
 historical.............  $(32.30) $(20.71) $ (9.83) $ (7.93) $  (9.78) $ (1.79)    $ (2.11)
                          =======  =======  =======  =======  ========  =======     =======
Weighted average common
 shares outstanding--
 historical.............      138      283      566    1,243     1,701    1,624       1,849
                          =======  =======  =======  =======  ========  =======     =======
Basic and diluted net
 loss per common share--
 pro forma..............                                      $   (.56)             $  (.13)
                                                              ========              =======
Weighted average common
 shares outstanding--pro
 forma..................                                        28,555               28,808
                                                              ========              =======
</TABLE>

<TABLE>
<CAPTION>
                                                     As of March 31, 2000
                                                 ------------------------------
                                                        (consolidated)
                                                                         Pro
                                                               Pro     forma as
                                                   Actual     Forma    Adjusted
                                                 ----------- --------  --------
                                                 (unaudited)
<S>                                              <C>         <C>       <C>
Balance Sheet Data:
Cash and cash equivalents.......................  $ 22,038   $ 22,038
Total assets....................................    27,394     27,394
Notes payable--dividends and accrued interest...       701        701
Long-term debt, less current portion............     2,020      2,020
Redeemable convertible preferred stock..........    63,550        --
Accumulated deficit.............................   (48,851)   (48,851)
Total stockholders equity (deficit).............   (44,773)    18,777
</TABLE>

  Pro forma net loss per share assumes all shares of our preferred stock had
been converted into common stock on the date of original issuance and certain
nonvested shares of our common stock, which automatically become vested upon
completion of this offering, were vested as of the original date of issuance.
See our financial statements for a more detailed description.


                                       5
<PAGE>

  Pro forma balance sheet data assumes the automatic conversion of all our
outstanding preferred stock into common stock upon the closing of this
offering.

  The pro forma as adjusted balance sheet data above reflect the sale of
shares of our common stock in this offering at an assumed initial public
offering price of $   per share after deducting estimated underwriting
discounts and commissions and estimated expenses of this offering, the
conversion of all our outstanding preferred stock into common stock upon the
closing of this offering and the issuance of an estimated     shares of our
common stock upon the automatic conversion at the initial public offering
price, at the closing of this offering, of $979,000 of convertible promissory
notes, plus accrued interest, issued in lieu of cash payment of dividends to
the holders of our series A-1 preferred stock. See "Use of Proceeds" and
"Capitalization" for a discussion about how we intend to use the proceeds from
this offering and about our capitalization.

                                       6
<PAGE>

                                  RISK FACTORS

  An investment in our common stock offered by this prospectus involves a
substantial risk of loss. You should carefully consider the risks described
below before making an investment decision. The risks and uncertainties
described below are not the only ones facing us. Additional risks and
uncertainties not presently known to us or that we currently consider
immaterial may also impair our operations. If any of the following risks
actually occurs, our business could be harmed. In that case, the trading price
of our common stock could decline, and you may lose all or part of your
investment.

Risks Related to Our Business

We have a history of net losses and may never achieve or maintain
profitability.

  We have incurred net losses since our inception, including net losses of
approximately $9.7 million for the year ended December 31, 1998, approximately
$16.0 million for the year ended December 31, 1999 and approximately $3.7
million for the three months ended March 31, 2000. As of March 31, 2000, we had
an accumulated deficit of approximately $48.9 million. We may incur additional
losses for at least the next several years. The extent of our future losses
will depend on the rate of growth, if any, of our revenue and on the level of
our expenses. To date, substantially all of our revenue has been derived from
corporate collaborations, license agreements and government grants. We expect
that substantially all of our revenue for the foreseeable future will result
from payments from these sources and from the outlicensing of our technologies
and of our internally developed pre-clinical and clinical drug candidates. We
also expect to spend significant amounts to enhance our drug discovery
technologies and to fund research and development of our internal pipeline of
drug candidates. Because our operating expenses will increase significantly in
the near term, we will need to generate significant additional revenue to
achieve profitability. In order to generate revenue, we must continue to
develop products and technologies from which we can derive revenue either
ourselves or through existing and future collaborations. Accordingly, we may
never achieve profitability. Even if we do achieve profitability, we may not be
able to sustain or increase profitability on a quarterly or annual basis.

We are developing and using new technologies, and if we are unable to
successfully commercialize these technologies, we will not be profitable.

  Our DiscoverWorks technologies, in particular our DirectedDiversity and
ThermoFluor technologies, represent a new and unproven approach to the
identification and optimization of lead compounds with therapeutic potential.
These technologies have not been used in the discovery of any compound that has
been commercialized. Furthermore, our ThermoFluor technology was not used in
our most advanced internal programs, including our thrombin and urokinase
inhibitor programs. These technologies may not result in the successful
identification, optimization or development of compounds that are safe or
efficacious. Because the development of new pharmaceutical products is highly
uncertain, our drug discovery technologies may not produce any commercially
successful compounds. Failure to validate our technologies through the
successful discovery of compounds which become commercialized would hinder our
ability to out-license our internal pipeline of drug candidates and to market
successfully our technologies and services.

  Historically, due to the highly proprietary nature of drug development and
lead optimization activities, the importance of these activities to drug
discovery and development efforts, and the desire to obtain maximum patent and
other proprietary protection for their programs, pharmaceutical and
biotechnology companies have conducted molecular target screening and lead
compound identification and optimization within their own internal research
departments. To succeed, we must convince these companies that our technologies
and capabilities justify the outsourcing of their programs to us or the
licensing by them of our technologies. To date, we have entered into only five
collaborations involving DirectedDiversity technology, including two signed
within the last three months. Under the terms of a settlement agreement with
Scriptgen Pharmaceuticals, Inc., we acquired a limited, non-exclusive license
to Scriptgen's ATLAS (Any Target Liquid Affinity Screen)

                                       7
<PAGE>

assay technology and Scriptgen was granted a limited, nonexclusive license to
the method claims of our ThermoFluor screening technology. As part of this
settlement agreement, until March 7, 2003, we are precluded from using our
ThermoFluor screening technology in the Hepatitis C Virus "infection" area as
part of collaborative agreements or as part of our internal drug programs. In
addition, we are precluded from using our ThermoFluor screening technology as
part of more than one collaboration agreement in the area of "infection" until
March 7, 2003, and such collaborative agreement must be limited to a maximum of
3 anti-viral targets. The settlement with Scriptgen, however, does not restrict
use of our ThermoFluor screening technology by us for our internal drug
discovery efforts, or for purposes of collaborative agreements outside the area
of "infection" other than the limitation with respect to the Hepatitis C Virus
"infection". Only one of our existing collaborations involves the use of our
ThermoFluor screening technology. Our ability to succeed will depend upon the
acceptance by potential collaborators of our systems, services and technologies
as effective discovery tools.

  As our DiscoverWorks technologies are further developed, integrated and used,
previously unforeseen or unexpected limitations or defects may emerge with
these technologies. In addition, operators using these technologies may require
substantial training in new technical skills. These potential complications
could delay or limit the use of our technologies, substantially increase the
anticipated cost of development, result in a breach by us of our contractual
obligations to our collaborators and others, or render us unable to use our
technologies at the quality and capacity levels required for success. Any
complication or delay could harm our ability to gain market acceptance for our
technologies and services and, in the case of a breach of a contractual
obligation, could subject us to litigation.

  In addition, we may not be successful in our efforts to develop certain
aspects of our technologies and, as a result, we may not be able to
successfully commercialize these technologies. For example, if we are not
successful in determining the 3-D molecular structure of the b\\2\\ adrenergic
receptor, or any other GPCR, this would significantly limit the usefulness of
our GPCR technology and might result in the commercial failure of this
technology.

If we do not update and enhance our technologies, they will become obsolete.

  The pharmaceutical market is characterized by rapid technological change, and
our future success will depend on our ability to update and enhance our
technologies. Because our technology platform is designed to integrate many
technologies, it may be difficult for us to stay abreast of the rapid change in
each of the areas encompassed within our technology platform. If we fail to
stay at the forefront of technological change we will be unable to compete
effectively. Further, because high throughput screening and lead optimization
are currently perceived by the pharmaceutical and biotechnology industries to
represent critical bottlenecks in the discovery process, our competitors are
using substantial resources to develop new technologies to reduce these
bottlenecks. Accordingly, our technologies may be rendered obsolete by advances
in existing technological approaches or the development of different approaches
by one or more of our current or future competitors.

The drug candidates in our internal pipeline are at an early stage of
development, and they may fail in subsequent development or commercialization.

  Our most advanced compound, 3DP-4815, is currently in a Phase 1 clinical
trial. All of the compounds that we are currently developing will require
significant additional research, formulation and manufacture development, and
pre-clinical and extensive clinical testing prior to registration and
commercialization. Pre-clinical and clinical studies of our products under
development may not demonstrate the safety and efficacy necessary to obtain
regulatory approvals. Pharmaceutical and biotechnology companies have suffered
significant setbacks in advanced clinical trials, even after experiencing
promising results in earlier trials. Products that appear to be promising at
early stages of development may not reach the market or be marketed
successfully for a number of reasons, including the following:

  . the product may be found to be ineffective or have harmful side effects
    during subsequent pre-clinical testing or clinical trials;

                                       8
<PAGE>

  . the product may fail to receive necessary regulatory clearance;

  . the product may be too difficult to manufacture on a large scale;

  . the product may be too expensive to manufacture or market;

  . the product may not achieve broad market acceptance;

  . others may hold proprietary rights that will prevent the product from
    being marketed; or

  . others may market equivalent or superior products.

  We do not expect any products we are developing either by ourselves to
outlicense or in conjunction with our collaborators to be commercially
available for at least several years, if at all. Our research and product
development efforts and those of our collaborators may not be successfully
completed and may not result in any successfully commercialized products.
Further, after commercial introduction of a new product, discovery of problems
through adverse event reporting could result in restrictions on the product,
including withdrawal from the market and, in certain cases, civil or criminal
penalties.

We are dependent on our collaborators, and our failure to successfully manage
our existing and future collaborations and license arrangements could prevent
us or our collaborators from developing and commercializing our products.

  Our strategy depends upon the maintenance of our existing collaborations and
licensing arrangements as well as the formation of new collaborations and
licensing arrangements, principally with pharmaceutical and biotechnology
companies. We may not be able to maintain our existing collaborations or
licensing arrangements, or establish additional collaborative or licensing
arrangements, on terms favorable to us. In addition, our current or future
collaborations or licensing arrangements may not be successful or we may be
unable to successfully manage these collaborations or licensing arrangements.
As a result, we could become involved in disputes that might result in, among
other things, a significant strain on our management resources, legal claims
involving significant time and expense, a loss of capital and a loss of current
or future collaborators. Our present or future collaborations or licensing
arrangements could also be harmed if:

  . we do not achieve our research and development objectives under our
    collaborative agreements;

  . conflicts arise with our collaborators as to rights to intellectual
    property to technologies or product candidates either we or they develop;

  . we enter into additional collaboration agreements that potentially
    conflict with the business objectives of our collaborators;

  . our collaborators become competitors of ours or enter into agreements
    with our competitors; or

  . consolidation in our target markets limits the number of potential
    collaborators.

  In addition, if we exclusively or co-exclusively license any aspect of our
technologies to a collaborator, we will limit our ability to license this
technology to other parties which may limit our ability to enter into future
collaborations or licensing arrangements.

  Furthermore, since we do not currently possess the resources necessary to
complete development and commercialization of our internal drug candidates, we
expect to rely on and continue to enter into licensing arrangements for the
further development and commercialization of our drug candidates. These drug
candidates will require significant pre-clinical and/or clinical development
efforts, the receipt of the requisite regulatory approvals and the integration
of manufacturing capabilities and successful marketing efforts. With the
exception of certain aspects of pre-clinical and early clinical development, we
do not intend to perform any of these activities. A party to whom we outlicense
a drug candidate may not devote sufficient resources to the development,
manufacture, marketing or sale of these products. We will have limited or no
control over the resources that any third party may devote to our projects.

                                       9
<PAGE>

  Any of our present or future collaborators may breach or terminate their
agreements with us or otherwise fail to conduct their collaborative activities
successfully and in a timely manner. In addition, disputes could arise over the
application of payment provisions under any of our collaboration agreements. If
we fail to enter into or maintain collaborative agreements, or if any of these
events occur, we may not be able to commercialize our technologies or develop
and commercialize our drug candidates.

If our collaborators fail to advance compounds arising from the use of our
technologies to develop and commercialize pharmaceutical products, our business
will suffer.

  Our future revenue will depend in part on the realization of milestone
payments and royalties, if any, triggered by the successful development and
commercialization by our collaborators of lead compounds identified through the
use of our technologies or of lead compounds developed internally by us and
then outlicensed. The agreements with our collaborators do not obligate them to
develop or commercialize lead compounds identified through the use of our
technologies. Development and commercialization of lead compounds will
therefore depend not only on the achievement of development objectives by us
and our collaborators, but also on each collaborator's own financial,
competitive, marketing and strategic considerations, such as the relative
advantages of alternative products being marketed or developed by others,
including relevant patent and proprietary positions. If a collaborator fails to
develop or commercialize a lead compound identified through the use of our
technologies, or if a compound developed by a collaborator is determined to be
unsafe or of no therapeutic benefit, we will not receive any future milestone
payments or royalties for that compound, and we may have only limited or no
rights to independently develop and commercialize that compound.

If the third-party expert clinical investigators and clinical research
organizations we intend to rely on to conduct any of our future clinical trials
do not perform in an acceptable or timely manner, our clinical trials could be
delayed or unsuccessful.

  We do not have the ability to independently conduct clinical studies and
obtain regulatory approvals for our drug candidates and, to the extent our
collaborators do not perform these functions, we intend to rely on third-party
expert clinical investigators and clinical research organizations to perform
these functions. If we cannot locate acceptable third parties to run our
clinical studies or enter into favorable agreements with them, or if these
third parties do not successfully carry out their contractual duties, meet
expected deadlines and follow regulatory guidelines, including clinical
laboratory and manufacturing guidelines, then we will be unable to get required
approvals and will be unable to commercialize our drug candidates on a timely
basis, if at all.

If we or our collaborators are unable to manufacture or contract with third
parties to manufacture drug candidates in sufficient quantities and at an
acceptable cost, we or our collaborators may be unable to complete clinical
trials and commercialize these drug candidates.

  Completion of any pre-clinical trials for our drug candidates involving large
quantities of chemical compounds, or any future clinical trials and
commercialization of drug candidates by us or our collaborators will require
access to, or development of, facilities to manufacture a sufficient supply of
our drug candidates. We do not have the facilities or experience to manufacture
the quantities of drug candidates necessary for any such trials or commercial
purposes on our own and do not intend to develop or acquire facilities for the
manufacture of such quantities of drug candidates in the foreseeable future. We
currently intend, instead, to rely on third-party contract manufacturers.

  In addition, because we intend to outlicense drug candidates for further
development and commercialization, once a drug candidate is outlicensed, we
must rely on our collaborators' ability to manufacture, or have manufactured,
the quantities necessary for further development and commercialization of these
drug candidates.

                                       10
<PAGE>

  Our manufacturing strategy presents the following risks:

  . we, or our collaborators, may not be able to locate acceptable
    manufacturers or enter into favorable long-term agreements with them;

  . third parties may not be able to successfully manufacture our drug
    candidates and even if they can they may not be able to do so in a cost
    effective and/or timely manner;

  . the manufacturing processes for our drug candidates have not been tested
    in quantities needed for clinical trials or commercial sales;

  . delays in scale-up to commercial quantities could delay clinical studies,
    regulatory submissions and commercialization of drug candidates;

  . we may not have intellectual property rights, or may have to share
    intellectual property rights, to many improvements in the manufacturing
    processes or new manufacturing processes for our drug candidates;

  . a long lead time is needed to manufacture our drug candidates and the
    manufacturing process is complex; and

  . manufacturers of our drug candidates are subject to the FDA's current
    Good Manufacturing Practices regulations, or cGMPs, and similar foreign
    standards and we and our collaborators do not have control over
    compliance with these regulations by third-party manufacturers.

  Any of these factors could delay clinical trials or commercialization of drug
candidates developed and commercialized by us or by our collaborators, entail
higher costs and result in us or our collaborators being unable to effectively
sell any products.

If we, or our collaborators, do not obtain and maintain required regulatory
approvals, we will be unable to commercialize our product candidates.

  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 ourselves or by our
collaborators. The nature and the extent to which such regulation may apply
will vary depending on the nature of any such pharmaceutical products. In
particular, human pharmaceutical therapeutic products are subject to rigorous
pre-clinical and clinical testing and other approval requirements by the United
States Food and Drug Administration, or FDA, and by foreign regulatory
authorities. Various federal and, in some cases, state statutes and regulations
and similar statutes and regulations of foreign jurisdictions also govern or
influence the manufacturing, safety, labeling, storage, recordkeeping,
promotion, advertising 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. Both we and our collaborators
may be unable to successfully complete the pre-clinical and clinical
development of, and file new drug applications, or NDAs, with the FDA, for any
drug candidate. In addition approval may not be granted on a timely basis, if
at all, for any drug candidate. Any failure by our collaborators or licensees
to obtain, or any delay in obtaining, regulatory approval could adversely
affect our ability to receive milestone payments or royalty revenues. Even if
FDA regulatory approvals are obtained, material changes to an approved product,
such as manufacturing changes or additional labeling claims, require further
FDA review and approval. Once obtained, any approval may be withdrawn. Further,
if we, our collaborators, our contract research organizations or our contract
manufacturers fail to comply with applicable FDA and other regulatory
requirements at any stage during the regulatory process, the FDA may impose
sanctions, including delays, warning letters, fines, product recalls or
seizures, injunctions, refusal of the FDA to review pending market approval
applications or supplements to approval applications, total or partial
suspension of production, civil penalties, withdrawals of previously approved
marketing applications, or criminal prosecutions. For marketing outside the
United States, we and our collaborators are also 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 may vary from country to
country, adding to the overall expense of drug development.

                                       11
<PAGE>

If we are unable to build sales, marketing and distribution capabilities or
enter into agreements with third parties to perform these functions, we will
not be able to commercialize any of our drug candidates.

  We currently have no sales, marketing or distribution capabilities to
commercialize our drug candidates. In order to commercialize any of our drug
candidates, we must either internally develop sales, marketing and distribution
capabilities or make arrangements with third parties to perform these services.
We intend to rely for the foreseeable future on collaborations with licensees
of our compounds to market any of our drug candidates which receive regulatory
approvals in the future.

  To market any of our drug products directly, we would have to develop a
marketing and sales force with technical expertise and supporting distribution
capabilities and we may not be able to do so. To promote any of our drug
products through third parties, we would have to locate acceptable third
parties for these functions and enter into agreements with them on acceptable
terms and we may not be able to do so. If we enter into co-promotion or other
licensing arrangements, any product revenues would likely be lower than if we
directly marketed and sold our products, and any revenues we may receive would
depend upon the efforts of third parties, which efforts may not be successful.
If these third parties are not successful carrying out their contractual duties
or do not meet expected deadlines, our sales would suffer and we might not be
profitable.

Our ability to compete in the market may decline if we do not adequately
protect our proprietary technologies, or lose some of our intellectual property
rights as a result of, or otherwise become involved in expensive lawsuits or
administrative proceedings.

  Our intellectual property consists of patents, copyrights, trade secrets, and
trademarks. As of May 23, 2000, 15 U.S. patents and seven foreign patents
relating to our technologies and compounds have issued, and 40 U.S. patent
applications (including non-provisional and provisional applications) and 122
foreign patent applications are pending. Our success depends in part on our
ability to obtain patents and maintain adequate protection of our intellectual
property for our technologies and products in the United States and other
countries. We currently do not have any issued patents for any of our lead
compounds for any of our internal programs and we may be unable to obtain any
issued patents for any patent applications we have filed or may file in the
future for such compounds.

  Our commercial success depends in part on avoiding infringing patents and
proprietary rights of third parties and developing and maintaining a
proprietary position with regard to our own technologies, products and
business. The patent positions of pharmaceutical companies, including our
patent position, involve complex legal and factual questions and, therefore,
enforceability cannot be predicted with certainty. Patents, if issued, may be
lost in part or in whole as a result of lawsuits or administrative proceedings,
or may be otherwise challenged, invalidated or circumvented. We cannot be sure
that relevant patents have not been issued, or that relevant publications or
actions by others have not occurred, that could block our ability to obtain
patents or to operate as we would like. Others may develop similar technologies
or duplicate technologies developed by us. We are aware of the existence of
claims in published patent applications in some countries that, if granted and
valid, may block our ability to commercialize products or processes in those
countries if we are unable to circumvent or license them. As to those patents
that we have licensed, our rights depend on maintaining our obligations to the
licensor under the applicable license agreement and we may be unable to do so.

  Our industry is characterized by extensive litigation regarding patents and
other intellectual property rights. Many companies have employed intellectual
property litigation as a way to gain a competitive advantage. If we became
involved in litigation or interference proceedings declared by the United
States Patent and Trademark Office, or oppositions or other intellectual
property proceedings outside of the United States, to defend our intellectual
property rights or as a result of alleged infringement of the rights of others,
we might have to spend significant amounts of time and money. We are aware of a
significant number of patents and patent applications relating to our
technologies filed by, and issued to, third parties. Should any of our
competitors have filed patent applications or obtain patents that claim
inventions also claimed by us, we may have to participate in an interference
proceeding declared by the relevant patent regulatory agency to determine

                                       12
<PAGE>

priority of invention and, thus, the right to a patent for these inventions or
discoveries in the United States. Such a proceeding could result in substantial
cost to us even if the outcome is favorable. Even if successful on priority
grounds, an interference may result in loss of claims based on patentability
grounds raised in the interference. The litigation or proceedings could divert
our management time and efforts. Even unsuccessful claims could result in
significant legal fees and other expenses, diversion of management time and
disruption in our business. Uncertainties resulting from initiation and
continuation of any patent or related litigation could harm our ability to
compete.

  An adverse ruling arising out of any intellectual property dispute, including
but not limited to an adverse decision as to the priority of our inventions,
would undercut or invalidate our intellectual property position. An adverse
ruling could also subject us to significant liability for damages, prevent us
from using processes or products, or require us to license disputed rights from
third parties. Although patent and intellectual property disputes in the
biotechnology area are often settled through licensing or similar arrangements,
costs associated with these arrangements may be substantial and could include
ongoing royalties. Furthermore, necessary licenses may not be available to us
on satisfactory terms, if at all.

  From time to time we have received letters from third parties suggesting that
we may want to consider licensing patents held by such third parties. We
believe that we have defenses to any infringement claim with respect to such
patents. However, we cannot be certain that one or more of the third parties
will not initiate litigation alleging that our technologies infringe claims of
such patents or that a court would not find such claims valid and infringed.

  Specific technologies developed by us were funded with U.S. government
grants. Portions of our ThermoFluor screening technology were developed using
funds from a grant awarded by the National Institute for General Medical
Sciences at the National Institutes of Health. Portions of our human fibroblast
growth factor analog technology were developed using funds from grants awarded
by the National Institute for Diabetes and Digestive and Kidney Diseases at the
National Institutes of Health. Portions of our GPCR technology were developed
using funds from grants awarded by the National Institute for General Medical
Sciences at the National Institutes of Health. We elected to retain title in
these technologies, subject to a nonexclusive, nontransferable, irrevocable,
paid-up license to the U.S. government to practice or have practiced for or on
behalf of the government any technology developed with these funds.

Confidentiality agreements with employees and others may not adequately prevent
disclosure of trade secrets and other proprietary information.

  In order to protect our proprietary technology and processes, we also rely in
part on trade secret protection for our confidential and proprietary
information. Our policy is to execute confidentiality agreements with our
employees and consultants upon the commencement of an employment or consulting
arrangement with us. These agreements require that all confidential information
developed by the individual or made known to the individual by us during the
course of the individual's relationship with us be kept confidential and not
disclosed to third parties. These agreements also provide that inventions
conceived by the individual in the course of rendering services to us shall be
our exclusive property. Proprietary information, however, may be disclosed,
others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets and we
may be unable to meaningfully protect our trade secrets. Costly and time-
consuming litigation could be necessary to enforce and determine the scope of
our proprietary rights, and failure to obtain or maintain trade secret
protection could adversely affect our competitive business position.

If our competitors develop and market drug discovery technologies or drug
candidates faster than we do or which are superior to our drug discovery
technologies or drug candidates, our commercial opportunities will be reduced
or eliminated.

  We compete both in the markets for drug discovery technologies and services
and the markets for pharmaceutical products. We compete with major
pharmaceutical, biotechnology and discovery services

                                       13
<PAGE>

companies, academic and scientific institutions, governmental agencies, and
public and private research organizations. These entities compete with us
either on their own or in collaborations.

  The markets for our DiscoverWorks collaborative drug discovery technologies
and services are very competitive, and we expect the intensity of competition
to increase as pharmaceutical and biotechnology companies continue to outsource
a portion of their discovery processes and seek collaborations to access
innovations in discovery technologies.

  We also compete with the internal drug discovery departments of our customers
and potential customers. Many of our customers and potential customers have
acquired or are developing integrated drug discovery capabilities that use high
throughput screening, combinatorial chemistry, specialized computer software,
and structure-based drug design.

  For drug candidates we seek to out-license from our internal drug discovery
pipeline, we face, and will continue to face, intense competition from
organizations such as large pharmaceutical and biotechnology companies.
Competition to any of the programs in our internal drug discovery pipeline may
arise from current or future drug candidates in the same therapeutic class or
other classes of therapeutic agents or other methods of preventing or reducing
the incidence of disease. Furthermore, any drug candidate that is successfully
developed may compete with existing therapies that have long histories of safe
and effective use.

  Due to perceived shortcomings of available agents and the large market
potential, competition to develop a safe, orally active antithrombotic agent is
intense, with many discovery programs in process. In addition, our orally
active urokinase inhibitor for the inhibition of cancer metastasis and tumor
angiogenesis and for cardiovascular indications faces competition from a number
of agents and approaches currently under development.

  Our other research programs in small molecule drug discovery are also in
highly competitive areas. Many other companies are working in these areas and
they may achieve earlier or greater success than we may be able to achieve.

  Our current and anticipated future research programs and services that focus
on the discovery of small molecule drugs that target GPCRs are also in a highly
competitive area. Most major pharmaceutical companies have extensive drug
discovery programs that target one or more GPCRs, and many biotechnology
companies have developed propriety positions for particular GPCR receptors or
screening technologies. Competition has also arisen and is anticipated to
accelerate in the area of structural genomics, where academic laboratories and
possibly companies, either on their own or in collaboration with others, are
seeking to determine the molecular structures of GPCRs, and databases of GPCR
molecular structures are being created in competition with the GPCR structural
genomics and other databases we expect to develop.

  Most of our competitors, either alone, or together with their collaborators,
have substantially greater research and development capabilities and financial,
scientific, operational, marketing and sales resources than we do, as well as
significantly more experience in research and development, clinical trials,
regulatory matters, manufacturing, marketing and sales. These competitors and
other companies may have already developed or may in the future develop new
technologies or products that compete with ours or which could render our
technologies and products obsolete. In addition, our competitors may succeed in
obtaining broader patent protection, receiving FDA approval for products or
developing and commercializing products or technologies before us. We also
compete with these organizations in recruiting and retaining qualified
scientific and management personnel.

If we lose our key personnel or are unable to attract and retain qualified
personnel as necessary, it could delay our product development programs and
harm our research and development efforts.

  We are highly dependent on the principal members of our scientific and
management staff, including David C. U'Prichard, our Chief Executive Officer,
and F. Raymond Salemme, our President and Chief

                                       14
<PAGE>

Scientific Officer. If we lose the services of one or more such persons, we may
be unable to achieve our business objectives. Our future success also will
depend in part on the continued service of our other key scientific, software,
engineering and management personnel and our ability to identify, hire and
retain additional personnel. There is intense competition for such qualified
personnel in the areas of our activities, and there can be no assurance that we
will be able to continue to attract and retain such personnel necessary for the
development of our business. Failure to attract and retain key personnel could
have a material adverse effect on our business, financial condition and results
of operations.

We may encounter difficulties managing our growth, which could adversely affect
our results of operations.

  We anticipate rapidly growing our business and if our growth continues, it
will place a strain on our management and operational and financial resources.
In order to effectively manage our growth, we must continue to improve our
operational, financial and management controls, reporting systems and
procedures and to attract and retain sufficient numbers of talented employees.
We may not be able to successfully implement improvements to our controls,
systems, and procedures in an efficient or timely manner or retract or retain
sufficient employees. In addition, we may discover deficiencies in existing
systems and controls.

If we fail to obtain necessary funds for our operations, we will be unable to
maintain and improve our technology position and will be unable to develop and
commercialize our drug candidates.

  We believe that our available cash resources, funding from collaborations,
outlicensing of internal drug candidates and the net proceeds from this
offering will be sufficient to meet our capital requirements for at least the
next two years. However, we have based this estimate on assumptions that may
prove to be wrong. Our present and future capital requirements depend on many
factors, including:

  . the level of research and development investment required to maintain and
    improve our technology position;

  . our ability to enter into new agreements with collaborators or to extend
    the terms of our existing collaborations, and the terms of any agreement
    of this type;

  . our success rate or that of our collaborators in discovery efforts
    associated with milestones and royalties;

  . the timing, willingness and success of our collaborators to commercialize
    our products that would result in milestone payments and in royalties;

  . costs of recruiting and retaining qualified personnel;

  . costs of filing, prosecuting, defending and enforcing patent claims and
    other intellectual property rights;

  . our need or decision to acquire or license complementary technologies or
    novel targets, or acquire complementary businesses; and

  . changes in drug candidate development plans needed to address any
    difficulties in clinical studies or in commercialization.

  We expect that additional capital may be required in the future to fund our
operations. We do not know whether additional financing will be available on
acceptable terms when needed. We have consumed substantial amounts of cash to
date and expect capital outlays and operating expenditures to increase over the
next several years as we expand our infrastructure and research and development
activities. We may raise these funds through public or private equity offerings
or debt financings or through corporate collaborations and licensing
arrangements.


                                       15
<PAGE>

  If we raise additional capital by issuing equity securities, our existing
stockholders' percentage ownership will be reduced and they may experience
substantial dilution. Any equity securities issued may also provide for rights,
preferences or privileges senior to holders of our common stock. If we raise
additional funds by issuing debt securities, these debt securities would have
rights, preferences and privileges senior to holders of our common stock and
the terms of the debt securities issued could impose significant restrictions
on our operations. If we raise additional funds through collaborations and
licensing arrangements, we may be required to relinquish some rights to our
technologies or drug candidates, or grant licenses on terms that are not
favorable to us. If adequate funds are not available, we may have to delay or
may not be able to continue developing our drug candidates.

  If additional funds are required to operate our business, these funds may not
be available on terms favorable to us, if at all. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our
operations, take advantage of opportunities, develop products or technologies
or otherwise respond to competitive pressures could be significantly delayed or
limited and we may need to downsize or cease our operations.

We expect that our quarterly results of operations will fluctuate, and this
fluctuation could cause our stock price to decline, causing investor losses.

  To date, substantially all of our revenue has been from corporate
collaborations, license agreements and government grants. We expect that a
significant portion of our revenues for the foreseeable future will be
comprised of this funding as well as milestone payments. The timing of revenue
in the future will depend largely upon the signing of collaborative research
and development or technology licensing agreements or the outlicensing of drug
candidates for further development and payment of up-front fees, milestone
payments and royalty revenues as a result thereof. In any one fiscal quarter we
may receive multiple or no payments from our collaborators. As a result,
operating results may vary substantially from quarter to quarter. Revenue for
any given period may be greater or less than revenue in the immediately
preceding period or in the comparable period of the prior year. Our operating
results may also fluctuate due to other factors, including the following:

  . termination of collaborations and licensing arrangements;

  . the ability and willingness of collaborators to develop and commercialize
    milestone and royalty-bearing products on expected timelines and the
    resulting demand for any commercialized products;

  . our ability to enter into new collaborative agreements, or to extend the
    terms of our existing collaborative agreements, and the terms of any
    agreement of this type;

  . our ability or that of our collaborators to successfully satisfy all
    pertinent regulatory requirements;

  . the level of our expenditures on research and development and the level
    of other operating expenses; and

  . general and industry specific economic conditions, which may affect our
    collaborators' research and development expenditures.

  If revenue declines or does not grow as anticipated due to the expiration of
collaborative agreements, failure to obtain new agreements or grants, lower-
than-expected milestone or royalty payments or other factors, we may not be
able to correspondingly reduce our operating expenses. A large portion of our
expenses, including expenses for facilities, equipment and personnel, are
relatively fixed. Failure to achieve anticipated levels of revenue could
therefore significantly harm our operating results for a particular fiscal
period.

  Due to the possibility of fluctuations in our revenue and expenses, we
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance. Our operating results in some
quarters may not meet the expectations of stock market analysts and investors.
In that case, our stock price may decline.


                                       16
<PAGE>

There is uncertainty of pharmaceutical pricing and health care reform.

  We expect that a significant portion of our revenue in the foreseeable future
will be derived from products and services provided to the pharmaceutical and
biotechnology industries. Accordingly, our success in the foreseeable future is
directly dependent upon the success of the companies within those industries
and their continued demand for our products and services. The levels of
revenues and profitability of pharmaceutical and biotechnology 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 pharmaceutical products is subject to
governmental control. In the United States, there have been, and we expect that
there will continue to be, a number of federal and state proposals to implement
similar governmental control. 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. If these proposals or reforms harm pharmaceutical and
biotechnology companies that are current or prospective collaborators with whom
we work to develop drug candidates or to whom we outlicense internally
developed drug candidates, our ability to generate revenues will be diminished.
In addition, our ability, and the ability of our collaborators, to
commercialize any drug candidates could be adversely affected by successful
cost control initiatives and may also depend in part on the extent to which
reimbursement for the products will be available from:

  . government and health administration authorities;

  . private health insurers; and

  . other third-party payors.

If government and other third-party payors do not provide adequate coverage and
reimbursement levels for products, the market acceptance of these products may
be reduced.

If we use or our collaborators use biological and hazardous materials in a
manner that causes injury, we may be liable for damages.

  Both we and our collaborators conduct research and development activities
which involve the controlled use of potentially harmful biological materials as
well as hazardous materials, chemicals and various radioactive compounds. We
cannot completely eliminate the risk of accidental contamination or injury from
the use, storage, handling or disposal of these materials. In the event of
contamination or injury, we could be held liable for damages that result, and
any liability could exceed our resources. Both we and our collaborators are
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of these materials and specified
waste products. The cost of compliance with these laws and regulations could be
significant.

We may be sued for product liability.

  Our business exposes us to potential product liability risks, which are
inherent in the life-science industry. We may not be able to avoid product
liability claims. Product liability insurance for the pharmaceutical industry
is generally expensive, if available at all. If we are unable to obtain
sufficient insurance coverage on reasonable terms or to otherwise protect
against potential product liability claims, we may be unable to commercialize
our product candidates. A successful product liability claim brought against us
in excess of our insurance coverage, if any, may cause us to incur substantial
liabilities and our business may fail.

If we engage in any acquisition or business combination, we will incur a
variety of risks that could adversely affect our business operations.

  In the past we have considered and we will continue to consider in the
future, if and when appropriate opportunities become available, strategic
business initiatives intended to further the development of our

                                       17
<PAGE>

business, including acquiring businesses, technologies or products or entering
into a business combination with another company. If we do pursue such a
strategy, we could, among other things:

  . issue equity securities that would dilute current stockholders'
    percentage ownership, incur substantial debt, or both;

  . expend substantial operation, financial and management resources in
    integrating new businesses, technologies and products;

  . assume substantial actual or contingent liabilities; or

  . merge, or otherwise enter into a business combination with, another
    company in which our stockholders would receive cash or shares of the
    other company, or a combination of both. In such case, many stockholders
    may disagree with the terms of such business combination or may view the
    sufficiency of the consideration to be received to be inadequate, or
    both.

  In addition, any future acquisitions or business combinations might
negatively impact our business relations with a collaborator and could lead to
a termination of our agreement with such collaborator. Further, recent proposed
accounting changes relating to accounting for acquisitions could result in a
negative impact on our results of operations. Any of the foregoing could harm
our business.

Risks Related to This Offering

Our common stock has never been publicly traded and we cannot predict the
extent to which a trading market will develop.

  Prior to this offering, there has been no public market for our common stock.
If you purchase shares of our common stock in this offering, you will not pay a
price that was established in a competitive market. Rather, you will pay a
price that we negotiated with representatives of the underwriters. That price
may not be indicative of the public trading market for our common stock should
one develop. Although we have applied to list the shares on the Nasdaq National
Market, there can be no guarantee that after this offering an active trading
market in our stock will develop or continue.

Our common stock price is likely to be highly volatile and the value of your
investment may fluctuate significantly.

  The market price for securities of early-stage drug discovery companies has
been particularly volatile, often for reasons unrelated to their business. In
addition to various risks described elsewhere in this prospectus, some of the
factors that could also cause volatility and could result in declines in the
market price of our common stock include:

  . results of preclinical studies and clinical trials conducted by us or on
    our behalf, by our collaborators, or by our competitors;

  . announcements of technological innovations or new drug candidates or
    commercial products by us, our collaborators or our competitors;

  . regulatory developments in both the United States and foreign countries;

  . changes in reimbursement policies;

  . public concern as to the safety and efficacy of products developed by us,
    our collaborators or our competitors;

  . developments or disputes concerning patents or other proprietary rights;

  . fluctuations in our operating results;

                                       18
<PAGE>

  . changes in financial estimates or recommendations by security analysts;

  . lack of adequate trading liquidity as a public company; and

  . general market conditions.

  In the past, following periods of volatility in the market price of a
particular company's securities, class action litigation has often been brought
against the company. We may become involved in this type of litigation in the
future. Litigation of this type is often extremely expensive and diverts
management's attention and resources.

You will incur immediate and substantial dilution of the book value of your
shares.

  The offering price of our common stock is substantially higher than the net
tangible pro forma book value per share of our outstanding common stock. As a
result, investors purchasing common stock in this offering will incur immediate
and substantial dilution in the net tangible book value of their common stock
of $   per share. In the past, we issued options and warrants to acquire
capital stock at prices significantly below the assumed offering price. There
will be further dilution to investors when any of these outstanding options and
warrants are exercised.

If a large number of shares of our common stock are sold after this offering,
or if there is the perception that such sales could occur, the market price of
our common stock may decline.

  The market price of our common stock could decline due to sales of a large
number of shares in the market after this offering or the perception that such
sales could occur, including sales or distributions of shares by our large
stockholders. These sales could also make it more difficult for us to raise
funds through offerings of equity securities in the future at a time and price
that we deem appropriate, and could also make it more difficult for us to pay
in stock for any acquisitions we may decide to pursue in the future.

  Upon the completion of this offering, we will have    shares of common stock
outstanding, assuming no exercise of options or warrants and assuming no
exercise of the underwriters' over-allotment option. Of these outstanding
shares of common stock, the     shares sold in this offering will be freely
tradable, without restriction under the Securities Act of 1933, as amended,
unless purchased by our "affiliates." The remaining     shares of common stock
held by existing stockholders are "restricted securities" and may be resold in
the public market only if registered or pursuant to an exemption from
registration, such as Rule 144 under the Securities Act.

  Immediately following the completion of this offering, holders of     shares
of common stock will be entitled to registration rights. Upon registration,
these shares may be freely sold in the public market.

  All of our officers, directors and  % holders of shares have agreed, pursuant
to lock-up agreements, that they will not, directly or indirectly, offer, sell
or agree to sell, or otherwise dispose of any shares of our common stock or
convertible securities in the public market without the prior written consent
of Bear, Stearns & Co. Inc. for a period of 180 days after the date of this
prospectus. Upon expiration of the lock-up agreements,     shares of common
stock currently outstanding will be immediately eligible for resale, subject to
the requirements of Rule 144.

  We may issue additional shares:

  . to employees, directors and consultants;

  . in connection with corporate alliances;

  . in connection with acquisitions; and

  . to raise capital.


                                       19
<PAGE>

As a result of these factors, a substantial number of shares of our common
stock could be sold in the public market at any time.

Our certificate of incorporation and Delaware law contain provisions that could
discourage a third party from making a takeover offer that could be beneficial
to us and our stockholders.

  Certain provisions of our certificate of incorporation and bylaws and
Delaware law could delay or prevent a third party from acquiring shares of our
common stock or replacing members of our board of directors. Our certificate of
incorporation provides for the division of our board of directors into three
classes and requires supermajority approval of the removal of any member of our
board of directors. In addition, our certificate of incorporation prevents our
stockholders from acting by written consent. Our board of directors has the
power to issue up to five million shares of preferred stock without stockholder
approval. This preferred stock could have rights, including voting rights, that
would be superior to those of our common stock, and our board of directors has
the power to determine these rights. These provisions may make it more
difficult for a third party to acquire a majority of our outstanding voting
stock or to replace a majority of our board of directors.

  In addition, we are subject to Section 203 of the Delaware General
Corporation Law which contains provisions imposing restrictions on the ability
of stockholders to take action to acquire control of us or otherwise engage in
transactions with us. Section 203 coupled with the provisions of our
certificate of incorporation and bylaws may discourage transactions in which
our stockholders might otherwise receive a premium for their shares over the
then current price and may limit our stockholders' ability to approve
transactions that they think are in their best interests.

Because our officers, directors, principal stockholders and affiliates will own
approximately  % of our outstanding common stock following the offering, they
could control our actions in a manner that conflicts with our interests and the
interests of our other stockholders.

  Upon the completion of this offering, our officers, directors, principal
stockholders and affiliates will own approximately    shares, or  %, of our
outstanding common stock. The interests of these controlling stockholders could
conflict with the interests of our other stockholders. For example, if these
controlling stockholders choose to act together, they may be able to exert
considerable influence over us, including in the election of directors and the
approval of actions submitted to our stockholders. This concentration of
ownership may also have the effect of discouraging third-party offers to
acquire our company or of delaying or preventing a change in control of our
company.

The net proceeds from this offering may be allocated in ways with which you and
other stockholders may not agree.

  Management will have significant flexibility in applying the net proceeds of
this offering and could use these proceeds for purposes other than those
contemplated at the time of the offering.

We do not expect to pay dividends in the foreseeable future and stockholders
must rely on stock appreciation for any return on their investment.

  We do not intend to pay any cash dividends on our common stock for the
foreseeable future. As a result, only the appreciation, if any, of the price of
our common stock will provide a return to investors.

                                       20
<PAGE>

                           FORWARD-LOOKING STATEMENTS

  This prospectus contains forward-looking statements under the captions
"Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere. These forward-
looking statements include, among others, statements about the following:

  . anticipated losses and expenditures;

  . anticipated revenues from corporate collaborations, licensing agreements,
    government grants, products and/or services;

  . development and commercialization of existing and new technologies;

  . ability to out-license our internal pipeline of drug candidates;

  . ability to market our technologies and services;

  . potential determination of the 3-D molecular structure of the [FORMULA
    APPEARS HERE] adrenergic receptor, or of any other GPCR;

  . the status of our regulatory process for 3DP-4815 and our other product
    candidates;

  . our intentions concerning and our reliance on collaborations and license
    arrangements;

  . development and commercialization of product candidates by us or our
    collaborators and licensors (including lead compounds identified by
    collaborators or licensors through the use of our technologies or
    developed internally by us and then out-licensed);

  . our intention to rely on third-party expert clinical investigators and
    clinical research organizations;

  . our intention, or our collaborators' intention, to rely on third parties
    for manufacturing, sales, marketing and distribution;

  . ability of us, or our collaborators, to obtain and maintain required
    regulatory approvals for product candidates;

  . our competition;

  . our intellectual property rights;

  . our growth rate and ability to manage growth;

  . our ability to meet capital requirements for at least the next two years;

  . our intentions regarding use of proceeds;

  . our intentions concerning payment of dividends; and

  . our ability to broadly exploit our integrated technology platform.

  When used in this prospectus, the terms "believe," "anticipate," "estimate,"
"expect," "seek," "intend," "could," "will," "predict," "plan," "potential,"
"continue," and "may", or the negative of these terms or other similar
terminology, are generally intended to identify "forward-looking statements."
Our forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause our actual results, performance or
achievements, to be materially different from any future results, performance
or achievements express or implied by these forward-looking statements. We
discuss these factors in more detail elsewhere in this prospectus, including
under the captions "Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business." You
should not place undue reliance on our forward-looking statements. We do not
intend to update any of these factors or to publicly announce the result of any
revisions to any of these forward-looking statements.


                                       21
<PAGE>

                                USE OF PROCEEDS

  We estimate our net proceeds from the sale of our common stock in this
offering will be approximately $   million, or approximately $   million if the
underwriters' over-allotment option is exercised in full. This estimate is
based upon an assumed offering price of $   per share after deducting estimated
underwriting discounts and commissions and estimated offering expenses.

  We expect to use these proceeds for the following purposes:

  . further research and development of our drug discovery technologies and
    programs;

  . acquisition or licensing of targets or technologies;

  . expansion of our facilities; and

  . general corporate and working capital purposes.

  In addition, a portion of the net proceeds may be used to acquire businesses
that are comparable to ours. We currently have no agreements with respect to
any material acquisitions.

  The amounts and timing of our actual expenditures for each purpose may vary
significantly depending upon numerous factors, including:

  . the scope of development efforts for our drug discovery technologies and
    programs;

  . the timing of regulatory approvals;

  . our ability to enter into new and maintain current collaborative or
    licensing arrangements, as well as their timing and terms;

  . the progress and success of our internal pipeline of drug candidates and
    our ability to outlicense them;

  . competition;

  . the progress and success of our research and development collaborations
    and the receipt and variability of funding, milestone payments and
    royalties from our collaborators;

  . the market acceptance of any products introduced by us or our
    collaborators;

  . time and cost of defending and enforcing patent and other intellectual
    property claims;

  . future revenue growth, if any; and

  . the amount of cash, if any, we generate from operations.

  We will retain broad discretion in the allocation of the net proceeds of this
offering. Pending the uses described above, we intend to invest the net
proceeds of this offering in short-term, investment-grade, interest-bearing
securities.

                                DIVIDEND POLICY

  Pursuant to our certificate of incorporation, from and after October 1998,
the holders of our series A-1 preferred stock were entitled to receive a 10%
dividend per annum, payable in equal quarterly installments. In connection
therewith, we have declared and paid aggregate dividends of $979,000 through
the first quarter of 2000. These dividends were paid by issuing each holder of
our series A-1 preferred stock a convertible promissory note payable for the
amount of the holder's portion of the declared dividend. These notes bear
interest at 10% per annum. In addition we will accrue approximately $1,800 per
day in additional dividends for each day between April 1, 2000 and the
completion of this offering which we intend to pay in cash. Our series A-2,
series A-3, series A-4 and series A-5 preferred stockholders are also entitled
to receive a 10% dividend per annum payable in equal installments from and
after the fifth anniversary of the date each such series was originally issued.
The $979,000 principal amount of and the accrued interest on the promissory
notes outstanding at the time of the closing of our initial public offering
will be automatically converted into shares of our common stock valued at the
initial public offering price. We estimate that     shares of common stock will
be issued upon such conversion. We do not intend to pay any cash dividends,
other than the obligations described above, in the foreseeable future.

                                       22
<PAGE>

                                 CAPITALIZATION

  You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes to those statements included elsewhere in this
prospectus. This table sets forth as of March 31, 2000 (consolidated):

  . our actual capitalization;

  . our pro forma capitalization, assuming the automatic conversion of all of
    our outstanding preferred stock into common stock upon the closing of
    this offering;

  . our pro forma as-adjusted capitalization to give effect to the sale of
        shares of our common stock in this offering at an assumed initial
    public offering price of $   per share after deducting estimated
    underwriting discounts and commissions and estimated expenses of this
    offering and the automatic conversion of all of our outstanding preferred
    stock into common stock upon the closing of this offering; and the
    issuance of an estimated     shares of common stock issuable at the
    initial public offering price upon the automatic conversion at the
    initial public offering price, at the closing of this offering, of
    $979,000 of convertible promissory notes, plus accrued interest issued in
    lieu of cash payment of dividends, to the holders of our series A-1
    preferred stock.

<TABLE>
<CAPTION>
                                                        As of March 31, 2000
                                                           (consolidated)
                                                      --------------------------
                                                                          Pro
                                                                 Pro    Forma As
                                                      Actual    Forma   Adjusted
                                                      -------  -------  --------
                                                       (in thousands, except
                                                            share data)
<S>                                                   <C>      <C>      <C>
Notes payable--dividends and accrued interest........     701      701
Long-term debt, less current portion.................   2,020    2,020
                                                      -------  -------   -----
 Total long-term debt................................   2,721    2,721
                                                      -------  -------
Redeemable convertible preferred stock...............  63,550      --
                                                      -------  -------   -----

Stockholders' Equity (Deficit):
Convertible preferred stock--par.....................       1      --
Common stock--par....................................       3       39
Additional paid in capital...........................   4,590   68,105
Deferred compensation................................    (516)    (516)
Accumulated deficit.................................. (48,851) (48,851)
                                                      -------  -------   -----
 Total stockholders' equity (deficit)................ (44,773)  18,777
                                                      -------  -------   -----
Total capitalization.................................  21,498   21,498
                                                      =======  =======   =====
</TABLE>

  This table assumes no exercise of stock options or warrants outstanding as of
March 31, 2000. As of March 31, 2000, there were options outstanding under our
stock option plan to purchase 5,835,911 shares with a weighted average exercise
price of $1.13 per share; warrants to purchase 4,920,626 shares of common stock
at a weighted average exercise price of $0.90 per share; and warrants to
purchase 239,475 shares of series A-1 preferred stock, which will either be
exercised prior to the closing of this offering or become exercisable for
239,475 shares of common stock upon the closing of this offering at an exercise
price of $1.00 per share.

                                       23
<PAGE>

                                    DILUTION

  As of March 31, 2000, our pro forma net tangible book value was $  , or $
per share. Pro forma net tangible book value per share is determined by
dividing pro forma net tangible book value (total tangible assets less total
liabilities) by the pro forma number of shares of common stock after giving
effect to the automatic conversion of all outstanding shares of preferred stock
into an aggregate of     shares of common stock upon the closing of this
offering.

  Without taking into effect any changes in pro forma net tangible book value
after March 31, 2000, after giving effect to the sale of the common stock
offered hereby at an assumed offering price of $   per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses, the pro forma as adjusted net tangible book value would have
been $  , or $   per share. This represents an immediate increase in pro forma
net tangible book value of $   per share of common stock to our recent
stockholders and an immediate dilution of $   or  % per share to new investors
who purchase shares in this offering. The following table illustrates this
dilution.

<TABLE>
   <S>                                                                <C>  <C>
   Assumed offering price per share..................................      $
   Pro forma net tangible book value per share before the offering... $
   Increase per share attributed to new investors....................
                                                                      ----
   Pro forma net tangible book value per share after this offering...
                                                                           ----
   Dilution in net tangible book value per share to new investors....      $
                                                                           ====
</TABLE>

  If the underwriters exercise their over-allotment option in full, the pro
forma as-adjusted net tangible book value per share after the offering would be
$   per share, the increase in pro forma net tangible book value per share to
existing stockholders would be $   per share and the dilution in pro forma net
tangible book value to new investors would be $   per share.

  The following table summarizes, on a pro forma as adjusted basis as of March
31, 2000, the differences between the total consideration paid and the average
price per share paid by the existing stockholders and the new investors with
respect to the number of shares of common stock purchased from us based on an
assumed offering price of $   per share:

<TABLE>
<CAPTION>
                                                        Total
                                         Shares     Consideration
                                     -------------- -------------- Average Price
                                     Number Percent Amount Percent   Per Share
                                     ------ ------- ------ ------- -------------
<S>                                  <C>    <C>     <C>    <C>     <C>
Existing stockholders...............              %  $           %     $
                                      ---    -----   ----
New public investors................
                                      ---    -----   ----   -----
    Total...........................         100.0%  $      100.0%
                                      ===    =====   ====   =====
</TABLE>

  These tables do not assume exercise of stock options or warrants outstanding
as of March 31, 2000.

  As of May 23, 2000, there were 5,757,124 shares issuable upon exercise of
outstanding stock options at a weighted average exercise price of $1.14 per
share. As of May 23, 2000, there were 4,920,626 shares of common stock issuable
upon the exercise of outstanding warrants, at a weighted average exercise price
of $0.90 per share and 239,475 shares of series A-1 preferred stock issuable
upon the exercise of outstanding warrants, which will either be exercised prior
to the closing of this offering or become exercisable for 239,475 shares of
common stock upon the closing of this offering at an exercise price of $1.00
per share. To the extent that any of these options or warrants are exercised,
there will be further dilution to new investors.

                                       24
<PAGE>

                         SELECTED FINANCIAL INFORMATION
                       (in thousands and per share data)

  The selected financial data set forth below are derived from our financial
statements. Our statements of operations data for the years ended December 31,
1997, 1998 and 1999 and our balance sheet data at December 31, 1998 and 1999,
are derived from our financial statements that have been audited by Richard A.
Eisner & Company, LLP, which are included elsewhere in this prospectus, and are
qualified by reference to such financial statements. The statement of
operations data for the years ended December 31, 1995 and 1996 and the balance
sheet data as of December 31, 1995, 1996 and 1997 are derived from our audited
financial statements, which are not included in this prospectus. The statement
of operations data for the three-months ended March 31, 2000 and 1999 and the
balance sheet data as of March 31, 2000, are derived from our unaudited
financial statements prepared on the same basis as our audited financial
statements and, in the opinion of our management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of our financial position and results of operations. The results of operations
for an interim period are not necessarily indicative of results to be expected
for a full year. The selected financial information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and related
notes appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
                                                                          Three Months Ended
                                  Year ended December 31,                     March 31,
                          --------------------------------------------  -----------------------
                           1995     1996     1997     1998      1999     1999         2000
                          -------  -------  -------  -------  --------  -------  --------------
                                                                                 (consolidated)
<S>                       <C>      <C>      <C>      <C>      <C>       <C>      <C>
Statements of Operations
 Data:
Grant and research
 revenue................  $   463  $   967  $ 3,580  $ 5,095  $  4,489  $ 1,379     $ 1,484
                          -------  -------  -------  -------  --------  -------     -------
Costs and expenses
 Research and
  development...........    3,414    4,556    6,517   10,984    12,136    2,975       3,425
 General and
  administrative........    1,122    1,708    3,000    4,458     6,525    1,155       1,537
 Litigation settlement..       --       --       --       --     1,500       --          --
                          -------  -------  -------  -------  --------  -------     -------
 Total costs and
  expenses..............    4,536    6,264    9,517   15,442    20,161    4,130       4,962
                          -------  -------  -------  -------  --------  -------     -------
Loss from operations....   (4,073)  (5,297)  (5,937) (10,347)  (15,672)  (2,751)     (3,478)
Interest income.........       16       14      521      868       328      125          87
Interest expense........     (401)    (580)    (149)    (232)     (625)    (114)       (351)
                          -------  -------  -------  -------  --------  -------     -------
Net loss................  $(4,458) $(5,862) $(5,565) $(9,711) $(15,969) $(2,740)    $(3,742)
Declared and accrued
 cumulative dividends on
 preferred stock........       --       --       --     (144)     (669)    (167)       (167)
                          -------  -------  -------  -------  --------  -------     -------
Net loss applicable to
 common stock...........  $(4,458) $(5,862) $(5,565) $(9,855) $(16,638) $(2,907)    $(3,909)
                          =======  =======  =======  =======  ========  =======     =======
Basic and diluted net
 loss per common share--
 historical.............  $(32.30) $(20.71) $ (9.83) $ (7.93) $  (9.78) $ (1.79)    $ (2.11)
                          =======  =======  =======  =======  ========  =======     =======
Weighted average common
 shares outstanding--
 historical.............      138      283      566    1,243     1,701    1,624       1,849
                          =======  =======  =======  =======  ========  =======     =======
Basic and diluted net
 loss per common share--
 pro forma..............                                      $   (.56)             $  (.13)
                                                              ========              =======
Weighted average common
 shares outstanding--pro
 forma..................                                        28,555               28,808
                                                              ========              =======
</TABLE>

<TABLE>
<CAPTION>
                                      As of December 31,                   March 31,
                          -----------------------------------------------  ---------
                           1995      1996      1997      1998      1999      2000
                          -------  --------  --------  --------  --------  ---------
                                                                   (consolidated)
<S>                       <C>      <C>       <C>       <C>       <C>       <C>
Balance Sheet Data:
Cash, cash equivalents
 and marketable
 securities.............  $   547  $  1,312  $  8,953  $  9,726  $  7,620  $ 22,038
Total assets............    2,954     3,401    12,897    15,833    12,550    27,394
Notes payable--dividends
 and accrued interest...                                    144       685       701
Long-term debt, less
 current portion........    1,077       575       820     3,270     2,330     2,020
Convertible notes and
 accrued interest.......       --        --        --        --    10,115        --
Long-term portion of
 settlement accrual.....       --        --        --        --       500        --
Redeemable convertible
 preferred stock........    6,610    12,015    24,461    34,834    34,834    63,550
Accumulated deficit.....   (8,001)  (13,864)  (19,429)  (29,140)  (45,109)  (48,851)
Total capital
 deficiency.............   (7,858)  (11,198)  (14,262)  (25,263)  (41,678)  (44,773)
</TABLE>

  See our financial statements for a description of the computation of the
historical and pro forma net loss per share and the number of shares used in
the historical and pro forma per share calculations in "Statements of
Operations Data" above.

                                       25
<PAGE>

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

  The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and the notes to
those statements and other financial information included elsewhere in this
prospectus. This discussion contains certain statements of a forward-looking
nature that involve risks and uncertainties. As a result of many factors, such
as those set forth under "Risk Factors" and elsewhere in this prospectus, our
actual results may differ materially from those anticipated by such forward-
looking statements.

Overview

  We are a post-genomics drug discovery company that has developed a unique
integration of proprietary technologies to provide an accelerated and improved
methodology for "gene-to-clinic" small molecule drug discovery. Our objective
is to be an industry leader in the discovery and optimization of novel drug
candidates. Our strategy is to pursue collaborations with pharmaceutical and
biotechnology companies through: (1) application of our technology to partner-
funded research and development agreements and (2) outlicensing of drug
candidates that we have developed internally.

  To date, substantially all of our revenue has been from corporate
collaborations, license agreements and government grants. Revenue from our
corporate collaborations and our licensing agreements consists of nonrefundable
up-front fees, ongoing research and development funding, potential milestone
payments and royalties upon the sale of designated products. Royalties from
sales of products are not expected for at least several years, if at all. We
recognize revenue from corporate collaborations, including periodic payments
for research and development activities and related nonrefundable technology
access fees and/or technology or software licensing fees, over the period that
we perform research and development activities under the terms of the
agreements. Revenue from nonrefundable up-front fees for the licensing of
technology, products or software under agreements which do not require us to
perform research or development activities or other significant future
performance obligations is recognized at the time the agreement is executed or
the software is delivered. Revenue resulting from the achievement of milestone
events stipulated in the agreements is recognized when the milestone is
achieved. Up-front fees and other amounts received in excess of revenue
recognized are recorded as deferred income.

  We have incurred substantial operating losses since our inception in 1993. As
of March 31, 2000, our accumulated deficit was $48.9 million. We have funded
our operations primarily through private placements of equity securities
totaling $72.0 million and revenues of $16.1 million. Our losses have resulted
principally from costs incurred in research and development activities related
to our efforts to develop our technologies and our internal drug discovery
programs and from the associated administrative costs required to support these
efforts. We expect to incur additional operating losses over the next several
years as we continue to develop our technologies and fund internal product
research and development. Our ability to achieve profitability is dependent on
the progress and commercialization of drug candidates from existing internal
programs and collaborations and our ability to initiate and develop new
internal programs and enter into additional collaborations with favorable
economic terms. Payments either under collaborative agreements or related to
the outlicensing of drug candidates from our internal pipeline will be subject
to significant fluctuation in both timing and amount and therefore our results
of operations for any period may not be comparable to the results of operations
from any other period.

Results of Operations

 Three Months Ended March 31, 2000 and 1999

  Revenue. Our revenue for the three months ended March 31, 2000 was $1.5
million as compared to $1.4 million for the three months ended March 31, 1999.
Revenues in 2000 included $1.4 million from corporate collaborations,

                                       26
<PAGE>

including revenue from new agreements with DuPont Pharmaceuticals Company and
Boehringer Ingelheim Pharmaceuticals, Inc., and continued funding from Aventis
and The Heska Corporation and $0.1 million from government grants. Revenues in
the first quarter of 1999 included $1.4 million from corporate collaborations,
including revenues from Wyeth-Ayerst, Merck KGaA, and Heska Corporation.

  Research and Development Expenses. Our research and development expenses
increased $0.4 million, to $3.4 million for the three months ended March 31,
2000 from $3.0 million for the three months ended March 31, 1999. This increase
was attributable to the expansion of research efforts in our internal programs,
including clinical testing of our lead thrombin inhibitor compound, the
commencement of collaborative discovery programs and investment in our core
technologies, with related increases in expenses for personnel, facility
expansion, equipment and lab supplies for all of these activities.

  General and Administrative Expenses. Our general and administrative expenses
increased $0.3 million, to $1.5 million for the three months ended March 31,
2000 from $1.2 million for the three months ended March 31, 1999. The increase
was primarily attributable to increased management and administrative personnel
expenses and legal and professional fees incurred in connection with litigation
over intellectual property, which we settled in March 2000, and the expansion
of our operations and business development efforts.

  Other Income (Expenses). Interest income was approximately $0.1 million for
the first quarter of both 2000 and 1999. Interest expense increased $0.3
million to $0.4 million.

 Years Ended December 31, 1999 and 1998

  Revenue. Our revenue for 1999 was $4.5 million as compared to $5.1 million in
1998. Revenues in 1999 included $4.3 million from corporate collaborations,
including revenue from a new agreement with Aventis, continued funding from
Wyeth-Ayerst, Merck KGaA, Heska Corporation and E.I. DuPont de Nemours and $0.2
million from government grants. Revenues in 1998 included $4.5 million from
corporate collaborations, including funding from Wyeth-Ayerst, Merck KGaA, and
Heska Corporation, and $0.6 million from government grants. The decrease in
revenue for 1999 is primarily attributable to the completion in August 1998 of
funding from an Advanced Technology Program (ATP) award sponsored by the
National Institute of Standards and Technology, which commenced in August of
1995, and a reduction in revenues from Wyeth-Ayerst. Our agreements with Wyeth-
Ayerst and Merck KGaA ended in 1999.

  Research and Development Expenses. Our research and development expenses
increased $1.1 million, to $12.1 million for 1999 from $11.0 million for 1998.
This increase was attributable to the expansion of research efforts in our
internal programs, including preclinical testing of our lead thrombin inhibitor
compounds, the commencement of collaborative discovery programs, investment in
our core technologies and associated increases in expenses for personnel,
facility expansion, equipment and lab supplies.

  General and Administrative Expenses. Our general and administrative expenses
increased $2.0 million, to $6.5 million for 1999 from $4.5 million for 1998.
The increase was primarily attributable to increased management and
administrative personnel expenses and legal and professional fees incurred in
connection with litigation involving our ThermoFluor technology, which we
settled in March 2000, the expansion of our operations and business development
efforts. In connection with the settlement of litigation, we accrued an expense
of $1.5 million in 1999.

  Other Income (Expenses). Interest income decreased $0.6 million, to $0.3
million for 1999 from $0.9 million for 1998. This was attributable to lower
average cash balances during 1999. Interest expense increased $0.4 million, to
$0.6 million in 1999 from $0.2 million in 1998. The increase in interest
expense was primarily attributable to an increase in short-term borrowings from
certain of our investors.

  Provision for Income Taxes. We incurred net operating losses for the years
ended December 31, 1999 and 1998, and, accordingly, we did not pay any federal
income taxes. As of December 31, 1999, we had federal

                                       27
<PAGE>

net operating loss carryforwards of approximately $40.4 million, which expire
through 2019. Our utilization of the net operating losses may be subject to
substantial annual limitations pursuant to Section 382 of the Internal Revenue
Code. The annual limitations may result in the expiration of net operating
losses prior to utilization.

 Years Ended December 31, 1998 and 1997

  Revenue. Our revenue for 1998 was $5.1 million as compared to $3.6 million in
1997. Revenues in 1998 included $4.5 million from corporate collaborations,
including revenue from Wyeth-Ayerst, Merck KGaA, and Heska Corporation, and
$0.6 million from government grants. Revenues in 1997 included $2.5 million
from corporate collaborations, including the initiation of the agreement with
Wyeth-Ayerst, funding from Merck KGaA, and $1.1 million from government grants.
The increase in revenue from corporate collaborations was primarily
attributable to the full year of funding under the Heska agreement. The
decrease in grant revenue is primarily attributable to the completion in August
1998 of funding from an Advanced Technology Program (ATP) award, sponsored by
the National Institute of Standards and Technology which commenced in August of
1995.

  Research and Development Expenses. Our research and development expenses
increased $4.5 million to $11.0 million for 1998 from $6.5 million for 1997.
This increase was attributable to the expansion of research efforts in our
internal programs, including preclinical testing of our lead thrombin inhibitor
compounds, the commencement of collaborative discovery programs, investment in
our core technologies, and associated increases in expenses for personnel,
facility expansion, equipment and lab supplies.

  General and Administrative Expenses. Our general and administrative expenses
increased $1.5 million to $4.5 million for 1998 from $3.0 million for 1997. The
increase was primarily attributable to increased management and administrative
personnel expenses and legal and professional fees incurred in connection with
the expansion of our operations and business development efforts.

  Other Income (Expenses). Interest income increased $0.4 million to $0.9
million for 1998 from $0.5 million for 1997. This was attributable to higher
average cash balances during 1998. Interest expense increased $0.1 million to
$0.2 million in 1998 from $0.1 million in 1997. The increase in interest
expense was primarily attributable to an increase in short-term borrowings from
certain of our investors.

  Provision for Income Taxes. We incurred net operating losses for 1998 and
1997, and, accordingly, we did not pay any federal income taxes.

Liquidity and Capital Resources

  At March 31, 2000, we had cash and cash equivalents of $22.0 million and
working capital of $16.7 million. We have funded our operations to date
primarily through private placements of equity securities with aggregate
proceeds of approximately $72.0 million, revenues from corporate collaborations
totaling $12.9 million, government grants totaling $3.2 million, capital
equipment and leasehold improvement financing totaling $7.8 million and
interest earned on the net proceeds of our private placements. Our operating
activities used funds totaling $10.6 million, $8.4 million and $3.8 million in
1999, 1998 and 1997, respectively.

  To date, substantially all of our revenue has been from corporate license
agreements and government grants. We expect that substantially all of our
revenue for the foreseeable future will come from similar sources as well as
from interest income. Furthermore, our ability to achieve profitability will be
dependent upon our ability to enter into additional corporate collaborations
and outlicense any internally developed products. There can be no assurance
that we will be able to negotiate additional collaborative agreements in the
future on acceptable terms, if at all, or that such current or future
collaborative agreements will be successful and provide us with expected
benefits. We believe that the net proceeds from this offering, expected revenue
from collaborations and outlicense arrangements, existing capital resources and
interest income should be sufficient to fund anticipated levels of operations
for at least the next two years.

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<PAGE>

Recently Issued Accounting Standards

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

Quantitative and Qualitative Disclosures About Market Risk

  Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
Our risk associated with fluctuating interest expense is limited to our capital
lease obligations, the underlying interest rates of which are closely tied to
market rates, and our investments in interest rate sensitive financial
instruments. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. We seek to ensure the
safety and preservation of our invested principal funds by limiting default
risk, market risk and reinvestment risk. We seek to mitigate default risk by
investing in investment grade securities. A hypothetical 100 basis point
adverse move in interest rates along the entire interest rate yield curve would
not materially affect the fair value of our interest rate sensitive financial
instruments at December 31, 1998 or December 31, 1999. Declines in interest
rates over time will, however, reduce our interest income while increases in
interest rates over time will increase our interest expense.

                                       29
<PAGE>

                                  OUR BUSINESS

Overview

  We are a post-genomics drug discovery company that has developed a unique
integration of proprietary technologies to provide an accelerated and improved
methodology for "gene-to-clinic" small molecule drug discovery. We designed our
DiscoverWorks technologies to capitalize on the opportunities for drug
discovery presented by the thousands of new therapeutic targets being revealed
from the sequencing of the human genome. Our technologies also facilitate drug
discovery for well-characterized therapeutic targets that have historically
proven difficult using traditional discovery methods. We believe that our
technologies, which are applicable to virtually any disease target or
therapeutic indication, produce development compounds in a more timely and
cost-effective manner and with a higher probability of success than that
currently achieved by other pharmaceutical and biotechnology companies. We are
using our technologies both to assist collaborators in discovering drug
candidates, and to discover and develop an internal pipeline of orally active
drug candidates initially targeted at cardiovascular disease and oncology,
which we currently intend to out-license at the pre-clinical or early clinical
stage.

Industry Background

  Drugs are chemical compounds that change the activity of biological target
proteins associated with particular disease states to achieve the desired
therapeutic effect. Using traditional approaches, it has been estimated
generally to take from five to seven years from the initial identification of a
protein as a suitable therapeutic target to the production of a drug candidate
ready to go into clinical trials. The major steps in the drug discovery process
following identification of the biological target involve (a) hit
identification, (b) lead generation, (c) lead optimization and (d) target
validation, each of which is described below.

  Hit identification: This involves the screening of large collections of
compounds to identify those compounds that interact with the biological target
(which may be an enzyme, receptor or other protein). A compound that interacts
with a target protein is referred to as a "hit." In order to identify hits, the
following steps are undertaken:

  . production ("cloning and expression") of sufficient quantities of the
    target protein to facilitate high throughput screening;

  . design and development of a high throughput screen specific to the target
    protein; and

  . screening the target protein against collections or "libraries" of
    compounds.

  Lead generation: This involves the chemical modification of hits by iterative
synthesis and testing of analogs to produce "leads," which are compounds with
improved chemical characteristics, thereby increasing their suitability as
potential drugs.

  Lead optimization: This involves the further optimization of leads by
additional iterative chemical modification to produce drug development
candidates with optimized characteristics for further preclinical and clinical
development.

  Target validation: In parallel to the above steps in the discovery process,
studies are undertaken to demonstrate the link between the target protein and
the particular clinical disease. These tests usually involve correlating
changes in the level of the target protein in cells or animals with changes in
cell biology or animal physiology indicative of the disease state. This
"biology-driven" target validation, which is generally employed today in the
pharmaceutical industry, is in contrast to "chemistry-driven" target
validation, where the role of the target protein in disease is determined by
testing a target-specific compound in cell or animal models.


                                       30
<PAGE>

  Although advances in recent years have improved the drug discovery process,
there remain serious bottlenecks, which can include:

  . an inability to produce in a reasonable time sufficient quantities of the
    target protein for high throughput screening and concurrent 3-D structure
    analysis of the target protein;

  . the need to establish a different high throughput screen for each new
    target, which typically can take from two to six months;

  . an inability to rapidly generate leads from initial hits, a process which
    typically can take one to two years;

  . the need for large resources in the lead optimization process;

  . an inability to incorporate desired drug-like attributes into leads, and
    to validate target proteins, sufficiently early in the optimization
    process; and

  . the time-consuming and resource-intensive nature of the biology-driven
    target validation process.

  Traditional drug discovery thus remains a costly and time-consuming process,
in which the failure rate is very high. Despite a more than three-fold increase
in research and development expenditure in the last ten years by the
pharmaceutical industry, there has been only a modest increase in the number of
new chemical entities, or NCEs, approved by the FDA. The challenges faced by
pharmaceutical companies to timely and cost-effective drug discovery will grow
as continuing advances are made in genomics research, since it is estimated
that 5,000 to 10,000 potential target proteins will be identified through
genomics research within the next five years.

                                   [GRAPHIC]

  Illustration captioned "Expected Proliferation of New Target Proteins from
Genomics." This illustration shows two funnels that represent the drug
discovery process, beginning with the identification of new target proteins,
and ending with marketed drugs. Between the funnels are listed the five steps
in the drug discovery process: "Discovery," "Pre-clinical Development,"
"Clinical Development," "Registration and Marketing" and "Marketed Drug." The
funnel on the left illustrates the current process and is labeled "Now." The
funnel on the right illustrates the anticipated process five years from now and
is labeled "Next 5 years." The mouth of discovery funnel on the right is larger
than that of the funnel on the left to illustrate the anticipated increase from
500 target proteins to 5,000 to 10,000 target proteins.


                                       31
<PAGE>

Our Integrated DiscoverWorks Solution

  We believe we provide a unique solution to the problems of efficiency and
productivity in drug discovery in the post-genomics era, by integrating the use
of an array of advanced tools with proprietary information technology to more
efficiently discover novel drugs and harness the opportunities presented by
genomics. Our DiscoverWorks technology platform includes the following
technologies and capabilities:

  . Broadly applicable target protein production capabilities: Our
    proprietary protein expression and refolding technology allows for the
    rapid, cost-efficient production of large quantities of a wide-range of
    target proteins, including important membrane-bound proteins such as GPCR
    targets.

  . ThermoFluor any-target quantitative high-throughput screening: Our
    proprietary ThermoFluor high-throughput screening technology provides a
    direct means to quantitatively assess binding of potential drug compounds
    to virtually any target protein, including those derived from genomics.
    ThermoFluor screening does not require knowledge of a target's detailed
    biochemical function, as is required to set-up and use conventional
    screening assays. ThermoFluor screens can be set up for virtually any
    target protein in less than one week. The ThermoFluor screen can also be
    used to rapidly determine whether a target protein is suitable for small
    molecule drug discovery (i.e. whether the target protein is "drugable").

  . Libraries of diverse and drug-like compounds: We have a highly diverse
    Probe Library of over 200,000 actual compounds pre-designed for
    pharmaceutical acceptability, and a virtual library stored in our
    computers of approximately 2.5 billion novel analogs of the Probe Library
    compounds. We call this virtual library our "Synthetically Accessible
    Library" because each of the compounds therein can be generated in
    physical form using automated chemistry synthesis protocols developed and
    verified in our laboratories. In DiscoverWorks, we initially screen our
    Probe Library using the ThermoFluor screen to find hits. We then generate
    leads from these hits by iteratively synthesizing and testing focused
    libraries of up to 1,000 compounds selected from our virtual library.
    Such focused libraries are routinely synthesized in two to three weeks.
    We have indexed each of the compounds in our libraries using a
    comprehensive set of approximately 500 molecular descriptors,
    facilitating the rapid selection and synthesis of compounds with desired
    properties.

  . Patented DirectedDiversity technology linking combinatorial chemistry
    with chemi-informatics software and drug property databases: Our
    DirectedDiversity technology allows the directed, iterative synthesis and
    testing of focused libraries of compounds for lead generation and
    optimization, which compounds are intelligently selected by our decision
    support and process control software to confer desired drug-like
    characteristics. We believe that our DirectedDiversity technology,
    combined with the high-quality compounds in our Probe Library and our
    extensive knowledge of the chemistry of such compounds linked with
    screening results in our drug property databases, allows lead generation
    in as little as six to nine months, as compared to one to two years for
    more traditional methods generally employed in the industry at this time.
    Such leads are termed by us "Prototype NCE Leads", which we define in
    terms of potency, selectivity, potential for in vivo activity, and
    chemical properties that indicate potentially acceptable toxicologic,
    pharmacokinetic and metabolic profiles in man.

  . State-of-the-art structure-based drug design capabilities: We have
    integrated into our DiscoverWorks platform structure-based drug design
    technology that uses X-ray crystallography to directly visualize how
    compounds bind to a target protein. This technology allows the atom-by-
    atom modification of hits to produce leads with improved potency and
    specificity, and permits us to incorporate 3-D structural information
    into the intelligent selection of sub-libraries of the Probe Library
    directed to specific families of target proteins, as well as the
    intelligent design of focused libraries for lead generation. Our
    structure analysis capabilities are enhanced by our ability to make large
    amounts of proteins through our proprietary protein production
    technology.

  . Chemistry-driven target validation: Our DiscoverWorks technologies
    provide us with two ways to validate novel genomics targets early in the
    discovery process:


                                       32
<PAGE>

    . by using ThermoFluor screening of novel, unvalidated target proteins
      against reference compound libraries to establish the biochemical or
      pharmacological properties of the target, and

    . by allowing us to rapidly produce potent and specific leads to
      validate the significance of a novel target through assessment of the
      activity of these leads in disease models.

  We believe that our technology platform offers an important solution to the
resource and productivity dilemmas facing post-genomics drug discovery by
providing the following advantages:

  . Time compression: The efficiency of our ThermoFluor process combined with
    the capabilities of our DirectedDiversity combinatorial chemistry
    technology and associated computer software, and our ability rapidly to
    select and synthesize compounds from our libraries, compresses an
    important segment of the R&D process, from assay set-up to the generation
    of a lead series of compounds with potential for in vivo efficacy, to
    seven to ten months (including one month for assay set up and Probe
    Library screening, and six to nine months for Prototype NCE Lead
    generation) compared with an estimated 14-30 months using traditional
    methods. This is expected to significantly reduce resources required and
    development costs per target; allow more drug targets to be exploited
    with a given set of resources; and accelerate the time to market of
    successful drugs, thereby improving market position and increasing post-
    commercialization patent life.

                                   [GRAPHIC]

  Illustration captioned "Time Compression in the Discovery Process." This
illustration consists of two arrows, representing hypothetical timelines for
the development of a Prototype NCE Lead by, respectively, 3DP's DiscoverWorks
technology and conventional drug discovery technology. The first arrow, titled
"3DP's DiscoverWorks Technology," depicts two time periods, a period of "<1
month," with the caption "ThermoFluor HTS Setup and Probe Library Screening"
and a period of "6-9 months," with the caption "DirectedDiversity Lead
Generation." The first arrow points toward the words "Prototype NCE Lead 7-10
Months Total Time." The second arrow, titled "Conventional Pharmaceutical
Industry Technology," depicts two time periods, a period of "2-6 months," with
the caption "Conventional HTS Setup and Library Screening," and a period of
"12-24 months," with the caption "Conventional Lead Generation." The second
arrow points toward the words "Prototype NCE Lead 14-30 Months Total Time."

  . Improved compound characteristics: DiscoverWorks enhances the
    incorporation of drug-like characteristics into development compounds
    through the high quality of our compound libraries together with our
    DirectedDiversity combinatorial chemistry technology and associated
    chemi-informatics software and drug property databases, and our
    structure-based drug design capabilities, thus increasing the likelihood
    of commercial success of individual compounds. In addition, since more
    compounds can be developed with equivalent resources, a user has more
    drug candidates from which to choose, thereby further enhancing the
    likelihood of commercial success.

  . Broad target applicability: As a result of the flexible capabilities of
    ThermoFluor, the breadth of our compound libraries and our protein
    expression capabilities, DiscoverWorks can be used for virtually any
    target. While our efforts have initially focused on the areas of
    cardiovascular disease and oncology, we believe our technology is
    applicable to any therapeutic category or family of target proteins.


                                       33
<PAGE>

  We believe our technology drives value creation through the reduction of risk
in discovery and early development by facilitating better, more timely
decisions. We expect our technology, with its broad applicability, to increase
in value as the genomics revolution expands the number of novel molecular
targets.

Our Strategy

  Our objective is to be an industry leader in post-genomics discovery and
optimization of novel drug candidates. The main elements of our strategy are
to:

  . Maintain and improve technology position: We intend to continue to pursue
    technological innovation to enable us to have the most advanced and
    reliable drug discovery processes and tools, both for our collaborations
    and for our internal development programs. To date, the key proprietary
    technologies used in DiscoverWorks have been invented by us. We intend to
    continue to patent or otherwise protect our technological innovations to
    maintain our strong intellectual property position. We also intend to
    expand our libraries of drug compounds and associated drug property
    databases to facilitate the rapid discovery of new drug candidates.

   A key component of our strategy is the development and commercialization
   of our unique GPCR structural genomics technology, which we believe
   represents a significant market opportunity. We believe that our
   breakthrough work in GPCR production and 3-D structure determination has
   the potential to drive multiple discovery collaborations with
   pharmaceutical and biotechnology companies, as well as expand our internal
   development pipeline. We intend to extend our technology platform by
   determining new GPCR 3-D structures and developing a database of GPCR
   structural models.

  . Expand internal drug discovery pipeline: Our strategy is to outlicense
    internally developed drug candidates at the preclinical or early clinical
    stage, so that we utilize our resources on the stages of R&D where we can
    add the greatest value. Our current internal drug discovery programs are
    focused on cardiovascular and oncology indications. We intend to expand
    our internal pipeline to focus on GPCR targets for central nervous system
    and metabolic diseases and other biological targets in high-value
    therapeutic markets. We intend to form collaborations with major genomics
    and biotechnology companies to supply high-quality genomics targets to
    add to our portfolio of target proteins.

  . Pursue additional collaborative R&D agreements: We intend to continue to
    enter into collaborative R&D agreements with leading companies based on
    our DiscoverWorks technology platform, which is capable of providing our
    partners with an entire range of drug discovery services from target
    expression through generation of leads, which we can further optimize to
    produce an IND candidate.

  . Deploy our technologies across diverse markets: We intend to continue to
    deploy our DiscoverWorks technologies in the pharmaceutical, agricultural
    and veterinary medicine industries. Discoveries or products made for any
    particular market may find use in other markets, resulting in enhanced
    revenues.

Evolution of Our Integrated Platform

  Our company was founded in 1993. Originally we focused on connecting
combinatorial chemistry and structure-based drug design to improve the lead
generation and optimization stages of drug discovery. To facilitate this
process, we developed and integrated proprietary chemi-informatic and process
control software systems for combinatorial chemistry, which we call
DirectedDiversity. Our first patent for DirectedDiversity was issued in 1995
and our DirectedDiversity software has been continually enhanced since then.
With the anticipated increase in previously unknown targets due to structural
genomics, we also sought to develop a flexible any-target screening technology,
which we call ThermoFluor. Our first patent for ThermoFluor was issued in
February 2000. Subsequently, we have been able to achieve an integration of our
DirectedDiversity and ThermoFluor technologies and our structure-based drug
design capability to create our DiscoverWorks platform. With the recent
settlement of a lawsuit with Scriptgen, we are able to broadly exploit our
integrated DiscoverWorks technology platform.

                                       34
<PAGE>

Our DiscoverWorks Technology Platform

  DiscoverWorks is a highly integrated, modular and flexible platform for drug
discovery that links our ThermoFluor high-throughput screening technology,
Probe and Synthetically Accessible Libraries, DirectedDiversity chemi-
informatics and combinatorial chemistry capabilities and structure-based drug
design expertise. Starting from the DNA sequence of a new molecular target, we
have developed complete capabilities required to generate Prototype NCE Leads.
Our DiscoverWorks technologies can efficiently assimilate and process vast
quantities of data produced from the combination of combinatorial chemistry and
high-throughput screening, and can be rapidly and efficiently scaled to meet
virtually any anticipated demand. Our DiscoverWorks process integrates the
following technologies:

                                   [GRAPHIC]


  Illustration captioned "3DP's Integrated Drug Discovery Technology." This
illustration consists of eight interconnected small illustrations, each with an
accompanying caption. The eight illustrations, counter-clockwise from the upper
lefthand corner, are as follows: First illustration: illustration of the 3D
molecular structure of a target protein, with an accompanying caption reading:
"Target Protein 3D Structure." Second illustration: illustration of stackable
plates containing a library of compounds, with an accompanying caption reading
"DirectedDiversity Probe Library." Third illustration: illustration of an
automated ThermoFluor high throughout screening station, with an accompanying
caption reading "ThermoFluor & other HTS." Fourth illustration: illustration of
a computer visualizing and analyzing data, with an accompanying caption reading
"Structure-Activity Data Analysis." Fifth illustration: illustration of a
rodent, with an accompanying caption reading "Prototype NCE Lead Target
Validation." Sixth illustration: illustration of a chemical compound, with an
accompanying caption reading "Structure-Based Drug Design." Seventh
illustration: illustration of an information storage facility, with an
accompanying caption reading "Synthetically Accessible Compound Library."
Eighth illustration: illustration of an automated chemical synthesizer, with an
accompanying caption reading "Automated Chemical Synthesis." Interposed in the
center of the illustration is a caption reading "DiscoverWorks Technology
Platform" and, in the lower left corner of the illustration, a caption reading
"Target Protein/Target Protein Production."

 Target Protein Production

  We believe that timely large-scale production of target proteins is essential
for effective use of quantitative high-throughput screening technology. We have
extensive experience in cloning, engineering and expressing target proteins
using a wide array of bacterial, insect cell and mammalian cell expression
systems. In addition, we have developed proprietary technology for refolding
proteins that allows the rapid, parallel production of target proteins derived
from genome sequencing. We believe that we can produce less expensively and
more efficiently large quantities of membrane protein and other target proteins
that are difficult to make, in order to facilitate high-throughput screening
and target protein 3-D molecular structure analysis.

 ThermoFluor and Other High-Throughput Screening Technologies

  Our proprietary ThermoFluor high-throughput screening system provides a
quantitative measurement of drug-binding affinity for virtually any target
protein. ThermoFluor is based on a physical effect common to all functionally
active proteins. Proteins, which constitute the vast majority of molecular
targets, are highly organized structures that melt at different defined
temperatures. By measuring the shift in melting temperature of the protein-drug
complex caused by drug binding, it is possible to estimate the binding affinity
of the drug.

                                       35
<PAGE>

As a result, ThermoFluor can be applied with equal effectiveness to virtually
all varieties of enzymes, receptors, growth factors, antibodies, cell adhesion
molecules and other target proteins. We have developed ThermoFluor in an
automated workstation format using 384 well assay plates, with integrated data
processing and database connectivity. We intend to continue to develop
ThermoFluor to incorporate miniaturization technology and enhance throughput.

  ThermoFluor is able to directly discover leads for targets with unknown
biological function, including the thousands of new targets being identified
through genome sequencing. Conventional high-throughput screening techniques
rely on readouts that reflect specific biological activities and thus are
generally time-consuming to set up and difficult to employ in the case of
targets with unknown biological function. We believe that ThermoFluor
significantly shortens the time required for high throughput screen development
and compound library screening from two to six months for conventional assays
to one month or less. This time savings results from the uniform ThermoFluor
assay approach, as opposed to the need to develop a custom assay for each new
conventional high-throughput screen. The ThermoFluor assay developed and used
for high throughput screening can also be applied during lead generation and
optimization, thus in many instances avoiding the need to set up secondary
biochemical assays and offering additional time and cost savings in the
discovery process. The technology is also portable and scalable.

  We can also complement ThermoFluor with additional capabilities in high-
throughput screening using conventional robot-assisted receptor binding or
enzyme assays.

 DirectedDiversity Probe Library

  In order to initiate our DiscoverWorks discovery process, we have constructed
a DirectedDiversity Probe Library incorporating more than 200,000 individually
synthesized "drug-like" compounds designed to include the following desirable
properties:

  . diversity of chemical structures;

  . comprehensive representation of all 3-D molecular shapes that we believe
    are useful for targeting drug binding sites on proteins; and

  . possession of the structural and physicochemical features commonly found
    in orally-active, small molecule marketed drugs.

  As opposed to the compound libraries used by many pharmaceutical companies,
which may include compounds of unknown structure or which may lack certain
desired characteristics for drug candidates, our Probe Library has been
carefully assembled to reflect the parameters above, thereby optimizing its
value as a screening library. Prior to including a compound in our Probe
Library, we extensively analyze and accumulate information on the compound,
including a comprehensive set of approximately 500 molecular descriptors. The
Probe Library includes sub-libraries directed toward serine and
metalloproteases, GPCRs and several other enzyme receptor classes with broad
therapeutic relevance.

 DirectedDiversity Synthetically Accessible Library

  To complement our Probe Library, we have generated a Synthetically Accessible
Library of approximately 2.5 billion compounds that are analogs of the
compounds in our Probe Library. Each of the compounds in the Synthetically
Accessible Library can be generated in physical form using automated chemistry
synthesis protocols developed and verified in our laboratories. For a typical
optimization cycle, we select a focused library of approximately 1,000
compounds from our Synthetically Accessible Library and synthesize them within
two to three weeks. As with our Probe Library, each of the compounds in our
Synthetically Accessible Library is indexed using a comprehensive set of
approximately 500 molecular descriptors.

                                       36
<PAGE>

 DirectedDiversity Chemi-informatics Software and Databases

  Using the 500 molecular descriptors referred to above and intelligent
algorithms, our patented DirectedDiversity chemi-informatics software helps
assure that properties important in drug development, such as potency,
selectivity, bio-availability and minimal toxicity, are factored into compound
selection for inclusion in a focused library, and more broadly the Prototype
NCE Lead generation and further lead optimization processes. Starting with hits
from the Probe Library, our chemists use our proprietary software and graphics
interfaces to rapidly retrieve thousands of compounds from our Synthetically
Accessible Library which conform to the range of desired properties. Each
selected compound can then be synthesized for subsequent biological testing.
Through our ability to rapidly select and synthesize a focused library of
compounds in each optimization cycle, our chemists can test many optimization
hypotheses in parallel, with all information tracked and captured by the
DirectedDiversity software for use in subsequent iterations and other discovery
programs. The combination of the detailed chemical description of each of our
compounds and the biological screening data that is generated provides a
valuable drug property database for lead generation and further optimization.

  We believe our DiscoverWorks process is more efficient than traditional
methods due to the quality of both the compounds in our Probe Library and the
compounds from our Synthetically Accessible Library that we synthesize,
combined with the selection and feedback capabilities of our DirectedDiversity
chemi-informatics software and drug property databases. In contrast,
traditional approaches to library generation using combinatorial chemistry are
less directed and information-rich. Moreover, generation of leads derived from
conventional screening hits may require the development of novel synthetic
procedures to make analogs, either because synthetic methods for generating
analogs have not previously been developed or the hit has an unknown chemical
structure which must be first determined in order to develop analogs.
Accordingly, an unnecessary expenditure of time and effort may be required in
the discovery process, and the compounds thereby produced may lack required
properties for orally active drugs. We estimate that a Prototype NCE Lead can
typically be generated using our technology in as little as six to nine months,
with five cycles of focused library design, synthesis and biological testing.
This compares to an estimated traditional lead generation process of 12 to 24
months which often requires more synthesis and testing cycles.

 Automated Chemical Synthesis Technologies

  We have a broad repertoire of modern parallel synthetic technologies, which
enables us to synthesize approximately 10,000 compounds per month. We believe
this compound production is sufficient to support multiple concurrent discovery
programs and can be readily expanded.

 Structure-Based Drug Design Technology

  We have integrated into our DiscoverWorks platform structure-based drug
design technology that uses X-ray crystallography to directly visualize how
lead compounds bind to a target protein. Structure-based drug design allows the
atom-by-atom modification of leads to produce chemically novel compounds with
high potency and specificity toward a given target protein. We have established
a state-of-the-art facility for protein production, crystallization, X-ray
crystallography and computational chemistry to carry out 3-D structure
determination of target proteins and their bound complexes with lead compounds.
To date, our scientists have carried out in excess of 100 structure
determinations of protein complexes in our laboratories. The integration of
DirectedDiversity technology with structure-based drug design allows us to
automate and multiplex the rational design and chemical synthesis of compounds,
enabling the simultaneous investigation and optimization of multiple drug
properties.

  We recently joined a consortium of major pharmaceutical companies who have
formed the Industrial Macromolecular Crystallography Association (IMCA) and
developed a facility for collecting X-ray diffraction data using the unique
properties of the Advanced Photon Source at the Argonne National Laboratory.
The Advanced Photon Source is among the most brilliant X-ray sources in the
world and greatly extends our capabilities for determining new structures and
rapidly carrying out structure-based design programs. By

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<PAGE>

joining IMCA, 3DP becomes the only biotechnology company that currently has
direct and guaranteed access to synchrotron X-ray data collection facilities.
Other members of IMCA include Merck & Co., Glaxo-Wellcome, SmithKline Beecham,
Pharmacia, Eli Lilly and Company, Schering-Plough, Pfizer, Warner-Lambert,
Abbott Laboratories, Bristol-Myers Squibb, and Procter & Gamble.

 Chemistry-Driven Target Validation

  Our chemistry-driven target validation process relies on the any-target
capability of our ThermoFluor screen, coupled with our ability to generate
Prototype NCE Leads rapidly. We have two methods of chemistry-driven target
validation: (1) ThermoFluor screening of novel, unvalidated target proteins
with reference libraries of compounds designed specifically to classify
biochemical function and pharmacological properties of target proteins and (2)
use of DiscoverWorks technology to rapidly produce potent and specific leads to
assess and validate the significance of a new target protein in disease models.
By capitalizing on our ability, using DiscoverWorks, to produce a Prototype NCE
Lead in less time than with conventional drug discovery we can perform
chemistry-driven validation of novel genomics targets early in the discovery
process. This provides an advantage compared to the more prolonged and
resource-intensive strategies of validating target proteins either by chemistry
driven validation as performed in conventional drug discovery, or by biological
means of validation.

 GPCR Technology Program

  G-protein coupled receptors, or GPCRs, are an important class of target
proteins that exist on the surface membrane of all cells, and are associated
with a wide range of therapeutic categories, including asthma, inflammation,
obesity, cancer, and cardiovascular, metabolic, gastrointestinal and central
nervous system diseases. There are estimated to be over 1,000 GPCRs in the
human genome with potential therapeutic utility. GPCRs have been historically
valuable drug targets, but to date there are less than 200 well-characterized
GPCRs with known ligands (compounds which specifically bind to the GPCR), of
which only half are currently targets of commercial drugs. To date, the
industry has been unable to utilize an important drug discovery tool,
structure-based drug design using x-ray crystallography, to develop drugs
targeting either novel or well-characterized GPCRs. This is due to the
inability of the industry to crystallize GPCRs and thereby derive three-
dimensional X-ray structures that provide a direct view of the drug-binding
site.

  Since 1995, we have been working to crystallize and determine the 3-D
structure of GPCRs. We believe that successful GPCR structure determination
will constitute a major breakthrough in drug discovery for this key group of
drug target proteins. Currently, it is estimated that the less than 100 GPCRs
targeted by commercial drugs account for over $20 billion in annual worldwide
drug sales. These include major drug classes such as antipsychotics,
antihistamines, beta-blockers, anti-migraine drugs, anti-ulcer drugs and
analgesics, and blockbuster drugs such as Claritin, Zantac, Cozaar, Zyprexa and
Tenormin. Both the characterized GPCRs with known ligands but for which no
commercial drugs have yet been developed, and the approximately 1,000
uncharacterized GPCRs with possible therapeutic utility, represent potentially
important drug targets.

  Our GPCR 3-D structure determination program has four principal milestones:

  1. production of the large amounts of pure GPCR protein required to make
     crystals;

  2. production of crystals of the target GPCR that will provide high quality
     X-ray structural data;

  3. collection of high quality X-ray structural data from such crystals; and

  4. computer processing of such X-ray structural data to determine the 3-D
     molecular structure of such GPCR in order to facilitate structure-based
     drug design.


                                       38
<PAGE>

  To date, we have been successful in achieving the first three milestones, and
we are progressing toward the final objective for our initial GPCR target, the
B2-adrenergic receptor, which has an important role in asthma and central
nervous system diseases, and has been the subject of extensive biochemical
studies. We have successfully developed proprietary protein expression and
refolding technology to produce large amounts of GPCRs for discovery efforts. A
patent application has been filed for a component of this technology and we
intend to file additional patent applications for other components of this
technology. Our scientists have subsequently been able to produce stable, high-
quality crystals of the B2-adrenergic GPCR that have provided high-
resolution X-ray diffraction data, which we believe will allow for the first
time the determination of the 3-D molecular structure of a GPCR target.

  GPCR Drug Discovery: We believe our GPCR technology presents a novel
opportunity to exploit this broad and important range of drug targets,
benefiting both our internal discovery programs and pharmaceutical and
biotechnology company collaborations. We believe that our GPCR technology, on
the basis of our anticipated successful 3-D molecular structure determination,
will enable for the first time the application of structure-based drug design,
based on actual molecular target protein structure, for both existing and new
GPCR targets leading to:

  . more precisely designed drugs with fewer side effects than many existing
    GPCR drugs, such as antipsychotics;

  . drugs with lower addiction risk than existing GPCR drugs for pain, such
    as morphine;

  . small molecule, orally active drugs for GPCR targets for which the only
    currently known ligands are peptides or proteins that, as drugs, would
    need to be given by injection; and

  . drugs targeting the approximately 1,000 identified GPCRs which are
    potentially therapeutically relevant, but for which ligands have not yet
    been discovered.

  To expedite drug discovery using GPCR target proteins, our current Probe
Library contains more than 20,000 synthesized compounds which have been
designed based upon structural features of commercially successful GPCR drugs,
for utility against GPCR target proteins. In addition, our Synthetically
Accessible Library contains a corresponding collection of approximately 200
million analogs of these compounds.

  GPCR Structural Genomics: If we successfully determine the B2-adrenergic
GPCR structure, we plan to create a database containing model 3-D structures of
all other GPCRs whose gene sequences have been identified in the human genome.
We believe that this "3-D homology database" will facilitate discovery of new
drugs that act at any of the estimated 1,000 uncharacterized GPCRs that are
potential new drug target proteins. In addition, we plan to expand the database
and enhance its accuracy and utility for drug discovery, through the 3-D
structure analysis of additional diverse GPCR target proteins, GPCRs complexed
with different types of receptor ligands, and GPCRs complexed with various
signal transduction proteins. We will utilize this structural genomics database
for our internal programs, and we will offer access to this database to
collaborative partners.

  Our membership in the IMCA provides access to a facility for collecting X-ray
diffraction data using the unique properties of the Advanced Photon Source, a
dedicated synchrotron X-ray source located at the Argonne National Laboratory.
Access to this facility greatly extends our capabilities for determining new
GPCR structures and rapidly carrying out structure-based design programs.

Our Drug Discovery Collaborations

  We seek to enter into discovery collaborations and joint discovery programs
with pharmaceutical, biotechnology, agrochemical and veterinary medicine
companies. These arrangements can take various forms ranging from comprehensive
"gene-to-clinic" programs to licensing agreements for portions of our
libraries, or specific R&D arrangements that utilize our technologies for lead
identification, lead generation and/or lead optimization purposes. Our
technologies are flexible and have applicability for virtually any therapeutic
area.

                                       39
<PAGE>

  Our collaboration strategy is aimed at capitalizing on the trend within the
pharmaceutical industry to outsource major components of the drug discovery
process that can be more effectively provided by companies that have unique
and/or focused technologies. We also seek collaborations with biotechnology
companies that may lack the chemical screening, synthesis and/or optimization
capabilities that our technology platform offers. These collaborations allow us
to leverage the investment we have made in our technology platform and provide
funding for our internal drug development efforts. A summary of our drug
discovery collaborations is provided below.

 DuPont Pharmaceuticals Company

  In February 2000, we entered into a collaboration with DuPont Pharmaceuticals
Company, or DuPont Pharmaceuticals, to use our DirectedDiversity technology to
assist DuPont Pharmaceuticals in the discovery of new human and animal drug
compounds for specific biological targets. The initial term of the
collaborative discovery and lead optimization agreement is until December 31,
2001, subject to extension by DuPont. Under our agreement, we will generate
custom combinatorial chemistry libraries based on molecules and information
provided by DuPont Pharmaceuticals and will optimize those molecules into
preclinical drug candidates. DuPont Pharmaceuticals is responsible for
preclinical and clinical development, and marketing and sales of the resulting
products. During the initial term of the agreement, we received a technology
access fee and are eligible to receive research funding. We could also receive
additional milestone payments for each product developed and we are entitled to
receive royalties on sales of licensed products. We have agreed not to work
with anyone other than DuPont on compounds acting through the targets of the
research program during the term of the program and for one year thereafter.

  DuPont Pharmaceuticals may terminate the agreement upon 90 days notice,
provided they pay the balance of any financial support due for the remainder of
the term of the research program.

  We have also entered into a separate agreement granting DuPont
Pharmaceuticals an option for a nonexclusive license to use our
DirectedDiversity patents in support of their internal and collaborative
research programs.

 Boehringer Ingelheim Pharmaceuticals, Inc.

  Effective December 1999, we entered into a collaboration agreement with
Boehringer Ingelheim Pharmaceuticals, Inc., or BIPI, to use our
DirectedDiversity technology to assist BIPI in the discovery of new drugs for
specific biological targets in humans. The initial term of our collaboration is
two years, subject to annual extensions by BIPI. Under our agreement, we have
agreed to generate custom combinatorial chemistry libraries based on molecules
and information provided by BIPI and will optimize those molecules into
preclinical development candidates. BIPI is responsible for preclinical and
clinical development, and marketing and sales of the resulting products. During
the initial term of the agreement, we will receive payments for technology
access and research funding totaling $3.25 million. We may also receive
milestone payments of up to $4.8 million and will receive royalties on sales of
resulting products.

  BIPI may terminate the agreement upon 30 days' written notice provided it
pays us, in most circumstances, an early termination fee if it terminates the
agreement prior to the end of any term.

 Aventis Crop Protection GmbH

  In October 1999, we entered into a collaboration with Hoechst Schering AgrEvo
GmbH, now a part of Aventis Crop Protection GmbH, or Aventis, to use our
DirectedDiversity technology to assist Aventis in the discovery of compounds
applicable to plant and pest management and animal health. The initial term of
our agreement is two years. Under our agreement, we have agreed to provide
libraries of diverse compounds to

                                       40
<PAGE>

Aventis, and will use our DirectedDiversity technologies to optimize active
compounds identified from Aventis' screening of the compound libraries. Aventis
will receive the exclusive worldwide right to commercialize products in the
fields of plant and pest management and animal health discovered during the
course of the collaboration. We will retain rights for non-agrochemical uses of
compounds. During the initial term of the agreement, we will receive payment
for delivery of compounds, research and development funding and license fees
totaling $3.6 million. We will also receive royalties on sales of resulting
products. If we enter into a business collaboration with a company that has
substantial activity in the plant and pest management or animal health field
and is a significant competitor of Aventis, Aventis may either terminate our
agreement or require us to take reasonable actions to ensure that Aventis'
confidential or proprietary information is not disclosed to such company.

 E.I. DuPont de Nemours

  In October 1998, we entered into a collaborative research and license
agreement with the Agricultural Products Division of E.I. DuPont de Nemours, or
DuPont, pursuant to which we are using our DirectedDiversity chemi-informatics
software and Synthetically Accessible Library to assist DuPont in the discovery
and development of new agrochemicals. We have received a technology licensing
fee, and we are eligible to receive additional technology licensing fees,
potential milestone payments and royalties on the sale of any products
developed through this collaboration. We have advanced in this collaboration
from initial hits to more potent compounds identified from our libraries.

  The initial term of the agreement is three years. DuPont may terminate the
research program under the agreement at any time, but such termination will not
affect either DuPont's obligation to pay us license fees under the agreement or
our obligation to provide DuPont with access to DirectedDiversity workstations.

 Heska Corporation

  In December 1997, we entered into a research and license agreement with Heska
Corporation, or Heska, to use our DirectedDiversity technology to assist in the
discovery and development of new veterinary therapeutic agents. Under our
agreement, we also granted Heska the exclusive worldwide right to license the
veterinary therapeutic products developed for sale worldwide. Our agreement
originally had a two year-term expiring in December 1999 and has been extended
until July 2000. Under our agreement, we have received up-front payments and
research funding and could receive additional milestone payments and royalties
for products developed. Pursuant to this collaboration, candidate compounds
have been identified and Prototype NCE leads have been generated. We are also
entitled to royalties on sales of products licensed under the agreement.

 BioCryst Pharmaceuticals, Inc.

  In October 1996, we entered into a research collaboration with BioCryst
Pharmaceuticals, Inc., to share resources and technology to develop inhibitors
of key serine proteases that represent promising targets for inhibiting the
activation of "Complements" (plasma proteins that work to eliminate
microorganisms and other antigens from tissues and blood). This pathway plays a
major role in mediating a broad range of immunological diseases. In June 1999,
we updated and renewed our original agreement to concentrate on selected
complement enzymes as targets for the design of inhibitors. Under our
agreement, we are each responsible for our own research costs. If a drug
candidate emerges as a result of our joint research, we will then negotiate the
product development and commercialization rights and responsibilities. Under
this collaboration, we have generated Prototype NCE Leads which are currently
being optimized further through in vivo evaluation and for which we have filed
patent applications. The initial term of the agreement is one year, subject to
automatic annual renewal. Either of us may terminate the agreement at any time
upon 60 days written notice.

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<PAGE>

Our Internal Product Pipeline

  We have developed a promising pipeline of small molecule, orally active
development candidates in the areas of cardiovascular disease and oncology. Our
current strategy with respect to our internal pipeline is to advance compounds
to late-stage pre-clinical or early stage clinical trials, and then to
outlicense such compounds to pharmaceutical companies for further development
and commercialization. We believe that by focusing our efforts on pre-clinical
development and the early stages of clinical development, we can use our
resources on the stages of drug research and development where we can add the
greatest value.

  As of May 23, 2000, we had nine internal pipeline programs in various stages
of discovery and development. 3DP-4815, our most advanced cardiovascular
compound, is an oral thrombin inhibitor presently in Phase 1 clinical trials.
Our most advanced oncology compound, which also has cardiovascular utility, is
an orally bioavailable urokinase inhibitor. We have recently out-licensed the
urokinase inhibitor program to Schering AG, Germany. As illustrated below, many
of our development candidates have utility across therapeutic areas.


<TABLE>
<CAPTION>
    Molecular Target      Therapeutic Area           Indication                    Status
-----------------------------------------------------------------------------------------------
  <S>                     <C>               <C>                              <C>
         Thrombin          Cardiovascular               Thrombosis              Phase 1 Trial
-----------------------------------------------------------------------------------------------
        Urokinase             Oncology                 Solid Tumors             Pre-clinical
     (out-licensed to      Cardiovascular      Restenosis, Atherosclerosis
  Schering AG, Germany)
-----------------------------------------------------------------------------------------------
     AvB3/AvB5                Oncology                 Solid Tumors             Pre-clinical
                           Bone Disorders              Osteoporosis
                           Cardiovascular               Restenosis
-----------------------------------------------------------------------------------------------
          C1s-1             Inflammation        Lupus, Autoimmune Diseases      Pre-clinical
    (in collaboration      Cardiovascular             Bypass Surgery
      with BioCryst)          Pulmonary         Adult Respiratory Distress
                                                      Syndrome (ARDS)
-----------------------------------------------------------------------------------------------
           FXa             Cardiovascular               Thrombosis           Prototype NCE Lead
-----------------------------------------------------------------------------------------------
          PAI-1            Cardiovascular        Adjunct to tPA Therapy,     Prototype NCE Lead
                              Oncology        Prophylaxis of Cardiovascular
                                                         Disease
                                                       Solid Tumors
-----------------------------------------------------------------------------------------------
        hdm2 (mdm)            Oncology          Adjunct to Chemotherapy &         Screening
                                                        Radiation
-----------------------------------------------------------------------------------------------
          mmp-2               Oncology                 Solid Tumor                Screening
                           Cardiovascular      Restenosis, Congestive Heart
                                                 Failure, Atherosclerosis
-----------------------------------------------------------------------------------------------
      VEGF Receptor           Oncology                 Solid Tumor                Screening
</TABLE>


  To date, our internal program pipeline has been based on biological targets
in high-value therapeutic areas that are well known in the pharmaceutical
industry, and have either been recently validated and/or have proved difficult
targets for the industry to develop into commercially attractive products. We
believe that our discovery success to date, in particular our progress with
historically difficult targets such as thrombin, PAI-1 and AvB3/AvB5
demonstrate the capabilities of our technology platform.

  The worldwide market for pharmaceuticals is approximately $60 billion
annually and is expected to grow substantially given expectations of improved
therapies which will arise from genomics and other scientific advances and the
demographics of an aging and longer-living global population. Despite the scale
of R&D

                                       42
<PAGE>

operations within large pharmaceutical companies, most will continue to in-
license a significant portion of the drugs that they eventually sell. The
market for pre-clinical/early clinical candidates from our internal programs is
therefore significant and is expected to continue to grow.

 Cardiovascular Disease and Oncology Discovery Programs

  Our initial cardiovascular disease focus is on the enzymes of the blood
coagulation cascade. This focus is derived from our expertise in serine
protease drug targets which are well-suited for structure-based drug design and
our other DiscoverWorks capabilities. We have assembled a portfolio of
molecular targets involved in such cardiovascular conditions as thrombosis,
restenosis (reocclusion of blood vessels), angina and atherosclerosis, and
which are also involved in the vascular remodeling (changes in blood vessel
structure) and angiogenesis (the formation of blood vessels that are required
to feed a growing tumor) which underlie the progression of cancer. Our
principal cardiovascular targets include inhibitors of thrombin, FXa and PAI-1.

  Our anticancer efforts are aimed at inhibiting cellular processes that
facilitate tumor progression and angiogenesis for a majority of cancer types,
which we believe may result in broadly useful anticancer agents. These cellular
processes include cell activation, proliferation and migration, adhesion and
focal proteolysis which are involved in metastasis (the spread of tumor cells
away from the original tumor), and angiogenesis. In addition, we are initiating
programs that target molecules involved in cell-cycle regulation and apoptosis
(cell death). Many of the agents under development are anticipated to have
crossover utility in cardiovascular disease. Our principal oncology targets
include urokinase, AvB3/AvB5 integrins, hdm2 (mdm2) and mmp-2.

 Key Cardiovascular Disease Drug Candidates

  Oral Thrombin Inhibitor: Our most advanced cardiovascular drug discovery
program focuses on the development of potent, selective, and orally active
inhibitors of thrombin for arterial and venous thrombosis. The only oral
anticoagulant currently marketed is warfarin (Coumadin and generic versions).
We have designed our compounds to work by a different mechanism of action from
warfarin, which we believe will provide an enhanced safety profile without the
need for monitoring.

  Following our initial work on the thrombin inhibitor program, in June 1997 we
entered into a license agreement with Wyeth-Ayerst Laboratories for the further
development and marketing of our small molecule thrombin inhibitors. During the
following two years, we collaborated with Wyeth-Ayerst on research and
development activities. On June 1, 1999, the parties agreed to terminate the
agreement with all rights returning to us. We believe that the termination was
influenced by Wyeth-Ayerst's shift in focus away from the cardiovascular
therapeutic area.

  3DP-4815 was discovered through the close integration of structure-based drug
design and DirectedDiversity combinatorial chemistry and represents a new class
of orally bioavailable thrombin inhibitors. 3DP-4815 is a low molecular weight,
homogenous, achiral compound that potently and reversibly inhibits thrombin
with excellent specificity. 3DP-4815 is orally bioavailable and efficacious in
several animal models. We filed an Investigatory New Drug Application ("IND")
with the FDA for 3DP-4815 in December 1999 and initiated Phase 1 clinical
trials in January 2000. Unlike many agents, where the beneficial effect is
first indicated in extensive Phase 2 trials to establish efficacy in the
targeted disease, the effectiveness of agents in inhibiting blood clotting is
readily measured in Phase 1 trials on healthy volunteers. To date, in Phase 1
3DP-4815 appears to exhibit good safety and tolerability characteristics.

  Throughout the pre-clinical development phase for 3DP-4815, we have actively
pursued the discovery of additional compounds in the thrombin inhibitor
program, and have identified novel classes of compounds that differ
significantly in their chemical structures and pharmacokinetic properties from
3DP-4815. These may offer the opportunity for backups to 3DP-4815, or
additional therapeutic types of oral antithrombotic agents differentiated by
their pharmacokinetic and other properties.


                                       43
<PAGE>

  PAI-1 Antagonist: The pharmaceutical industry in the last decade has
recognized the potential commercial importance of an antagonist of plasminogen
activator inhibitor-1 (PAI-1) as a prophylactic thrombolytic, but the target
has proved difficult for traditional high throughput screening and discovery
efforts. PAI-1 has also been identified as an independent prognostic factor
associated with decreased long term survival for metastatic cancer, and
therefore PAI-1 antagonists may be of use in treating cancer. We have
discovered novel antagonists of PAI-1 through screening our Probe Library using
ThermoFluor, and are currently performing chemical optimization of the lead
series.

 Key Oncology Disease Drug Candidates

  Urokinase Inhibitor for Cancer Therapy: Our most advanced oncology discovery
program targets the inhibition of urokinase plasminogen activator (uPA or
Urokinase). An inhibitor of uPA provides a new therapeutic approach to cancer
treatment following surgical removal of tumors, through its ability to inhibit
angiogenesis and metastasis. An expanding body of evidence supports the
identification of uPA as a target for agents that control the spread and growth
of cancer. In addition, uPA has been identified as a target for agents that
prevent restenosis.

  Urokinase is a serine protease enzyme that is related to thrombin, but has a
different active site structure and enzymatic specificity. Our urokinase
inhibitor discovery program draws substantially from the knowledge base
developed in our thrombin inhibitor program. We have advanced our urokinase
inhibitor program using focused libraries and structure-based drug design, and
have discovered proprietary, potent, orally active, small molecule inhibitors
of urokinase. Our pre-clinical lead compounds have been shown to inhibit tumor
cell invasion associated with prostate cancer and melanoma and vascular smooth
muscle cell migration without causing cytotoxic effects, and to have high oral
bioavailability in in vivo models. We believe that our urokinase inhibitor has
potential application as a stand alone agent or in combination with other
compounds under development or currently marketed as part of a multi-drug
therapy regimen.

  In May 2000, we entered into a license and research agreement with Schering
AG, Germany in which Schering AG, Germany obtained, for human therapeutic uses,
exclusive worldwide rights to our urokinase inhibitor compounds. Under our
agreement, we will be responsible for further research and optimization of the
compounds and Schering AG, Germany will be responsible for development,
marketing and sales of the resulting products. During the initial two year
research and development term we will receive payments for research funding
totaling $5 million. We are also eligible to receive milestone payments of up
to approximately $23 million for the first product developed in a therapeutic
area, and we are eligible to receive further milestones for additional
therapeutic areas. We will also receive royalties on resulting products. After
the initial research term, Schering AG, Germany may terminate the agreement at
any time on 90 days' notice. In conjunction with the agreement, we issued
625,000 shares of our series D preferred stock to an affiliate of Schering AG,
Germany for $5 million.

  Antagonists of AvB3 and AvB5 Integrins: The integrin adhesion
receptors for vitronectin and osteopontin, AvB3 and AvB5 are essential
modulators of angiogenesis and endothelial cell adhesion and have been
implicated in tumor angiogenesis, atherosclerosis, restenosis and osteoporosis.
We have applied our proprietary technology to the discovery of potent and
selective small molecule antagonists of AvB3 and AvB5 and discovered
several independent lead series of compounds. Our lead compounds have been
shown to inhibit both AvB3 and AvB5 dependent cell adhesion,
endothelial and smooth muscle cell migration, and to lack cytotoxic effects.

 Other Internal Discovery Programs

  In addition to programs in cardiovascular disease and oncology, we plan to
use our G-Protein Coupled Receptor technology as the basis for initiation of
additional programs for central nervous system and metabolic diseases.

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<PAGE>

Intellectual Property

  Protection of our intellectual property is a strategic priority for our
business. Our ability to protect and use our intellectual property rights in
the continued development and commercialization of our technologies and drug
candidates, operate without infringing the proprietary rights of others and
prevent others from infringing on our proprietary rights is crucial to our
continued success. We will be able to protect our proprietary rights from
unauthorized use by third parties only to the extent that our proprietary
rights are covered by valid and enforceable patents, trademarks or copyrights,
or are effectively maintained as trade secrets, know-how or other proprietary
information. We currently rely on a combination of patents and pending patent
applications, some of which we license and most of which we own, trademarks,
copyrights, trade secrets, know-how and proprietary information to protect our
interests in continuing to develop and commercialize our technologies and drug
candidates.

  We devote significant resources to obtaining, enforcing and defending
patents, as well as developing and protecting our other proprietary
information. Our comprehensive patent strategy is to augment our broad
proprietary portfolio by continuing to actively seek patents for our
technologies and compounds. We have already obtained patents or filed patent
applications on a number of our technologies and on certain of the compounds we
have developed. We also have certain proprietary trade secrets and know-how
that are not patentable or for which we have chosen to maintain secrecy rather
than file for patent protection.

  We have taken security measures to protect our trade secrets, proprietary
know-how and technologies and confidential information and continue to explore
further methods of protection. We have executed confidentiality agreements with
our employees and consultants upon the commencement of an employment or
consulting arrangement with us. These agreements require that all confidential
information developed or made known to the individual by us during the course
of the individual's relationship with us be kept confidential and not disclosed
to third parties. These agreements also provide that inventions conceived by
the individual in the course of rendering services to us shall be our exclusive
property. We also attempt to limit access to, and dissemination of, our
confidential information.

  Our intellectual property estate is as follows:

 Drug Discovery Program Patents

  We have eight issued U.S. patents, one Australian patent, one New Zealand
patent, and one South African patent covering our drug discovery program
inventions.

  The patents cover various compounds, methods of making compounds,
pharmaceutical compositions, and methods of using the compounds for inhibiting
proteases and for treating particular disease states. The proteases that are
inhibited include, but are not limited to, thrombin, factor Xa, urokinase,
complement and other protease inhibitors, integrins and certain other targets.
Disease states include cardiovascular diseases and cancer as described in the
section entitled "Our Internal Pipeline." The U.S. patents are directed to
distinct families of novel compounds.

  We also have 19 pending U.S. patent applications, two of which have received
notice of allowance from the U.S. patent office, and 86 pending foreign patent
applications also covering compounds, methods of making compounds,
pharmaceutical compositions, and methods of using the compounds for inhibiting
proteases and for treating particular disease states.

  We currently do not have any issued patents for any of our lead compounds for
any of our internal programs and we may be unable to obtain any issued patents
for any patent applications we have filed or may file in the future for such
compounds.

 DirectedDiversity Combinatorial Chemistry Process Patents

  Our DirectedDiversity technology is protected by four issued U.S. patents.
Collectively, these patents provide apparatus and process patent coverage for
the automated, semi-automated and/or manual computer directed selection,
synthesis, testing, and refinement of compounds in chemical libraries,
including the computer codes that allow implementation of this process.

                                       45
<PAGE>

  In October 1995, we were issued our first U.S. patent covering our
DirectedDiversity technology. The patent covers the use of semi-automated
feedback control for refining the properties of combinatorial libraries for all
applications in which suitable properties can be measured (e.g., drugs,
herbicides, paints, scents, solvents, advanced materials, etc.). A second U.S.
patent related to our DirectedDiversity technology was issued in December 1996
covering the automatic generation of new drug leads through computer-
controlled, iterative robotic synthesis and analysis of chemical libraries. Our
third U.S. patent, issued in November 1997, covers additional features of our
DirectedDiversity technology, including inventions related to computer software
for semi-automatic and automatic generation of compounds of interest. We
received our fourth U.S. patent for DirectedDiversity, covering the generation
of new drug leads through computer-controlled, iterative robotic synthesis and
analysis of chemical libraries, in May 1999.

  We also have two Australian patents and two Israeli patents covering our
DirectedDiversity technology described above.

  Additionally, we have eight pending U.S. patent applications (one of which
received a notice of allowance from the U.S. Patent Office) and 18 pending
foreign patent applications. In addition to our DirectedDiversity technology
described above, these patent applications cover novel methods for handling
large multidimensional data sets. Within our DirectedDiversity technology,
these methods are utilized for visualizing chemical compound
similarity/dissimilarity, for lead identification, and for lead optimization.
The methods for handling large multi-dimensional data sets have applications
beyond our DirectedDiversity technology. Two of these pending U.S. patent
applications and one of these pending foreign patent applications cover
apparatuses, processes, and software inventions for quickly and efficiently
searching large chemical libraries, as well as other inventions relating to
data mining.

 ThermoFluor Patents

  We have two U.S. patents covering our ThermoFluor screening and protein
characterization technology, process and instruments. One U.S. patent covers
methods for screening compounds for binding to proteins and nucleic acids, and
the other covers an instrument for implementing our patented methods for
screening compounds.

  We also have nine pending U.S. patent applications and nine pending foreign
patent applications covering this technology. The pending applications cover
methods for screening for biochemical conditions that stabilize proteins and
nucleic acids, methods for screening for biochemical conditions that facilitate
protein crystallization, methods for screening for biochemical conditions that
promote recombinant protein folding, and methods for screening for lead
compounds that bind to a target receptor. The pending applications also cover
"functional genomics," that include methods for screening proteins of unknown
function in order to determine the function of newly discovered proteins.

  Under the terms of a settlement agreement with Scriptgen Pharmaceuticals,
Inc., we acquired a limited, non-exclusive license to Scriptgen's ATLAS (Any
Target Ligand Affinity Screen) assay technology and Scriptgen was granted a
limited, nonexclusive license to the method claims of our ThermoFluor assay
technology. Under this agreement, we paid Scriptgen $0.5 million and will make
two additional payments of $0.5 million in September 2000 and March 2001. This
agreement restricts us, for a period of three years, from specified activities
in connection with screening drugs useful for treating "infection" (defined as
relating to drugs whose principal aim is to treat or cure infectious disease in
humans). As part of this settlement agreement, until March 7, 2003, we are
precluded from using our ThermoFluor screening technology in the Hepatitis C
Virus "infection" area as part of collaborative agreements or as part of our
internal drug programs. In addition, we are precluded from using our
ThermoFluor screening technology as part of more than one collaboration
agreement in the area of "infection" until March 7, 2003, and such
collaborative agreement must be limited to a maximum of 3 anti-viral targets.
The settlement with Scriptgen, however, does not restrict use of our
ThermoFluor screening technology by us for our internal drug discovery efforts,
or for purposes of collaborative agreements outside the area of "infection",
other than the limitation with respect to Hepatitis C Virus "infection".


                                       46
<PAGE>

 GPCR Technology Estate

  We have made significant discoveries in the area of GPCR (G-Protein Coupled
Receptor) technology which are useful for drug discovery. One patent
application concerning a component of this technology has been filed and we
intend to file additional patent applications for other components of this
technology.

 U.S. Government Grants

  We have been awarded a number of U.S. government grants to fund a variety of
internal scientific programs and undertake exploratory research. Pursuant to
these grants, we retain ownership of all intellectual property and commercial
rights generated during these projects, subject to a non-exclusive, non-
transferable, paid-up license to practice, for or on behalf of the United
States, inventions made with federal funds. This license is retained by the
U.S. government as provided by applicable statutes and regulations. We have
received the following award and government grants from the National Institutes
of Health (Small Business Innovative Research "SBIR" grants) and the National
Institute of Standards and Technology (Advanced Technology Program "ATP" award)
during the past several years that have totaled approximately $4.2 million:

<TABLE>
<CAPTION>
                                                                 Grant/Award
Grant/Award Title                                                    Date
-----------------                                               --------------
<S>                                                             <C>
Automated Receptor Screening by Thermal Physical Assays
 (SBIR)(Phase 1)...............................................       May 1995

Crystallization and Structural Determination of G-Coupled
 Protein Receptors (ATP).......................................    August 1995

Protein Engineering by Thermal Physical Assays (SBIR)(Phase
 1)............................................................ September 1995

Automated Receptor Screening by Thermal Physical Assays
 (SBIR)(Phase 2)............................................... September 1996

Four Helix Bundle Analog of a G-Protein Coupled Receptor
 (SBIR)(Phase 1)...............................................  February 1999

Expression of G-Protein Coupled Receptors for Structure
 Determination (SBIR)(Phase 1)................................. September 1999

Four Helix Bundle Analog of a G-Protein Coupled Receptor
 (SBIR)(Phase 2)...............................................     March 2000
</TABLE>

  The sponsoring agencies make decisions annually on continuations of multi-
year awards based on the availability of funds from the United States Congress
and our satisfactory performance under each award or grant.

Government Regulation

  The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements on the development,
manufacture and marketing of pharmaceutical candidates. These agencies and
other federal, state and local entities regulate research and development
activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record-keeping, approval, promotion and
advertising of our drug candidates and those of our collaborative partners.
Obtaining marketing approvals and subsequently complying with ongoing statutory
and regulatory requirements are costly and time-consuming. Any failure by us or
our collaborators, licensors or licensees to obtain, or any delay in obtaining,
regulatory approvals or in complying with other requirements could adversely
affect the commercialization of drug candidates and our ability to receive
upfront payments, milestone payments or royalty revenues.

  The steps required before a new drug candidate for humans may be distributed
commercially in the U.S. generally include:

  . conducting appropriate preclinical laboratory evaluations of the drug
    candidate's chemistry, formulation and stability, and preclinical studies
    to assess the potential safety and efficacy of the product candidate;

  . submitting the results of these evaluations and tests to the FDA, along
    with manufacturing information and analytical data, in an investigational
    new drug application (IND);

                                       47
<PAGE>

  . making the IND effective after the resolution of any safety or regulatory
    concerns of the FDA;

  . obtaining approval of Institutional Review Boards, or IRBs, to introduce
    the drug into humans in clinical studies;

  . conducting adequate and well-controlled human clinical trials that
    establish the safety and efficacy of the drug candidate for the intended
    use, typically in the following sequential, or slightly overlapping,
    stages:

    Phase 1: The drug candidate is initially introduced into healthy human
    subjects or patients and tested for safety, dose tolerance, absorption,
    metabolism, distribution and excretion;

    Phase 2: The drug candidate is studied in patients to identify possible
    adverse effects and safety risks, to determine dosage tolerance and the
    optimal dosage, and to collect some efficacy data;

    Phase 3: The drug candidate is studied in an expanded patient
    population at multiple clinical study sites to confirm efficacy and
    safety at the optimized dose, by measuring a primary endpoint
    established at the outset of the study; and

    Phase 4: The FDA may in some circumstances require post-marketing
    studies to delineate additional information about a drug's risks,
    benefits and optimal use.

  . submitting the results of preliminary research, preclinical studies, and
    clinical trials as well as chemistry, manufacturing and control and
    labeling information on the drug candidate to the FDA in an NDA; and

  . obtaining FDA approval of the NDA prior to any commercial sale or
    shipment of the drug candidate.

  Upon approval, a drug candidate may be marketed only in those dosage forms
and for those indications approved in the NDA. In addition to obtaining FDA
approval for each indication to be treated with each product candidate, each
foreign and domestic drug candidate manufacturing establishment must register
with the FDA, list its product candidates with the FDA, comply with cGMPs and
permit and pass manufacturing plant inspections by the FDA. Moreover, the
submission of applications for approval may require additional time to complete
manufacturing stability studies. Foreign companies that manufacture drug
candidates for distribution in the United States also must list their product
candidates with the FDA and comply with cGMPs. They are also subject to
periodic inspection by the FDA or by local authorities under agreement with the
FDA. Moreover, approval of drug candidates may be delayed by certain market
exclusivity and patent protections awarded to other parties concerning similar
products or drug candidates.

  Any drug candidates that we or our collaborators manufacture or distribute
pursuant to FDA approvals are subject to extensive continuing regulation by the
FDA, including recordkeeping requirements and reporting of adverse experiences
with the product candidate. Additionally, if we or our collaborators propose
any modifications to a product, including changes in indication, manufacturing
process, manufacturing facility or labeling, we or our collaborators may be
required to submit an NDA supplement to the FDA.

  Failure to comply subjects the manufacturer to possible FDA action, such as
Warning Letters, suspension of manufacturing, seizure of the product, voluntary
recall of a product or injunctive action, as well as possible civil penalties.
We currently rely on, and intend to continue to rely on, third parties to
manufacture our compounds and product candidates. These third parties will be
required to comply with cGMPs.

  Products manufactured in the United States for distribution abroad will be
subject to FDA regulations regarding export, as well as to the requirements of
the country to which they are shipped. These latter requirements are likely to
cover the conduct of clinical trials, the submission of marketing applications,
and all aspects of manufacturing and marketing. Such requirements can vary
significantly from country to country. As part of our strategic relationships,
our collaborators may be responsible for the foreign regulatory approval
process for our product candidates, although we may be legally liable for
noncompliance.


                                       48
<PAGE>

  We and our collaborators are also subject to various federal, state and local
laws, rules, regulations and policies relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and the
use and disposal of hazardous or potentially hazardous substances used in
connection with our research work.

  The extent of government regulation which might result from future
legislation or administrative action cannot be accurately predicted.
Consequently, the actual effect of these developments on our business is
uncertain and unpredictable.

Competition

  We compete both in the markets for drug discovery technologies and services
and the markets for pharmaceutical products. We compete with major
pharmaceutical, biotechnology and discovery services companies, academic and
scientific institutions, governmental agencies, and public and private research
organizations. These entities compete with us either on their own or in
collaborations.

  The markets for our DiscoverWorks drug discovery technologies and services
are very competitive, and we expect the intensity of competition to increase as
pharmaceutical and biotechnology companies continue to outsource a portion of
their discovery processes and seek collaborations to access innovations in
discovery technologies. Our technology platform integrates many technologies,
including combinatorial chemistry, chemi-informatics software, structure-based
drug design and high-throughput screening and we compete with many drug
discovery service companies offering one or more technology components of the
discovery process. We face competition based on numerous factors, including
size, diversity and ease of use of compound libraries, speed and cost of
identifying and optimizing potential lead compounds and patent position.
Companies such as Aurora Biosciences Corporation and Evotec BioSystems AG have
developed ultra-high throughput screening capabilities. In addition, several
competitors, including Scriptgen Pharmaceuticals, Inc., Novalon Pharmaceutical
Corporation and Cetek Corporation have developed alternative approaches to
screening protein targets of unknown function that are competitive with our
"any target" ThermoFluor technology. There are many companies that provide
combinatorial chemistry services for lead generation and optimization that
compete with our DiscoverWorks technologies and discovery services. Competitors
such as Pharmacopeia Inc. and ArQule, Inc. use computer methods to assist in
the design of large screening libraries and synthesize them using combinatorial
or parallel chemical synthesis methods, which are competitive with our
DirectedDiversity technology. Competitors such as Tripos Inc. and MDL
Information Systems, Inc. are computer software companies that offer chemi-
informatics and other software and database services to support drug discovery,
which are competitive with the software components of our DirectedDiversity
chemi-informatics technology. Competitors such as Vertex Pharmaceuticals
Incorporated and Axys Pharmaceuticals Inc. extensively use structure-based drug
design integrated with combinatorial chemistry and other drug discovery
technologies.

  We also compete with the internal drug discovery departments of our customers
and potential customers. Many of our customers and potential customers have
acquired or are developing integrated drug discovery capabilities that use
combinatorial chemistry, chemi-informatics software, structure-based drug
design and high throughput screening. In addition, many of these companies have
large collections of compounds that they have previously synthesized, purchased
from chemical supply catalogs or obtained from other sources against which they
may screen new targets.

  For drug candidates that we seek to out-license from our internal drug
discovery pipeline, we face, and will continue to face, intense competition
from organizations such as large pharmaceutical and biotechnology companies.
Competition with any of the programs in our internal drug discovery pipeline
may arise from current or future drug candidates in the same therapeutic class
or other classes of therapeutic agents or other methods of preventing or
reducing the incidence of disease. Furthermore, any drug candidate that is
successfully developed may compete with existing therapies that have long
histories of safe and effective use.


                                       49
<PAGE>

  Due to perceived shortcomings of available agents and the large market
potential, competition to develop a safe, orally active antithrombotic agent is
intense, with many discovery programs in process, including programs in
clinical development by AstraZeneca PLC and BASF. In addition, we are aware of
several other programs targeting additional proteins in the coagulation process
which could be competitive with our thrombin inhibitor, including programs of
Schering AG, Germany and AstraZeneca PLC targeting Factor Xa. In addition, we
are aware of an oral heparin program of Emisphere believed to be in Phase 2
which may also compete with our thrombin inhibitor. In addition, oral agents
that effect blood platelet activation could provide competitive therapeutic
approaches to oral inhibitors of the coagulation process. We are aware of such
drug development programs at Merck and Co., Inc., SmithKline Beecham and
Schering-Plough Corporation, among others.

  Our orally active urokinase inhibitor for the inhibition of cancer metastasis
and tumor angiogenesis faces competition from a number of agents and approaches
currently under development. We are aware of competing urokinase inhibitor
programs at Abbott Laboratories, Axys Pharmaceuticals, Inc., Corvas
International, Inc. and Pfizer Inc. We are also aware of urokinase receptor
antagonist programs under development which could compete with our oral
urokinase inhibitor. There are also a number of alternative approaches to
controlling angiogenesis or metastasis including the use of i) inhibitors of
matrix metalloproteases, including programs by British Biotech plc (in alliance
with Schering Plough), Bristol-Myers Squibb Company, Pharmacia Corporation and
Pfizer Inc., ii) inhibitors of cellular tyrosine kinases, including programs by
Cephalon Inc. and Sugen Inc., and iii) other therapeutic proteins or monoclonal
antibodies that target a variety of cellular mechanisms.

  Our other research programs in small molecule drug discovery are also in
highly competitive areas. Many other companies are working in these areas and
they may achieve earlier or greater success than we may be able to achieve.

  Our current and anticipated future research programs and services that focus
on the discovery of small molecule drugs that target GPCRs are also in a highly
competitive area. Most major pharmaceutical companies have extensive drug
discovery programs that target one or more GPCRs, and many biotechnology
companies have developed propriety positions on particular GPCR receptors or
screening technologies. Competition has also arisen and is anticipated to
accelerate in the area of structural genomics, where academic laboratories and
possibly certain companies, either on their own or in collaboration with
others, are seeking to determine the molecular structures of GPCRs, and
databases of GPCR molecular structures may be created in competition with the
GPCR structural genomics and other databases we expect to develop.

  Most of our competitors, either alone, or together with their collaborators,
have substantially greater research and development capabilities and financial,
scientific, operational, marketing and sales resources than we do, as well as
significantly more experience in research and development, clinical trials,
regulatory matters, manufacturing, marketing and sales. These competitors and
other companies may have already developed or may in the future develop new
technologies or products that compete with ours or which could render our
technologies and products obsolete. In addition, our competitors may succeed in
obtaining broader patent protection, receiving FDA approval for products or
developing and commercializing products or technologies before us. We also
compete with these organizations in recruiting and retaining qualified
scientific and management personnel.

Clinical Testing Strategy

  We do not have the ability to independently conduct clinical studies and
obtain regulatory approvals for our drug candidates. To the extent our
collaborators do not perform these functions, we intend to rely on third party
expert clinical investigators and clinical research organizations to perform
these functions.

Manufacturing Strategy

  We are an early stage drug discovery company and, accordingly, do not at this
stage require commercial scale manufacturing capabilities. We currently rely,
and anticipate continuing to do so for the foreseeable

                                       50
<PAGE>

future, on internal capabilities for synthesis of the small amounts of chemical
compounds required for the discovery phases of our internal programs and
external collaborations.

  Completion of any preclinical trials for our drug candidates involving large
quantities of chemical compounds, or any future clinical trials and
commercialization of our drug candidates by us or our collaborators, will
require access to, or development of, facilities to manufacture a sufficient
supply of our drug candidates. We do not have the facilities or experience to
manufacture the quantities of drug candidates necessary for any such trials or
commercial purposes on our own and do not intend to develop or acquire
facilities for the manufacture of such quantities of drug candidates in the
foreseeable future. We currently intend, instead, to rely on third-party
contract manufacturers.

  In addition, because we intend to outlicense drug candidates for further
development and commercialization, once a drug candidate is outlicensed, we
must rely on our collaborators' ability to manufacture, or have manufactured,
the quantities necessary for further development and commercialization of these
drug candidates.

Marketing and Sales

  We market and sell our DiscoverWorks drug discovery services and
technologies, and outlicense drug candidates from our internal drug discovery
programs, through a direct marketing effort to potential customers in the
pharmaceutical, agrochemical, and biotechnology industries. Since we are an
early-stage company, we do not have an established sales and marketing effort,
but have solicited our collaborative partners primarily through the efforts of
our management team. We also make presentations at trade shows and have an
internet web site that describes our products and services.

  We currently have no sales, marketing or distribution capabilities to
commercialize our drug candidates. In order to commercialize any of our drug
candidates, we must either internally develop sales, marketing and distribution
capabilities or make arrangements with third parties to perform these services.
We intend to rely for the foreseeable future on collaborations with licensees
of our compounds to market any of our drug candidates which receive regulatory
approvals in the future.

Employees

  As of May 23, 2000, we had 86 full-time employees, 47 of whom hold Ph.D.
degrees. Of these employees, 70 were engaged in research and development and 16
were engaged in business development, finance and general administration. Our
scientific staff includes: 19 molecular and cell biologists, 10 structural
biologists, biophysicists and enzymologists, 30 chemists and 11 computer
scientists and engineers. Many of our employees have extensive experience in
drug discovery at major pharmaceutical companies. None of our employees are
represented by labor unions or covered by collective bargaining agreements. We
have not experienced any work stoppages, consider our employee relations to be
good and believe that we enjoy a strong corporate culture, built on cooperation
among our various departments, which we view as a key element in our
interdisciplinary approach to research.

Facilities

  Our executive offices and research and development facility are located in
Exton, Pennsylvania. We lease approximately 30,000 square feet of space. Our
facility is leased through June 2008. To meet our expected growth needs, we are
also negotiating for approximately 10,000 square feet of adjacent space for use
in expansion of our research capabilities.

Legal Proceedings

  We are not currently a party to any material legal proceedings.

                                       51
<PAGE>

Center Gatefold

The gatefold consists of four pages.

The first page contains (under the 3-Dimensional Pharmaceuticals logo) four
illustrations. On the left side of the page, one above the other, are three
small illustrations depicting the major customer industries for our
technologies: the pharmaceutical, the agricultural and the veterinary medicine
industries. The first of the three small illustrations on the left side depicts
approximately a dozen capsules and tablets, with an accompanying caption
reading "Pharmaceutical"; the second of the three illustrations depicts a grain
mill, with an accompanying caption reading "Agrochemical"; and the third of the
three illustrations depicts two veterinarians and a dog, with an accompanying
caption reading "Veterinary". In the center of the page is a large illustration
of a double-strand of DNA coding for a target protein with an accompanying
caption reading: "We discover and optimize novel drug candidates through
employment of a uniquely integrated suite of proprietary technologies. We
believe our DiscoverWorks technologies can produce development compounds in a
more timely and cost effective manner, and with a higher probability of
success, than that currently achieved using more conventional methods. Our
DiscoverWorks technologies have application to the pharmaceutical, veterinary
and agrochemical industries."

The second and third pages of the gatefold constitute a unit entitled "The
DiscoverWorks Lead Generation Process." This two-page unit include nine small
illustrations, arranged in a circle, each with an accompanying caption. The
nine illustrations, counter-clockwise from the upper left-hand corner, are as
follows:

First illustration: illustration of the 3-D molecular structure of a protein
target, with an accompanying caption reading:
"3-D Protein Structure
The molecular 3-D structure of new targets allows direct visualization of how
compounds bind with target proteins, and enhanced intelligent selection of
Probe Library compound sets for screening."

Second illustration: illustration of stackable plates containing an inventory
of compounds, with an accompanying caption reading:
"Structure-Based Probe Library
Our Probe Library contains 200,000+ individually synthesized "drug-like"
compounds selected for chemical diversity and comprehensive representation of
3-D molecular shapes."

Third illustration: illustration of a double strand of DNA coding for a target
protein, with an accompanying caption reading:
"Target Proteins from Gene Sequencing
We clone and express target proteins using bacterial, insect and mammalian cell
expression systems. Our protein refolding technology allows rapid, parallel
production of target proteins at the required scale."

Fourth illustration: illustration of an automated ThermoFluor high throughput
screening station, with an accompanying caption reading:
"Quantitative High-Throughput Screening
Our ThermoFluor high-throughput screening technology provides a direct means to
quantitatively assess the binding affinity of potential drug compounds to
virtually any target protein, including those derived from genomics."

Fifth illustration: illustration of a computer visualizing and analyzing data,
with an accompanying caption reading:
"Structure-Activity Data Analysis
Our DirectedDiversity chemi-informatics software analyzes hits for structure-
activity relationships and rapidly retrieves from our Synthetically Accessible
Library thousands of compounds intelligently selected for predicted efficacy,
which are then synthesized and tested."
<PAGE>

Sixth illustration: illustration of a chemical compound in a gelatin capsule,
with an accompanying caption reading:
"Prototype NCE Lead
We are able to generate a Prototype NCE Lead suitable for in vivo efficacy in
7-10 months through iterative cycles of focused library selection, synthesis
and testing."

Seventh illustration: illustration of several chemical compounds bound to a
target protein, with an accompanying caption reading:
"Structure-Based Library Optimization
We integrate chemi-informatics software with target protein 3-D structural
information to automate and multiplex the rational design and chemical
synthesis of compounds and simultaneously optimize many drug properties."

Eighth illustration: illustration of a computer screen showing molecular
structures selected using our proprietary software, with an accompanying
caption reading:
"Synthetically Accessible Library
Our Synthetically Accessible Library contains 2.5 billion "drug-like" analogs
of Probe Library compounds. Our chemists make focused libraries of compounds
selected from our Synthetically Accessible Library using automated chemistry
synthesis protocols."

Ninth illustration: illustration of an automated chemical synthesizer, with an
accompanying caption reading:
"Automated Parallel Synthesis
We have a broad repertoire of modern parallel synthesis technologies and
synthesize thousands of novel compounds per month."

The fourth page of the gatefold is entitled: "Innovative Structure-Based Drug
Design and GPCR Structure Determination Program". This page consists of three
large illustrations placed diagonally from the top left hand side of the page
to the bottom right hand side of the page. The first illustration depicts a
protein crystal. The second illustration depicts a 3D protein structure. The
third illustration depicts an aerial view of the Argonne National Laboratory.
In the upper right hand side of the page is set forth the following two
paragraphs of text:

"Our innovations in structure-based drug design and X-ray crystallography
enable real time rational design of drugs using target protein structures. High
quality structural data is collected from crystals and analyzed to determine
the protein's 3-D molecular structure, which in turn facilitates structure-
based drug design."

"Recently, we successfully produced high quality crystals which we believe will
enable us to experimentally determine the first 3-D molecular structure of a G-
protein coupled receptor (GPCR). GPCRs comprise an important class of drug
targets, for which structure-based drug design based on the actual molecular
structure has not been possible to date."

In the lower left hand side of the page is set forth the following paragraph of
text:
"We have recently become a member of the Industrial Macromolecular
Crystallography Association (IMCA) consortium of major pharmaceutical companies
using dedicated resources for X-ray data collection at the Advanced Protein
Source within the Argonne National Laboratory in Chicago, Illinois. We are
currently the only biotechnology company to be an IMCA consortium member. This
access greatly enhances our ability to determine new structures and use
structure-based drug design as an effective discovery tool."
<PAGE>

                                   MANAGEMENT

Executive Officers and Directors

  The following table sets forth information about our directors, executive
officers and other key employees as of May 23, 2000:

<TABLE>
<CAPTION>
Name                       Age Position
----                       --- --------
<S>                        <C> <C>
David C. U'Prichard,
 Ph.D....................   51 Chief Executive Officer, Director
F. Raymond Salemme,
 Ph.D....................   54 President and Chief Scientific Officer, Director
Michael J. Wassil........   49 Vice President and Chief Financial Officer
Roger F. Bone, Ph.D......   42 Vice President, Biochemistry
David G. Fehr............   54 Vice President, Technology Operations
Scott M. Horvitz.........   41 Vice President, Finance and Administration
Richard M. Soll, Ph.D....   44 Vice President, Chemistry
Paul M. K. Weiss, Ph.D...   42 Executive Director, Technology Licensing
Stephen Bunting, Ph.D....   47 Director
Bernard Canavan,
 M.D.(2).................   64 Director
James H. Cavanaugh,
 Ph.D.(1)................   63 Director
Zola P. Horovitz,
 Ph.D.(1)(2).............   65 Director
David R. King(2).........   50 Director
Joshua Ruch(1)...........   50 Director
Harold R. Werner.........   51 Director
</TABLE>
--------
(1) Member of compensation committee.
(2) Member of audit committee.

  Dr. David C. U'Prichard joined us in September 1999 as our CEO. Most
recently, Dr. U'Prichard served as President of Research and Development at
SmithKline Beecham. While at SmithKline Beecham, Dr. U'Prichard oversaw the
entry of approximately ten compounds into global development, the international
registration of the diabetes drug Avandia and the entry of four compounds into
Phase III trials and six compounds into early clinical trials; additionally, he
instituted several major restructuring efforts at the company. Prior to
SmithKline Beecham, he worked for ICI/Zeneca from 1986 to 1997. Dr. U'Prichard
was also instrumental in the launch of Nova Pharmaceuticals in 1983, following
an academic career as the Associate Professor of Pharmacology and Neurobiology
at Northwestern University Medical School (1978-83), and his postdoctoral
fellowship at Johns Hopkins University (1975-78). Dr. U'Prichard received his
Ph.D. in Pharmacology from the University of Kansas, and his B.S. in
Pharmacology with first-class honors from the University of Glasgow, Scotland.
He has held academic appointments at Northwestern University, Johns Hopkins
University and the University of Pennsylvania and has an honorary professorship
at the University of Glasgow. He is also an author of more than 100 primary and
review publications and was a founding co-editor of Molecular Neurobiology, co-
editor of Epinephrine in the Central Nervous System and has served as a member
of various editorial boards.

  Dr. F. Raymond Salemme founded our company in 1993 and currently serves as
President and Chief Scientific Officer. Prior to founding 3DP, Dr. Salemme held
research management positions at various pharmaceutical companies including:
Senior Director, Biophysics and Computational Chemistry at Sterling Winthrop;
Research Leader, Protein Structure Group for DuPont Merck Pharmaceuticals,
Inc.; and Research Leader, Protein Structure Group at DuPont Company. In 1983,
Dr. Salemme founded the Genex Protein Engineering Division, among the first
industrial groups to use three-dimensional structural tools as the basis for
engineering proteins. From 1973 to 1983, Dr. Salemme was Professor of
Biochemistry at the University of Arizona. Dr. Salemme received a B.A. in
Molecular Biophysics from Yale University and a Ph.D. in Chemistry from the
University of California, San Diego, specializing in protein X-ray
crystallography. Dr. Salemme is a member of numerous professional societies,
and serves on several national and international scientific review

                                       52
<PAGE>

committees and journal editorial boards. Dr. Salemme has authored over 75
scientific publications and patents in the areas of structural biology,
biomaterials, computer modeling of proteins and structure-based drug design.
Dr. Salemme is a co-inventor of our DirectedDiversity chemi-informatics process
control technology and our ThermoFluor assay technology.

  Mr. Michael J. Wassil joined us in September 1997 as Vice President and Chief
Financial Officer. Prior thereto, from 1995 to 1997, Mr. Wassil was President
and founder of Med Tech Advisers, Inc. From 1983 to 1994, Mr. Wassil held
various positions at Interspec, Inc. (ISPC). Since 1987, Mr. Wassil served as
Executive Vice President, Chief Financial Officer and Secretary. In 1993 he
also became General Manager of Interspec's international operations. In 1994,
Interspec, Inc. was acquired by Advanced Technology Laboratories Inc. (ATLI) at
which point Mr. Wassil became Vice President and Chief Financial Officer of
ATL--Interspec. From 1978 to 1983, Mr. Wassil held several financial and
operating positions at Rorer Group Inc. Mr. Wassil began his career in 1972
with Price Waterhouse. A Certified Public Accountant, Mr. Wassil received his
B.S. in Finance from King's College. He is also a Director of Telefactor
Corporation and the Eastern Technology Council.

  Dr. Roger F. Bone joined us in 1993 and currently serves as Vice President,
Biochemistry. Prior thereto, Dr. Bone held several research positions at Merck
and Company from 1990 to 1993, and conducted his postdoctoral fellowship at the
University of California from 1985 to 1989. Dr. Bone received his Ph.D. in
Biochemistry from the University of North Carolina and his B.S. in Chemistry
from Purdue University.

  Mr. David G. Fehr joined us in January 1998 as Vice President, Technology
Operations. Mr. Fehr previously served from 1987 to 1993 as Vice President,
Development and Manager of Systems Integration at Bell & Howell Publication
Systems Company. Prior thereto, Mr. Fehr was Manager, Analytical Systems
Development at BF Goodrich Company. Mr. Fehr received his B.S. degree in
Physics, his M.S. in Industrial Administration from Carnegie-Mellon University,
and his M.S. in Physics from the University of California, San Diego.

  Mr. Scott M. Horvitz has served as Vice President, Finance and Administration
since our inception. From 1991 to 1993, Mr. Horvitz held various positions at
Magainin Pharmaceuticals Inc. and most recently served as Executive Director,
Finance and Human Resources. From 1983 to 1991, Mr. Horvitz was with the firm
of Richard A. Eisner and Company, LLP, Certified Public Accountants, where he
most recently served as a Senior Audit Manager specializing in venture-
financed, technology start-up companies. Mr. Horvitz holds a B.S. in Accounting
from the State University of New York at Albany and is a Certified Public
Accountant.

  Dr. Richard M. Soll joined us in 1994 and currently serves as Vice President,
Chemistry. From 1983 to 1994, Dr. Soll held various positions at Wyeth-Ayerst
Research and Ayerst Laboratories, most recently serving as a Principal
Scientist, Medicinal Chemistry. Dr. Soll conducted his postdoctoral fellowship
at Harvard University, and he received his Ph.D. in synthetic organic chemistry
from Dartmouth College and his B.S. in chemistry from the University of
Massachusetts.

  Dr. Paul M. K. Weiss joined us in December 1997 as Executive Director,
Technology Licensing. From 1993 to 1997, Dr. Weiss held various positions at
American Home Products Corporation and Wyeth-Ayerst Laboratories, including
Director-Licensing, Director-Business Development and Research, and Manager-
Business Development. Prior thereto, Dr. Weiss was employed by Columbia
Research Laboratories as International Director of Product Development and R&D
Coordinator. Dr. Weiss received his Ph.D. in Biochemistry and his M.B.A. from
the University of Wisconsin Madison, and his B.S. in Biochemistry from Carleton
University Institute of Biochemistry in Ottawa, Ontario.

  Dr. Stephen Bunting joined us as a director in November 1997. Dr. Bunting has
been a director of Abingworth Management Limited in London, UK since March 1987
and has been in the venture capital business for over 17 years during which he
has been involved in over 50 investments in the biotechology and medical area.
He has served on the boards of many life science companies including Aurora
Biosciences, Cantab Pharmaceuticals (UK), Devgen (Belgium), Genetic Therapy and
Hexagen (UK).

                                       53
<PAGE>

  Dr. Bernard Canavan joined us as a director in March 1997. Dr. Canavan
recently retired from American Home Products Corporation where he held the
position of President and Chief Operating Officer. Dr. Canavan started his
pharmaceutical career with Wyeth Limited Canada in 1969 as Medical Director. He
left Wyeth Canada in 1975 as President. He then joined Wyeth International Ltd.
as Executive Assistant to the President and in 1980 became President of Wyeth
International. In 1984 he took over as President of Wyeth Laboratories in
charge of Pharmaceutical Operations. From 1990 to 1994 he was President and COO
of American Home Products Corporation. Dr. Canavan is on the board of the
following companies: Magainin Pharmaceuticals, and Shire Pharmaceuticals Group
Plc.

  Dr. James H. Cavanaugh joined us as a director in May 1996 and has served as
our Chairman since August 1998. Dr. Cavanaugh is the President of HealthCare
Ventures LLC. Prior to HealthCare Ventures, he was President of SmithKline &
French Laboratories--U.S., the pharmaceutical division of SmithKline Beecham
Corporation. Previously, he served as President of SmithKline's clinical
laboratory business and as President of Allergan International. Prior to his
industry experience, Dr. Cavanaugh served as Staff Assistant to President Nixon
for Health Affairs and as Deputy Director of the Domestic Council. Under
President Ford, he was appointed Deputy Assistant to the President for Domestic
Affairs and Deputy Chief of the White House Staff. Before then, he served as
Deputy Assistant Secretary for Health and Scientific Affairs in the U.S.
Department of Health, Education and Welfare, and as Special Assistant to the
Surgeon General of the U.S. Public Health Service. He was a Special Consultant
to President Reagan and served as a member of the President's Export Council.
Preceding his government service, Dr. Cavanaugh was a member of the faculty of
the Graduate College and the College of Medicine at the University of Iowa,
where he received his Master's and Doctorate degrees. Dr. Cavanaugh currently
serves on the Boards of Trustees of the National Committee for Quality Health
Care (Chairman, 1988) and The National Center for Genome Resources, and as
Trustee Emeritus of the California College of Medicine. He has served on the
Board of Directors of the Pharmaceutical Research and Manufacturers
Association, Unihealth America, and the Proprietary Association. He was a
Founding Director of the Marine National Bank in Santa Ana, California. Dr.
Cavanaugh serves on the Board of the following companies: Diversa Corporation,
MedImmune Inc. and Shire Pharmaceuticals Group Plc.

  Dr. Zola P. Horovitz joined us as a director in September 1996. Dr. Horovitz
recently retired from Bristol-Myers Squibb, last serving as Vice President of
Business Development and Planning. Previously, he spent 31 years with The
Squibb Institute for Medical Research in Princeton, New Jersey, last serving as
Vice President of Research Planning & Scientific Liaison. Dr. Horovitz recently
served as Commissioner of the New Jersey Cancer Research Commission. He has
been an active member of many industry organizations, including the American
Society for Pharmacology & Experimental Therapies, British Pharmacological
Society, American Pharmaceutical Association, International Society of
Biochemical Pharmacology, and the New York Academy of Sciences, among others.
Additionally, he is a Fellow of the New Jersey Academy of Sciences, American
Foundation for Pharmaceutical Education, Academy of Pharmaceutical Sciences,
and the American Association for the Advancement of Science. Dr. Horovitz
earned a B.S. in Pharmacy and an M.S. and Ph.D. in Pharmacology from the
University of Pittsburgh. He is a registered pharmacist in the state of
Pennsylvania and has published more than 90 books, articles and abstracts in
the areas of pharmacology and drug research and development. Dr. Horovitz
serves on the Board of the following companies: BioCryst Pharmaceuticals, Inc.,
Diacrin, Inc., Magainin Pharmaceuticals Inc., Avigen, Inc., Clinicor, Inc.,
Synaptic Pharmaceuticals Corporation, Shire Pharmaceuticals Group Plc and
HeavenlyDoor.Com.

  Mr. David R. King joined us as a director in April 2000. Since 1981, Mr. King
has been a partner in the Business and Finance Section of the law firm of
Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Mr. King's practice
focuses on biotechnology and emerging growth companies and he has extensive
experience in corporate and securities law matters. Mr. King serves on the
Board of Cephalon, Inc.

  Mr. Joshua Ruch joined us as a director in March 1997. Mr. Ruch is Chairman
and Chief Executive Officer of Rho Management Company, Inc., an investment
advisory firm. Mr. Ruch has been employed by Rho Management Company in various
capacities since its inception in 1981. Mr. Ruch holds an M.B.A. from the
Harvard Graduate School of Business Administration.


                                       54
<PAGE>

  Mr. Harold R. Werner joined us as a director at our inception. Mr. Werner is
a Managing Director of HealthCare Ventures LLC. Mr. Werner has over twenty-five
years of experience in planning, development and financing of health care
technology. Prior to the founding of the HealthCare Ventures family of funds in
1985, Mr. Werner served as Director of New Ventures for Johnson & Johnson
Development Corporation, responsible for corporate venture capital and
strategic planning activities. These responsibilities included outside
investments and licenses for Johnson & Johnson in biotechnology,
pharmaceuticals, vision care, diagnostics and other high-technology areas of
health care. Previously, he was Senior Vice President of Robert S. First, Inc.,
and was responsible for managing its European and, later, U.S. health care
management consulting business. Mr. Werner received his B.S. (high honors) and
M.S. degrees in engineering from Princeton University and an M.B.A. from the
Harvard Graduate School of Business Administration.

Board Of Directors

  Upon or prior to the closing of this offering, our board of directors will be
divided into the following three classes, with the members of the respective
classes serving for staggered three-year terms:

  . Class 1 directors, whose terms expire at the annual meeting of
    stockholders to be held in 2001;

  . Class 2 directors, whose terms expire at the annual meeting of
    stockholders to be held in 2002; and

  . Class 3 directors, whose terms expire at the annual meeting of
    stockholders to be held in 2003.

  Messrs.     ,      and      will be our Class 1 directors, Messrs.     ,
and      will be our Class 2 directors, and Messrs.     ,      and      will be
our Class 3 directors. At each annual meeting of stockholders following this
offering, our stockholders will elect the successors to directors whose terms
have expired to serve from the time of election and qualification until the
third annual meeting following election.

  All directors were nominated and elected as directors by the holders of our
common and preferred stock in accordance with provisions of our certificate of
incorporation, our bylaws and our current stockholders agreement. These
provisions of our stockholders agreement will terminate upon the completion of
this offering. Each of the individuals will remain as a director until
resignation or until the stockholders elect their replacements in accordance
with our certificate of incorporation.

  Our executive officers are appointed by the board of directors and serve
until their successors have been duly elected and qualified. There are no
family relationships among any of our executive officers or directors.

Audit Committee

  We have established an audit committee. Our audit committee consists of three
independent directors. Our audit committee is responsible for reviewing with
management our financial controls and accounting and reporting activities. In
addition, our audit committee is also responsible for reviewing the
qualifications of our independent auditors, making recommendations to the board
of directors regarding the scope, fees and results of any audit and reviewing
any non-audit services and related fees. David R. King, one of our directors
and a current member of the audit committee, is a partner at Morgan, Lewis &
Bockius LLP, a law firm which has provided legal services for us in each of our
last three fiscal years.

Compensation Committee and Compensation Committee Interlocks and Insider
Participation

  We have established a compensation committee. Our compensation committee is
responsible for the evaluation, approval and administration of all salary,
incentive compensation, benefit plans and other forms of compensation for our
officers, directors and other employees, including bonuses and options granted
under our Equity Compensation Plan. None of the Compensation Committee members
has served as an officer or employee of us or our subsidiary.

                                       55
<PAGE>

  For information on recent purchases of our capital stock by the members of
our compensation committee or their respective affiliates, see the description
under "Certain Relationships and Related Transactions" included in this
prospectus.

Director Compensation

  Drs. Canavan and Horovitz and Mr. King each receive $10,000 per year as
consideration for their services as directors. Drs. Canavan and Horovitz are
entitled to receive consulting fees of $1,500 per day of additional service,
although no such consulting services have been rendered to date. Additionally,
Drs. Canavan and Horovitz each have received grants of options to purchase
50,000 shares of our common stock under our equity compensation plan in
connection with their service as directors. Mr. King received a restricted
stock grant in connection with his service as a director of 20,000 shares of
common stock for an aggregate purchase price of $45,000. All of the option
grants and restricted stock grants for our directors vest in equal annual
installments over a period of four years. Our non-employee directors are
reimbursed for expenses in connection with attendance at board and committee
meetings.

Scientific Advisory Board

  In addition to our in-house scientific resources, we have assembled a
Scientific Advisory Board of seven members with expertise in the areas of
protein structure-function relationships, computer-aided drug design, protein
modeling, intracellular signaling and molecular regulation of the immune
system. The Scientific Advisory Board meets as a group two to three times a
year to review our research, development and clinical activities. We also
consult with our scientific advisors throughout the year. Each member of the
Scientific Advisory Board has an individual consulting agreement under which he
is compensated by cash and/or by options to purchase shares of our common
stock. These consulting agreements also provide for confidentiality, assignment
of inventions and certain noncompetition provisions. None of our scientific
advisors is employed by us, and they may have commitments to, or consulting or
advisory contracts with, their employers or other entities that may conflict or
compete with their obligations to us. Our scientific advisors include:

<TABLE>
<CAPTION>
Name                      Title/Affiliation
----                      -----------------
<S>                       <C>
Don C. Wiley, Ph.D,       John L. Loeb Professor of Biochemistry and
 Chairman...............  Biophysics at Harvard University

Stephen J. Benkovic,      Evan Pugh Professor and Eberly Chair in
 Ph.D...................  Chemistry, The Pennsylvania State University

Jeremy M. Berg, Ph.D....  Professor and Director of the Department of
                          Biophysics and Biophysical Chemistry at the
                          Johns Hopkins University School of Medicine

Dale L. Boger, Ph.D.....  Richard and Alice Cramer Professor of Chemistry,
                          The Scripps Research Institute

Michael Levitt, Ph.D....  Chairman, Department of Structural Biology at
                          Stanford University

Victor J. Marder, M.D...  Director of the Vascular Medicine Program at
                          Orthopaedic Hospital/UCLA

Clarence E. Schutt,
 Ph.D...................  Professor of Chemistry at Princeton University
</TABLE>


                                       56
<PAGE>

Executive Compensation

  The following table sets forth the compensation awarded or paid, or earned or
accrued for services rendered to us, in all capacities during the fiscal year
ended December 31, 1999 by our Chief Executive Officer and the four other most
highly compensated officers whose total salary and bonus exceeded $100,000 in
fiscal 1999. In accordance with SEC rules, the compensation described in the
table does not include medical, group life insurance or other benefits which
are available generally to all our salaried employees and perquisites and other
personal benefits which do not exceed the lesser of $50,000 or 10% of the
officers' total salary and bonus disclosed in this table. We refer to these
officers as our named executive officers in other parts of this prospectus.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                    Long-Term
                                                                   Compensation
                                                                   ------------
                                                  Annual            Number of
                                               Compensation         Securities
                                     Fiscal --------------------    Underlying
Name and Principal Position           Year  Salary($)   Bonus($)     Options
---------------------------          ------ ---------   --------   ------------
<S>                                  <C>    <C>         <C>        <C>
David C. U'Prichard, Ph.D...........  1999    92,330(1)      --     2,064,000
 Chief Executive Officer
F. Raymond Salemme, Ph.D............  1999   245,549     95,723(2)     28,571
 President and Chief Scientific
 Officer
Michael J. Wassil...................  1999   166,005     55,405(3)     20,714
 Vice President and Chief Financial
 Officer
Scott M. Horvitz....................  1999   150,491     40,097(4)     19,643
 Vice President, Finance and
 Administration
Roger F. Bone.......................  1999   146,475     32,957        15,714
 Vice President, Biochemistry
</TABLE>
--------
(1) Dr. U'Prichard's employment with us began on September 20, 1999.
(2) Includes loan forgiveness of $29,565 and year end bonus of $66,158, $33,079
    of which was paid in February 2000; balance still accrued.
(3) Includes loan forgiveness of $22,204 and year end bonus of $33,201, $16,601
    of which was paid in February 2000; balance still accrued.
(4) Includes loan forgiveness of $6,261 and year end bonus of $33,836, $16,918
    of which was paid in February 2000; balance still accrued.

                                       57
<PAGE>

                               1999 Option Grants

  The following table sets forth information concerning stock options granted
to our named executive officers during the fiscal year ended December 31, 1999.
The potential realizable value represents amounts, net of exercise price before
taxes, that may be realized upon exercise of the options immediately prior to
the expiration of their terms assuming appreciation of 5% and 10% over the
option term. The 5% and 10% values are calculated based on rules promulgated by
the SEC and do not reflect our estimate of future stock price growth. The
actual value realized may be greater or less than the potential realizable
value set forth in the table.

<TABLE>
<CAPTION>
                                      Individual Grants
                         --------------------------------------------
                                                                        Potential
                                                                       Realizable
                                                                        Value at
                                                                      Assumed Rates
                                                                        of Stock
                                                                          Price
                         Number of  Percentage of                     Appreciation
                         Securities Total Options Exercise                 for
                         Underlying  Granted to    Price               Option Term
                          Options   Employees in    (per   Expiration -------------
Name                      Granted    Fiscal Year   share)     Date      5%    10%
----                     ---------- ------------- -------- ---------- ------ ------
<S>                      <C>        <C>           <C>      <C>        <C>    <C>
David C. U'Prichard,
 Ph.D...................   380,952      15.37      $1.05    09/17/09  $      $
                         1,339,048      54.03       1.05    09/17/09
                           344,000      13.88       2.60    09/17/09
F. Raymond Salemme,
 Ph.D...................    28,571       1.15       1.05    04/09/09
Michael J. Wassil.......    20,714        .84       1.05    04/09/09
Scott M. Horvitz........    19,643        .79       1.05    04/09/09
Roger F. Bone...........    15,714        .63       1.05    04/09/09
</TABLE>

                Aggregated Option Exercises In Last Fiscal Year
                       And Fiscal Year-End Option Values

  The following table sets forth information concerning year end option values
for the 1999 fiscal year for the executive officers named in the Summary
Compensation Table above. The value of unexercised in-the-money options is
calculated based on a value equal to an assumed initial public offering price
of    per share.

<TABLE>
<CAPTION>
                            Number of Securities
                           Underlying Unexercised    Value of Unexercised in-
                                 Options at            the-Money Options at
                              December 31, 1999          December 31, 1999
                          -------------------------  -------------------------
Name                      Exercisable Unexercisable  Exercisable Unexercisable
----                      ----------- -------------  ----------- -------------
<S>                       <C>         <C>            <C>         <C>
David U'Prichard,
 Ph.D. ..................       --      2,064,000(1)    $            $
F. Raymond Salemme,
 Ph.D....................   355,000       359,821
Michael J. Wassil........   101,113       124,051
Scott M. Horvitz.........    43,386        40,943
Roger F. Bone............    44,447       102,356
</TABLE>
--------
(1)  Pursuant to Dr. U'Prichard's offer letter with us, which permitted early
     exercise of the above options prior to vesting for a period of six months
     following the date of grant, Dr. U'Prichard exercised 495,238 options in
     March 2000. The shares acquired pursuant to such exercise are subject to
     restrictions which lapse over the same period as the predecessor stock
     options would have vested.

                                       58
<PAGE>

                               2000 Option Grants

  The following table sets forth information concerning stock options granted
to our named executive officers in the year 2000 as of May 23, 2000.

<TABLE>
<CAPTION>
                                        Individual Grants
                         -----------------------------------------------
                                                                           Potential
                                                                          Realizable
                                                                           Value at
                                                                         Assumed Rates
                                                                              of
                                                                          Stock Price
                         Number of  Percentage of                        Appreciation
                         Securities Total Options                         for Option
                         Underlying  Granted to    Exercise                  Term
                          Options   Employees in     Price    Expiration -------------
Name                      Granted    Fiscal Year  (per share)    Date      5%    10%
----                     ---------- ------------- ----------- ---------- ------ ------
<S>                      <C>        <C>           <C>         <C>        <C>    <C>
David C. U'Prichard,
 Ph.D. .................   37,500                    $2.25     03/31/10
F. Raymond Salemme,
 Ph.D. .................   62,500                    $2.25     03/31/10
Michael J. Wassil.......   13,000                    $2.25     03/31/10
Scott M. Horvitz........   42,000                    $2.25     03/31/10
Roger F. Bone...........   46,000                    $2.25     03/31/10
</TABLE>

  The figures in the two tables above represent options granted under our
Equity Compensation Plan. We granted options to purchase 2,478,570 shares of
our common stock in 1999 and as of May 22, 2000 have granted options to
purchase 810,000 shares of our common stock in 2000. All options were granted
at an exercise price equal to or greater than the fair market value of the
common stock on the date of grant as determined by our board of directors.

  The options granted to our employees typically vest in 25% increments on each
of the four annual anniversaries of the date of grant. The options granted to
our consultants generally vest in 33% increments on each of the three annual
anniversaries of the date of the grant or in accordance with specified
performance goals over a ten-year term. Options granted to the persons listed
above expire 10 years from the grant date.

  We have never granted stock appreciation rights.

Equity Compensation Plan

  On August 31, 1993, our board adopted our equity compensation plan, and the
plan was approved by our stockholders on October 12, 1993. The plan has been
subsequently amended, most recently in March 2000, to authorize a total of
9,325,000 shares of common stock for issuance under the plan.

  The plan provides for grants of incentive stock options, nonqualified stock
options, and restricted stock grants to our officers and employees, our non-
employee directors and members of the Scientific Advisory Board, and
independent contractors and consultants (who may be individuals or entities)
that perform services for us.

  General. The plan, as amended, authorizes up to 9,325,000 shares of our
common stock for issuance under the terms of the plan. The maximum number of
shares for which any individual may receive grants under the plan in any
calendar year is 1,000,000 shares. If options granted under the plan expire or
are terminated for any reason without being exercised, or if shares of
restricted stock are forfeited, the shares of common stock underlying the
grants will again be available for purposes of the plan. As of May 23, 2000,
5,757,124 shares are issuable upon the exercise of options outstanding under
the plan and 2,633,907 shares have been issued under the plan, including
706,488 shares subject to repurchase.

  Administration of the Plan. The compensation committee of the board of
directors administers and makes grants under the plan.

                                       59
<PAGE>

  Grants. Grants under the plan may consist of:

  . options intended to qualify as incentive stock options;

  .nonqualified stock options; and

  .restricted stock.

  Eligibility for Participation. Grants may be made to any of our officers and
employees, members of our board of directors and the Scientific Advisory Board,
and independent contractors and consultants who perform services for us.

  Options. The exercise price of options will be determined by the compensation
committee. The exercise price for incentive stock options will be equal to the
fair market value of our common stock on the date the option is granted;
however, the exercise price of an incentive stock option granted to an
individual who owns more than 10% of the voting power of our stock will not be
less than 110% of the fair market value of our stock on the date the option is
granted.

  Participants may pay the exercise price:

  . in cash;

  . with the approval of the compensation committee, by delivering shares of
    common stock owned by the grantee and having a fair market value on the
    date of exercise equal to the exercise price of the option; or

  . by such other method as the compensation committee may designate in the
    grant letter, including tendering the grantee a recourse promissory note
    on terms specified by the compensation committee.

  Options will become exercisable according to the terms determined by the
compensation committee and specified in the grant letter. The compensation
committee may impose restrictions on shares received upon the exercise of
options. The compensation committee will determine the term of each option, up
to a maximum ten-year term.

  Restricted Stock. The compensation committee may issue shares of stock to
participants subject to restrictions established by the committee. If
restricted stock is purchased, the grantee may pay the purchase price in cash
or, if the compensation committee permits, by a promissory note. If a grantee's
employment or service terminates during the restriction period or if any other
conditions are not met, the restricted stock will terminate as to all shares on
which restrictions are still applicable, and the shares must be immediately
returned to us, unless the compensation committee determines otherwise.

  Certain Corporate Changes. If all or substantially all of our assets are sold
or exchanged, we are to be dissolved or liquidated, or we are party to a merger
or consolidation with another corporation in which we will not be the surviving
corporation, then, unless the compensation committee provides otherwise in the
grant letter, each grantee will have the right to exercise the entire portion
of his or her grant not previously exercised within ten days after written
notice of the transaction is given to grantees, and any grants not exercised
after the ten day period will be forfeited.

  If we are a party to a merger or consolidation in which we are the surviving
corporation, then the compensation committee may determine that grantees will
have the right to exercise the entire portion of their grants not previously
exercised within ten days after written notice of the transaction is given to
grantees, and any grants not exercised after the ten day period will be
forfeited.

  In addition, the compensation committee may provide in the grant letter
specific provisions that are applicable in the event of a corporate
transaction, and the committee may also articulate the exercisability or
vesting of grants in the event of a corporate transaction or allow the
surviving corporation to assume or substitute outstanding grants.

                                       60
<PAGE>

  Transferability. Grants are generally not transferable by the participant,
except in the event of death. However, the compensation committee may permit
participants to transfer nonqualified stock options to family members or other
persons or entities on such terms as the compensation committee deems
appropriate.

  Amendment and Termination of the Plan. The board of directors may amend or
terminate the plan at any time. However, the board of directors may not make
any amendment without stockholder approval if stockholder approval is required
by Section 162(m) of the Internal Revenue Code. The plan will terminate on
August 31, 2003, unless the board of directors terminates the plan earlier or
extends it with approval of the stockholders.

  Adjustment Provisions. Upon a merger, recapitalization, stock split or other
change to our stock, the compensation committee shall appropriately adjust:

  . the maximum number and class of shares available for grants under the
    plan;

  . the number and class of shares covered by outstanding grants; and

  . the price per share of each outstanding option.

  Section 162(m). Section 162(m) of the Internal Revenue Code imposes a
$1,000,000 limit on the amount a public corporation can deduct for federal
income tax purposes for compensation paid to the chief executive officer or any
of the four other most highly compensated officers in any year. This limit
generally applies to all compensation, including amounts received upon the
exercise of stock options and the value of shares or cash paid pursuant to
other grants. An exception exists, however, for "performance-based
compensation." Stock options generally will meet the requirements of
performance-based compensation. Restricted stock granted under the plan will
not meet the requirements for performance-based compensation under section
162(m).

Employment, Change of Control and Termination of Employment Arrangements

  All of our employees, including our officers, are given employment offer
letters providing for their base compensation as well as potential additional
compensation in the form of bonuses or equity compensation pursuant to our
equity compensation plan. Some of the employment offer letters also provide for
severance payments covering periods of up to six months. In addition, our
equity compensation plan, as described elsewhere in this prospectus, contains
provisions concerning accelerated vesting of options and restricted stock in
connection with certain corporate changes. Except for such accelerated vesting
of their options or restricted stock upon such changes, none of our officers,
except for Dr. U'Prichard, has any compensatory plan or arrangement whereby a
resignation, retirement or other termination or a change in control could
result in payments to such officer exceeding $100,000.

  In addition, in September 1999, we entered into an employment offer letter
with David C. U'Prichard, Ph.D., our Chief Executive Officer. Pursuant to his
employment offer letter, Dr. U'Prichard's annual compensation was initially set
at a base salary of $325,000 and a target bonus of 40% of his base salary. In
addition, we granted Dr. U'Prichard options to purchase 1,720,000 shares of
common stock at an exercise price of $1.05 per share and options to purchase
344,000 shares of our common stock at an exercise price of $2.60. These options
vest 25% per year, beginning on the first anniversary of the grant date. During
the six months following the date of grant, such options may be exercised early
(i.e., without regard to the vesting provisions applicable to such options) and
the purchase price of such options may be paid by delivery of a promissory
note, bearing interest at the minimum rate necessary to avoid imputed interest,
with interest and principal being repayable in four equal installments on the
first four anniversaries of the date such options were granted. See "Certain
Relationships and Related Transactions". In general, early vesting provisions
would apply in the case of certain corporate changes, as provided in our equity
compensation plan, however, if a certain transaction occurs within the first
year of his date of hire, his early vesting rights under the plan would be
limited. In the event that, within two years of the date such options were
granted, there is a sale of substantially all our assets or a merger where we
are not the surviving entity, and such options are not assumed, the minimum
worth of all

                                       61
<PAGE>

such options which are vested will be deemed to be not less than $1.5 million,
as determined by our board of directors, and we will, if necessary, make a cash
payment to Dr. U'Prichard. In the event Dr. U'Prichard's employment is
terminated without cause, he will receive a severance compensation equal to his
base salary and payment of health insurance premiums for up to 12 months or
until he begins new full-time employment (except in the nonprofit sector),
whichever occurs first, and a payment in each month of such period of an
additional amount equal to one-twelfth of his prior year's bonus, if any
(annualized in respect of the bonus payment for 1999), times the portion of the
current fiscal year that has expired up to the date of his termination. In
addition, with respect to the 25% of his options vesting on the next
anniversary following termination, such options will be deemed to have been
subject to vesting in equal monthly portions during the twelve months prior to
such anniversary. If such a termination without cause occurs within 12 months
after a sale of our company, then the continued salary referred to in the
preceding sentence will be paid in a lump sum, and Dr. U'Prichard will be
entitled to a further lump-sum payment equal to the prior year's bonus payment,
annualized in respect of the bonus payment for 1999.


                                       62
<PAGE>

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transactions with Management and Others

  Series A-5 Preferred Stock Financing. In March 2000, we issued 9,572,248
shares of series A-5 preferred stock for $3.00 per share to eleven accredited
investors. Included in the amount were 3,451,165 shares issued upon the
conversion of the November 1999 Bridge Financing. The series A-5 preferred
stock will automatically convert into an aggregate of     shares of common
stock upon the closing of this offering. Investors owning 5% or more of our
shares and directors and officers who participated in this transaction include:

<TABLE>
<CAPTION>
                                                         Number of Shares of
                                   Number of Shares of    Common Stock upon
                                       Series A-5      Conversion of Series A-5
Investor                             Preferred Stock       Preferred Stock
--------                           ------------------- ------------------------
<S>                                <C>                 <C>
HealthCareVentures III, L.P. .....      1,067,100
HealthCareVentures IV, L.P. ......        313,366
HealthCareVentures V, L.P.........      1,022,253
Rho Management Trust II...........      1,702,016
Abingworth Bioventures SICAV......        576,459
Biotech Growth SA.................      3,878,170
</TABLE>

  Dr. Cavanaugh and Mr. Werner, two of our directors, are general partners of
HealthCare Partners III, L.P., HealthCare Partners IV, L.P. and HealthCare
Partners V, L.P., which are the general partners of HealthCare Ventures III,
L.P., HealthCare Ventures IV, L.P. and HealthCare Ventures V, L.P.,
respectively. In this prospectus we refer to HealthCare Ventures III, L.P.,
HealthCare Ventures IV, L.P. and HealthCare Ventures V, L.P., collectively, as
funds affiliated with HealthCare Ventures.

  Mr. Ruch, one of our directors, is the Chairman and Chief Executive Officer
of Rho Management Company, Inc., financial advisor to Rho Management Trust II.

  Dr. Bunting, one of our directors, is a director of Abingworth Management
Limited in London, UK. Abingworth Management Limited is the investment adviser
to Abingworth Bioventures SICAV.

  1999 Bridge Loan Financing. In November 1999, we issued and sold $10,000,000
of secured convertible promissory notes to eight accredited investors. The
promissory notes carried an interest rate of prime plus one percent per year
and under their terms automatically converted into 3,451,165 shares of series
A-5 preferred stock in March 2000. In connection with this financing, we issued
warrants to purchase 3,500,000 shares of our common stock at an exercise price
of $1.25 per share. Investors owning 5% or more of our capital stock and
directors and officers who participated in this transaction include:

<TABLE>
<CAPTION>
                                                             Number of Shares of
                                                                Common Stock
Investor                                     Promissory Note Underlying Warrants
--------                                     --------------- -------------------
<S>                                          <C>             <C>
HealthCare Ventures III, L.P. ..............   $3,092,000         1,082,200
HealthCare Ventures IV, L.P. ...............      908,000           317,800
Rho Management Trust II.....................    3,000,000         1,050,000
Abingworth Bioventures SICAV................      884,732           309,656
Biotech Growth SA...........................    1,578,706           552,547
</TABLE>

  Series A-4 Preferred Stock Financing. In January 1998, we issued 4,000,000
shares of series A-4 preferred stock for $2.60 per share to Biotech Growth SA.
The series A-4 preferred stock will automatically convert into an aggregate of
   shares of common stock upon the closing of this offering.

                                       63
<PAGE>

  Series A-3 Preferred Stock Financing. In March 1997 we issued 10,304,264
shares of series A-3 preferred stock for $1.21 per share to twelve accredited
investors. The series A-3 preferred stock will automatically convert into an
aggregate of    shares of common stock upon the closing of this offering.
Investors owning 5% or more of our shares and directors and officers who
participated in this transaction include:

<TABLE>
<CAPTION>
                                                               Number of Shares
                                                               of Common Stock
                                           Number of Shares of upon Conversion
                                               Series A-3       of Series A-3
Investor                                     Preferred Stock   Preferred Stock
--------                                   ------------------- ----------------
<S>                                        <C>                 <C>
HealthCareVentures III, L.P. .............        318,608
HealthCareVentures IV, L.P. ..............         93,563
Rho Management Trust II...................      2,640,089
Abingworth Bioventures SICAV..............      2,060,853
State of Michigan Retirement Systems......      2,473,023
</TABLE>


  1996 Bridge Loan Financing. In September 1996, we issued and sold $500,000 of
promissory notes to five accredited investors. The promissory notes carried an
interest rate of ten percent per year. In March 1997, we repaid the notes,
together with accrued interest of $23,014. In connection with this financing,
in March 1997 we issued warrants to purchase 100,000 shares of our common stock
at an exercise price of $0.01 per share. Investors owning 5% or more of our
capital stock and directors and officers who participated in this transaction
include:
<TABLE>
<CAPTION>
                                                             Number of Shares of
                                                                Common Stock
Investor                                     Promissory Note Underlying Warrants
--------                                     --------------- -------------------
<S>                                          <C>             <C>
HealthCare Ventures III, L.P. ..............    $316,288           63,257
HealthCare Ventures IV, L.P. ...............      92,882           18,577
Rho Management Trust II.....................      74,709           14,941
</TABLE>

Other Agreements With Officers And Directors

  In February 1997, we made a loan of $106,250 at 6.28% to F. Raymond Salemme,
our President and Chief Scientific Officer, to purchase 425,000 shares of our
restricted stock awarded to him under our equity compensation plan for a
purchase price of $0.25 per share. In September 1997, we made a loan of $75,000
at 6.14% to Michael J. Wassil, our Vice President and Chief Financial Officer,
to purchase 75,000 shares of our restricted stock awarded to him under our
equity compensation plan for a purchase price of $1.00 per share. Our
compensation committee has the discretion to forgive the loans to Dr. Salemme
and Mr. Wassil. Over the last two years, our compensation committee has
forgiven the loans at a rate of 25% of the outstanding principal and interest
per year. As of March 31, 2000, the outstanding principal amount of Dr.
Salemme's loan was $26,563 and the outstanding principal amount of Mr. Wassil's
loan was $37,500. In March 2000, we made a loan of $519,505 at 6.69% to David
C. U'Prichard, Ph.D., our Chief Executive Officer, to exercise options to
purchase 495,238 shares of our restricted stock at a purchase price of $1.05
per share, as provided under the terms of his employment offer letter. These
shares are subject to repurchase restrictions which lapse over the same period
as the predecessor stock options would have vested.

  Drs. Canavan and Horovitz, two of our directors, each have received grants of
options to purchase 50,000 shares of our common stock under our Equity
Compensation Plan in connection with their service as directors. In addition,
Mr. King, one of our directors, received a restricted stock grant in connection
with his service as a director of 20,000 shares of common stock for an
aggregate purchase price of $45,000. All of the option grants and restricted
stock awards for our directors vest in equal annual installments over a period
of four years.

Certain Business Relationships

  David R. King, one of our directors, is a partner at Morgan, Lewis & Bockius
LLP, a law firm which has provided legal services for us in each of our last
three fiscal years.

                                       64
<PAGE>

                             PRINCIPAL STOCKHOLDERS

  The following table sets forth information with respect to the beneficial
ownership of our common stock as of May 23, 2000, and after the sale of shares
in this offering, by:

  . each person or entity who beneficially owns more than 5% of our stock;

  . each of our named executive officers;

  . each of our directors; and

  . all of our directors and executive officers as a group.

  Unless otherwise indicated, the address for each stockholder is care of 3-
Dimensional Pharmaceuticals, Inc., 665 Stockton Drive, Exton, Pennsylvania
19341. Beneficial ownership is determined in accordance with the rules of the
SEC governing the determination of beneficial ownership of securities.

  Under the rules of the SEC, a person is deemed to be a beneficial owner of a
security if that person has or shares voting power, which includes the power to
vote or to direct the voting of such security, or investment power, which
includes the power to dispose of or to direct the disposition of such security.
A person is also deemed to be a beneficial owner of any securities for which
that person has a right to acquire beneficial ownership within 60 days. Under
these rules, more than one person may be deemed a beneficial owner of the same
securities and a person may be deemed to be the beneficial owner of securities
as to which such person has no economic interest.
<TABLE>
<CAPTION>
                                                      Percentage of Shares
                                                       Beneficially Owned
                                                      -------------------------
Name and Address of Beneficial      Number of Shares    Before         After
Owner                              Beneficially Owned  Offering       Offering
------------------------------     ------------------ -----------    ----------
<S>                                <C>                <C>            <C>
5% Stockholders
Funds Affiliated with HealthCare       12,570,688            29.95%
 Ventures(1).....................
 44 Nassau Street
 Princeton, New Jersey 08542
Rho Management Trust II(2).......       7,373,260            18.03
 152 West 57th street
 New York, NY 10019
State of Michigan Retirement            2,473,023             6.25
 Systems.........................
 Department of Treasury, Treasury
 Building
 30 West Allegan
 East Lansing, Michigan 48922
Abingworth Bioventures SICAV(3)..       2,946,968             7.39
 c/o Sanne & Cie
 Boite Postale 566
 L-2015 Luxembourg
Biotech Growth SA(4).............       8,430,717            21.01
 c/o Bellevue Asset Management AG
 Graftenauweg 4
 CH-6301 Zug
 Switzerland
</TABLE>

                                       65
<PAGE>

<TABLE>
<CAPTION>
                                                     Percentage of Shares
                                                      Beneficially Owned
                                                     ------------------------
                                   Number of Shares    Before        After
Directors and Executive Officers  Beneficially Owned  Offering      Offering
--------------------------------  ------------------ -----------   ----------
<S>                               <C>                <C>           <C>
David C. U'Prichard, Ph.D. .....         495,238             1.25
F. Raymond Salemme, Ph.D.(5)....       1,413,273             3.52
Michael J. Wassil(6)............         184,128           *
Roger F. Bone, Ph.D.(7).........         171,792           *
David G. Fehr(8)................          82,857           *
Scott M. Horvitz(9).............         197,033           *
Richard M. Soll, Ph.D.(10)......         157,554           *
Stephen Bunting, Ph.D.(3).......       2,946,968             7.39
Bernard Canavan, M.D.(11).......          22,500           *
James H. Cavanaugh, Ph.D.(1)....      12,570,688            29.95
Zola P. Horovitz, Ph.D.(12).....          22,500           *
David R. King...................          20,000           *
Joshua Ruch(2)..................       7,373,260            18.03
Harold R. Werner(1).............      12,570,688            29.95
                                      ----------      -----------    ---------
All executive officers and            26,144,332            58.50
 directors as a group (13
 persons).......................
</TABLE>
--------
 *  less than one percent
(1) Includes 8,926,936 shares held by HealthCare Ventures III, L.P., including
    1,853,385 shares issuable upon exercise of warrants exercisable within 60
    days. Also includes 2,621,499 shares held by HealthCare Ventures IV, L.P.,
    including 544,270 shares issuable upon exercise of warrants exercisable
    within 60 days. Also includes 1,022,253 shares held by HealthCare Ventures
    V, L.P. James H. Cavanaugh, Ph.D. and Harold R. Werner are General Partners
    of the general partner of each of the above-listed investment funds, and
    share investment and voting power over these shares with the other General
    Partners of each of the general partners of these funds, none of whom are
    affiliated with us. Dr. Cavanaugh and Mr. Werner disclaim beneficial
    ownership of such shares except to the extent of their pecuniary interest
    therein. Does not reflect shares of common stock issuable at the initial
    public offering price upon the automatic conversion of $528,364 of
    convertible promissory notes, plus accrued interest, and $155,160 of
    convertible promissory notes, plus accrued interest, issued to HealthCare
    Ventures III, L.P. and HealthCare Ventures IV, L.P., respectively, in lieu
    of cash payment of dividends.
(2) Includes 7,373,260 shares held by Rho Management Trust II, including
    1,335,121 shares issuable upon exercise of warrants exercisable within 60
    days. Joshua Ruch is the Chairman and Chief Executive Officer of Rho
    Management Company, Inc., financial advisor to Rho Management Trust II. Mr.
    Ruch disclaims beneficial ownership of such shares except to the extent of
    his pecuniary interest therein. Does not reflect shares of common stock
    issuable at the initial public offering price upon the automatic conversion
    of $91,422 of convertible promissory notes, plus accrued interest, issued
    to Rho Management Trust II in lieu of cash payment of dividends.
(3) Includes 2,946,968 shares held by Abingworth Bioventures SICAV, including
    309,656 shares issuable upon exercise of warrants exercisable within 60
    days. Stephen Bunting, Ph.D. is a director of Abingworth Management
    Limited, the investment adviser to Abingworth Bioventures SICAV. Dr.
    Bunting is neither a director nor an officer of Abingworth Bioventures
    SICAV. Dr. Bunting disclaims beneficial ownership of such shares except to
    the extent of his pecuniary interest in Abingworth Bioventures SICAV.
(4) Includes 552,547 shares issuable upon exercise of warrants exercisable
    within 60 days.
(5) Includes 559,523 shares of common stock issuable upon the exercise of stock
    options exercisable within 60 days.
(6) Includes 109,128 shares of common stock issuable upon the exercise of stock
    options exercisable within 60 days.
(7) Includes 90,381 shares of common stock issuable upon the exercise of stock
    options exercisable within 60 days.

                                       66
<PAGE>

(8) Includes 72,857 shares of common stock are issuable upon the exercise of
    stock options exercisable within 60 days.
(9) Includes 57,033 shares of common stock issuable upon the exercise of stock
    options exercisable within 60 days.
(10) Includes 155,054 shares of common stock issuable upon the exercise of
     stock options exercisable within 60 days.
(11) All 22,500 shares of common stock are issuable upon the exercise of stock
     options exercisable within 60 days.
(12) Includes 17,500 shares of common stock are issuable upon the exercise of
     stock options exercisable within 60 days.

                                       67
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

  The following description reflects the amendment and restatement of our
certificate of incorporation and our bylaws to be effective immediately prior
to the closing of this offering.

  Our authorized capital stock consists of     million shares, of which
million shares are common stock, par value $.001 per share, and     million
shares are preferred stock, par value $.001 per share, which our board of
directors has the power and authority to designate into classes or series.
Immediately after the sale of the shares of common stock in this offering, we
will have     shares of common stock outstanding and no shares of preferred
stock outstanding. The following is a summary of various provisions of our
common stock and preferred stock.

Common Stock

  The following summarizes the rights of holders of our common stock:

 Voting:

  . one vote for each share held of record on all matters submitted to a vote
    of stockholders

  . no cumulative voting rights

  . election of directors by plurality of votes cast

  . approval of all other matters by majority of votes cast

 Dividends:

  . subject to preferential dividend rights of outstanding shares of
    preferred stock, if any, common stockholders are entitled to receive
    declared dividends

  . the board of directors may only declare dividends out of legally
    available funds

 Additional Rights:

  . subject to the preferential liquidation rights of outstanding shares of
    preferred stock, if any, common stockholders are entitled to receive
    ratably net assets, available after the payment of all debts and
    liabilities, upon our liquidation, dissolution or winding up

  . no preemptive rights

  . no subscription rights

  . no redemption rights

  . no sinking fund rights

  . no conversion rights

  The rights and preferences of common stockholders are subject to the rights
of the holders of any series of preferred stock we may issue in the future.

Preferred Stock

  We may, by resolution of our board of directors, and without any further vote
or action by our stockholders, authorize and issue, subject to limitations
prescribed by law, up to an aggregate of    million shares of preferred stock.
The preferred stock may be issued in one or more classes or series of shares of
any class or series. With respect to any classes or series, the board of
directors may determine the designation and the number of shares, preferences,
limitations and special rights, including dividend rights, conversion rights,
voting rights, redemption rights and liquidation preferences.

  Prior to this offering, we had 6,686,986 shares of series A-1 preferred
stock, 4,333,990 shares of Series A-2 preferred stock, 10,304,264 shares of
series A-3 preferred stock, 4,000,000 shares of A-4 preferred stock,

                                       68
<PAGE>

9,572,248 shares of series A-5 preferred stock, 1,000,000 shares of series B
preferred stock, 400,000 shares of series C preferred stock and 625,000 shares
of series D preferred stock issued and outstanding. Upon the completion of this
offering, all of our outstanding shares of preferred stock will automatically
convert into a total of     shares of common stock.

Registration Rights

  Following completion of this offering and following the expiration of
applicable lock-up periods in connection with the offering, holders of
shares of common stock will have the right to require us to register their
shares under the Securities Act of 1933. The holders of at least 50% of the
shares of our common stock to be issued upon the conversion of our outstanding
series A preferred stock and certain warrants to acquire common stock may
require that we file up to four registration statements under the Securities
Act. In addition, when we are qualified to use Form S-3, each of these holders
may request an unlimited number of registrations on Form S-3. Beginning 12
months after the effective date of this offering, the holder of the shares of
our common stock to be issued upon the conversion of our outstanding series B
preferred stock may request that we file one registration statement. Subject to
the preference rights of the holders of common stock to be issued upon the
conversion of the series A preferred stock and subject to certain limitations,
beginning 12 months after the effective date of this offering, the holders of
the shares of our common stock to be issued upon the conversion of our
outstanding series C or D preferred stock may require that we file one
registration statement. They may also request that we file an unlimited number
of registrations on Form S-3, subject to preference rights of the holders of
common stock to be issued upon the conversion of the series A preferred stock.
Upon such a request, we generally will be required to use our best efforts to
effect any such registration. In addition, if we propose to register any of our
common stock, either for our own account or the account of stockholders, we are
required to notify the holders described above and, subject to certain
limitations, to include in such registration the shares of our common stock
acquired upon conversion of the preferred stock requested to be included.
Registration of shares of common stock pursuant to the exercise of these
registration rights would result in such shares becoming freely tradable
without restriction under the Securities Act of 1933 immediately upon the
effectiveness of such registration and may adversely affect our stock price. In
addition, we are generally obligated to bear the expenses, other than
underwriting discounts and sales commissions, of any such registration. The
registration rights associated with the series A preferred stock terminate on
December 31, 2007. The registration rights associated with the series B and C
preferred stock terminate six years following the effective date of this
offering and the registration rights associated with the series D preferred
stock terminate three years following such date.

Stockholders' Meeting

  Our next annual meeting of stockholders will be held in 2001.

Limitations on Liability

  Our certificate of incorporation limits or eliminates the liability of our
directors to us or our stockholders for monetary damage to the fullest extent
permitted by the Delaware General Corporation Law. As permitted by the Delaware
General Corporation Law, our certificate of incorporation provides that our
directors will not be personally liable to us or our stockholders for monetary
damages for a breach of fiduciary duty as a director, except for liability:

  . for any breach of such person's duty of loyalty;

  . for acts or omissions not in good faith or involving intentional
    misconduct or a knowing violation of law; and

  . for any transaction resulting in receipt by such person of an improper
    personal benefit.

  Our certificate of incorporation also contains provisions indemnifying our
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law.

                                       69
<PAGE>

Anti-Takeover Effects of Provisions of Charter Documents and Delaware Law

  Upon completion of this offering our certificate of incorporation will
provide for the division of our board of directors into three classes. Each
class must be as nearly equal in number as possible. Additionally, each class
must serve a three-year term. The terms of each class are staggered so that
each term ends in a different year over a three-year period. A director may
only be removed for cause and only by the vote of more than 50% of the shares
entitled to vote for the election of directors.

  Our certificate of incorporation also provides that our board of directors
may establish the rights of, and cause us to issue, substantial amounts of
preferred stock without the need for stockholder approval. Further, our board
of directors may determine the terms, conditions, rights, privileges and
preferences of the preferred stock. Our board is required to exercise its
business judgment when making such determinations. Our board of directors' use
of the preferred stock may inhibit the ability of third parties to acquire us.
Additionally, our board may use the preferred stock to dilute the common stock
of entities seeking to obtain control of us. The rights of the holders of
common stock will be subject to, and may be adversely affected by, any
preferred stock that may be issued in the future. Our preferred stock provides
desirable flexibility in connection with possible acquisitions, financings and
other corporate transactions. However, it may have the effect of discouraging,
delaying or preventing a change in control of us. We have no present plans to
issue any shares of preferred stock.

  The existence of the foregoing provisions in our certificate of incorporation
could make it more difficult for third parties to acquire or attempt to acquire
control of us or substantial amounts of our common stock.

  After this offering is completed, Section 203 of the Delaware General
Corporation Law will apply to us. Section 203 of the Delaware General
Corporation Law generally prohibits specific business combinations between a
Delaware corporation and an interested stockholder. An interested stockholder
is generally defined as a person who, together with any affiliates or
associates of such person, beneficially owns, or within three years did own,
directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. The statute broadly defines business combinations to
include:

  . mergers;

  . consolidations;

  . sales or other dispositions of assets having an aggregate value in excess
    of 10% of the consolidated assets of the corporation or aggregate market
    value of all outstanding stock of the corporation; and

  . certain transactions that would increase the interested stockholder's
    proportionate share ownership in the corporation.

  The statute prohibits any such business combination for a period of three
years commencing on the date the interested stockholder becomes an interested
stockholder, unless:

  . the business combination is approved by the corporation's board of
    directors prior to the date the interested stockholder becomes an
    interested stockholder;

  . the interested stockholder acquired at least 85% of the voting stock of
    the corporation, other than stock held by directors who are also officers
    or by certain employee stock plans, in the transaction in which it
    becomes an interested stockholder; and

  . the business combination is approved by a majority of the board of
    directors and by the affirmative vote of at least two-thirds of the
    outstanding voting stock that is not owned by the interested stockholder.

  The Delaware General Corporation Law contains provisions enabling a
corporation to avoid Section 203's restrictions if stockholders holding a
majority of the corporation's voting stock approve an amendment to the
corporation's certificate of incorporation or bylaws to avoid the restrictions.
In addition, the restrictions contained in Section 203 are not applicable to
any of our existing stockholders. We have not and do not currently intend to
elect out of the application of Section 203 of the Delaware General Corporation
Law.

                                       70
<PAGE>

Nasdaq National Market

  We have applied to list our common stock on the Nasdaq National Market under
the trading symbol DDDP.

Transfer Agent and Registrar

  The transfer agent and registrar for our common stock is    .

                        SHARES ELIGIBLE FOR FUTURE SALE

  Prior to this offering, there has been no public market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices. Since no shares will be
available for sale shortly after this offering because of the contractual and
legal restrictions on resale described below, sales of substantial amounts of
common stock in the public market after these restrictions lapse could
adversely affect the prevailing market price and our ability to raise equity
capital in the future.

  Upon completion of this offering, we will have outstanding an aggregate of
    shares of common stock, assuming no exercise of the underwriters' over-
allotment option, excluding     shares issuable upon exercise of outstanding
options. Of these shares, all of the shares sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act of 1933, unless such shares are purchased by affiliates as that
term is defined in Rule 144 under the Securities Act. The remaining shares of
common stock, excluding     shares issuable upon exercise of outstanding
options, held by existing stockholders are restricted securities as that term
is defined in Rule 144 under the Securities Act. Restricted shares may be sold
in the public market only if registered or if they qualify for an exemption
from registration described below under Rules 144, 144(k) or 701 promulgated
under the Securities Act.

  Beginning 180 days after the date of this prospectus, approximately
restricted shares subject to lock-up agreements between the underwriters and
most of our stockholders, including officers and directors, will become
eligible for sale in the public market under Rule 144(k), Rule 144 or Rule 701.
The lock-up agreements provide that the stockholders will not, directly or
indirectly, sell or otherwise dispose of any shares of common stock without the
prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days from
the date of this prospectus. Bona fide gifts by individuals to immediate family
members or transfers by a partnership to its partners are excepted from the
restrictions of the lock-up agreements, provided the transferee agrees to be
bound by similar restrictions. Bear, Stearns & Co. Inc. may release all or any
portion of the securities subject to the lock-up agreements without notice.

Rule 144

  Under Rule 144, beginning 90 days after the date the registration statement
of which this prospectus is a part is declared effective, a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for
at least one year, which includes the holding period of any prior owner other
than an affiliate, would generally be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:

  . 1% of the outstanding shares of our common stock then outstanding, which
    will equal approximately     shares immediately after this offering; or

  . the average weekly trading volume of our common stock on the Nasdaq
    National Market during the four calendar weeks preceding the filing of a
    notice on Form 144 with respect to such sale.

  Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.

                                       71
<PAGE>

Rule 144(k)

  Under Rule 144(k), a person who was not an affiliate of ours at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, which includes the holding period
of any prior owner except an affiliate, is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.

Rule 701

  In general, under Rule 701 of the Securities Act, any of our employees,
consultants or advisors, other than affiliates, who purchase or receives shares
from us in connection with a compensatory stock purchase plan or option plan or
other written agreement will be eligible to resell such shares beginning 90
days after the effective date of the registration statement of which this
prospectus is a part, subject only to the manner of sale provisions of Rule
144, and by affiliates under Rule 144 without compliance with its holding
period.

Registration Rights

  Upon completion of this offering, the holders of    shares of common stock,
or their transferees, will be entitled to certain rights with respect to the
registration of such shares under the Securities Act. When these shares are
registered under the Securities Act, they will be freely tradable unless held
by affiliates.

Stock Options

  We intend to file a registration statement under the Securities Act covering
    shares of common stock reserved for issuance under our equity compensation
plan 180 days following completion of this offering. Thereafter, shares which
are issued under the plan will, subject to Rule 144 volume limitations
applicable to affiliates, be available for sale in the open market, beginning
approximately 180 days after the closing of this offering.

                                       72
<PAGE>

                                  UNDERWRITING

  Subject to the terms and conditions set forth in an agreement among the
underwriters and us, each of the underwriters named below, through their
representatives, Bear, Stearns & Co. Inc., Chase Securities Inc. and U.S.
Bancorp Piper Jaffray Inc., have severally agreed to purchase from us the
aggregate number of shares of our common stock set forth opposite its name
below:

<TABLE>
<CAPTION>
                                                                        Number
   Underwriter                                                         Of Shares
   -----------                                                         ---------
   <S>                                                                 <C>
   Bear, Stearns & Co. Inc............................................
   Chase Securities Inc...............................................
   U.S. Bancorp Piper Jaffray Inc.....................................
                                                                          ---
       Total..........................................................
                                                                          ===
</TABLE>

  The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of various legal matters by their counsel
and to various other conditions, including delivery of legal opinions by our
counsel, the delivery of a letter by our independent auditors and the accuracy
of the representations and warranties made by us in the underwriting agreement.
Under the underwriting agreement, the underwriters are obliged to purchase and
pay for all of the above shares of our common stock if any are purchased.

Public Offering Price

  The underwriters propose to offer the shares of common stock directly to the
public at the offering price set forth on the cover page of this prospectus and
at that price less a concession not in excess of $   per share of common stock
to other dealers who are members of the National Association of Securities
Dealers, Inc. The underwriters may allow, and those dealers may reallow,
concessions not in excess of $   per share of common stock to other dealers.
After this offering, the offering price, concessions and other selling terms
may be changed by the underwriters. Our common stock is offered subject to
receipt and acceptance by the underwriters and subject to other conditions,
including the right to reject orders in whole or in part. The underwriters have
informed us that the underwriters do not expect to confirm sales of common
stock to any accounts over which they exercise discretionary authority.

  The following table summarizes the per share and total public offering price
of the shares of common stock in the offering, the underwriting compensation to
be paid to the underwriters by us and the proceeds of the offering, before
expenses, to us. The information presented assumes either no exercise or full
exercise by the underwriters of their over-allotment option.

<TABLE>
<CAPTION>
                                                               Total
                                                      ------------------------
                                                 Per  Without Over- With Over-
                                                Share   Allotment   Allotment
                                                ----- ------------- ----------
<S>                                             <C>   <C>           <C>
Public offering price.......................... $         $            $
Underwriting discounts and commissions payable
 by us.........................................
Proceeds, before expenses, to us...............
</TABLE>

  The underwriting discount and commission per share is equal to the public
offering price per share of our common stock less the amount paid by the
underwriters to us per share of common stock.

  We estimate total expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will
be approximately $1.2 million.


                                       73
<PAGE>

Over-Allotment Option To Purchase Additional Shares

  We have granted a 30-day over-allotment option to the underwriters to
purchase up to an aggregate of     additional shares of our common stock
exercisable at the offering price less the underwriting discounts and
commissions, each as set forth on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, then each of the
underwriters will be obligated to purchase additional shares of common stock in
proportion to their respective purchase commitments as shown in the table set
forth above, subject to various conditions.

Indemnification And Contribution

  The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the
Securities Act or will contribute to payments that the underwriters may be
required to make in respect of those liabilities.

Lock-Up Agreements

  Our directors and officers and stockholders holding    shares have agreed
that they will not offer, sell or agree to sell, directly or indirectly, or
otherwise dispose of any shares of common stock in the public market without
the prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days
from the date of this prospectus. Bona fide gifts by individuals to immediate
family members or transfers by a partnership to its partners are excepted from
the restrictions of the lock-up agreements, provided the transferee agrees to
be bound by similar restrictions.

  In addition, we have agreed that for a period of 180 days from the date of
this prospectus, we will not, without the prior written consent of Bear,
Stearns & Co. Inc., offer, sell or otherwise dispose of any shares of common
stock, except that we may issue, and grant options to purchase, shares of
common stock and restricted stock under our equity compensation plan. During
this lock-up period, subject to various conditions, we may also issue
additional equity securities in connection with collaborative and licensing
arrangements or to pay for possible acquisitions, so long as the recipients of
such securities are also subject to the 180 day lock-up period.

Nasdaq National Market Quotation

  Prior to this offering, there has been no public market for our common stock.
Consequently, the initial offering price for the common stock will be
determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in those negotiations, the
primary factors will be our results of operations in recent periods, estimates
of our prospects and the industry in which we compete, an assessment of our
management, the general state of the securities markets at the time of this
offering and the prices of similar securities of generally comparable
companies. We have applied for approval for the quotation of our common stock
on the Nasdaq National Market, under the symbol "DDDP." We cannot assure you,
however, that an active or orderly trading market will develop for the common
stock or that the common stock will trade in the public market subsequent to
this offering at or above the initial offering price.

Stabilization, Syndicate Short Position And Penalty Bids

  In order to facilitate this offering, persons participating in this offering
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock during and after this offering. Specifically, the
underwriters may over-allot or otherwise create a short position in the common
stock for their own account by selling more shares of common stock than we have
actually sold to them. The underwriters may elect to cover any such short
position by purchasing shares of common stock in the open market and may impose

                                       74
<PAGE>

penalty bids, under which selling concessions allowed to syndicate members or
other broker-dealers participating in this offering are reclaimed if shares of
common stock previously distributed in this offering are repurchased in
connection with stabilization transactions or otherwise. The effect of these
transactions may be to stabilize or maintain the market price at a level above
that which might otherwise prevail in the open market. The imposition of a
penalty bid may also affect the price of the common stock to the extent that it
discourages resales thereof. No representation is made as to the magnitude or
effect of any such stabilization or other transactions. Such transactions may
be effected on the Nasdaq National Market or otherwise and, if commenced, may
be discontinued at any time.

Reserved Share Program

  At our request, the underwriters have reserved for sale at the initial public
offering price up to     shares of common stock to be sold in this offering for
sale to our directors, officers, employees, business associates, business and
legal advisors, vendors and related persons. Purchases of reserved shares are
to be made through an account at Bear, Stearns & Co. Inc. in accordance with
Bear, Stearns & Co. Inc.'s procedures for opening an account and transacting in
securities. The number of shares available for sale to the general public will
be reduced to the extent that any reserved shares are purchased. Any reserved
shares not purchased by our directors, officers, employees, business
associates, business and legal advisors, vendors and related persons will be
offered by the underwriters to the general public on the same terms as the
other shares offered by this prospectus.

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

  Bear, Stearns & Co. Inc. was previously retained by us to identify and
provide advice with respect to potential transactions. Bear, Stearns & Co. Inc.
would be entitled to a fee, based on the value of the transaction as defined in
the engagement letter, if there is an agreement in respect of a covered
transaction prior to December 31, 2000.

                                       75
<PAGE>

                                 LEGAL MATTERS

  The validity of the shares of common stock offered hereby will be passed upon
for us by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain
legal matters will be passed upon for the Underwriters by Coudert Brothers, New
York, New York.

                                    EXPERTS

  Our financial statements and schedule included in this prospectus and
elsewhere in the registration statement as of December 31, 1999 (consolidated)
and 1998 and for the years ended December 1999, 1998 and 1997 have been audited
by Richard A. Eisner & Company, LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein and
therein in reliance on said reports given upon the authority of said firm as
experts in accounting and auditing.

                        ADDITIONAL INFORMATION ABOUT US

  We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered hereby. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement or the
exhibits and schedules which are part of the registration statement. For
further information with respect to us and our common stock, reference is made
to the registration statement and the exhibits and schedules. You may read and
copy any document we file at the Securities and Exchange Commission's public
reference facilities in Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information about the public reference rooms. Our Securities and
Exchange Commission filings are also available to the public from the
Securities and Exchange Commission's web site at http://www.sec.gov. Upon
completion of this offering, we will become subject to the information and
periodic reporting requirements of the Securities Exchange Act and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the Securities and Exchange Commission. Such periodic reports,
proxy statements and other information will be available for inspection and
copying at the Securities and Exchange Commission's public reference rooms and
the web site of the Securities and Exchange Commission referred to above.

                                       76
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                                    Contents

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Financial Statements

  Independent auditors' report............................................ F-2

  Balance sheets as of March 31, 2000 (consolidated) (unaudited) and
   December 31, 1999 (consolidated) and 1998.............................. F-3

  Statements of operations for the three-month periods ended March 31,
   2000 (consolidated) and 1999 (unaudited) and the years ended December
   31, 1999, 1998 and 1997................................................ F-4

  Statements of changes in capital deficiency for the three-month period
   ended March 31, 2000 (consolidated) (unaudited) and the years ended
   December 31, 1999, 1998 and 1997....................................... F-5

  Statements of cash flows for the three-month periods ended March 31,
   2000 (consolidated) and 1999 (unaudited) and the years ended December
   31, 1999, 1998 and 1997................................................ F-6

  Notes to financial statements........................................... F-7
</TABLE>

                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
3-Dimensional Pharmaceuticals, Inc.
Exton, Pennsylvania

  We have audited the accompanying balance sheets of 3-Dimensional
Pharmaceuticals, Inc. as of December 31, 1999 (consolidated) and 1998, and the
related statements of operations, changes in capital deficiency and cash flows
for each of the years in the three-year period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

  In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of 3-Dimensional Pharmaceuticals,
Inc. as of December 31, 1999 (consolidated) and 1998, and the results of
operations and cash flows for each of the years in the three-year period ended
December 31, 1999 in conformity with generally accepted accounting principles.

Richard A. Eisner & Company, LLP

New York, New York
February 25, 2000

                                      F-2
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                           December 31,
                                        March 31,    --------------------------
                                           2000          1999          1998
                                       ------------  ------------  ------------
                                       (unaudited)
                                            (consolidated)
<S>                                    <C>           <C>           <C>
ASSETS
Current assets:
  Cash and cash equivalents..........  $ 22,038,000  $  7,620,000  $  2,439,000
  Marketable securities..............                                 7,287,000
  Prepaid expenses and other current
   assets............................       298,000       243,000       271,000
  Grants and contracts receivable....       257,000        94,000       378,000
                                       ------------  ------------  ------------
   Total current assets..............    22,593,000     7,957,000    10,375,000
Property and equipment, net..........     3,997,000     4,314,000     5,210,000
Other assets.........................       215,000       209,000       127,000
Notes receivable from officers.......       589,000        70,000       121,000
                                       ------------  ------------  ------------
                                       $ 27,394,000  $ 12,550,000  $ 15,833,000
                                       ============  ============  ============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
  Accounts payable and accrued
   expenses..........................  $  1,917,000  $  2,737,000  $  1,272,000
  Deferred income....................     1,839,000       888,000       543,000
  Current portion of long-term debt..     1,140,000     1,139,000     1,033,000
  Current portion of settlement
   accrual...........................     1,000,000     1,000,000
                                       ------------  ------------  ------------
   Total current liabilities.........     5,896,000     5,764,000     2,848,000
  Notes payable--dividends and
   accrued interest..................       701,000       685,000       144,000
  Long-term debt, less current
   portion...........................     2,020,000     2,330,000     3,270,000
  Convertible notes payable and
   accrued interest..................                  10,115,000
  Long-term portion of settlement
   accrual...........................                     500,000
                                       ------------  ------------  ------------
                                          8,617,000    19,394,000     6,262,000
                                       ------------  ------------  ------------
Commitment and contingency (Notes L
 and M)
Redeemable Convertible Series A
 preferred stock--$.001 par value;
 35,136,963 shares authorized,
 34,897,488, 25,325,240 and
 25,325,240 issued and outstanding at
 March 31, 2000 and December 31, 1999
 and 1998, respectively (aggregate
 liquidating preference $63,721,218
 at March 31, 2000 and $35,004,474 at
 December 31, 1999 and 1998).........    63,550,000    34,834,000    34,834,000
                                       ------------  ------------  ------------
Capital deficiency:
  Convertible preferred stock--$.001
   par value; 6,000,000 shares
   authorized in aggregate, 1,400,000
   issued and outstanding at March
   31, 2000 and December 31, 1999 and
   1998 (aggregate liquidating
   preference $3,250,000)............         1,000         1,000         1,000
  Common stock--$.001 par value;
   44,784,915 shares authorized,
   2,620,923, 2,087,168, and
   2,055,139 shares outstanding at
   March 31, 2000 and December 31,
   1999 and 1998, respectively.......         3,000         2,000         2,000
  Additional paid-in capital.........     4,590,000     3,428,000     3,874,000
  Deferred compensation..............      (516,000)
  Accumulated deficit................   (48,851,000)  (45,109,000)  (29,140,000)
                                       ------------  ------------  ------------
   Total capital deficiency..........   (44,773,000)  (41,678,000)  (25,263,000)
                                       ============  ============  ============
                                       $ 27,394,000  $ 12,550,000  $ 15,833,000
                                       ============  ============  ============
</TABLE>

                       See notes to financial statements

                                      F-3
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                              Three Months Ended
                                  March 31,                  Year ended December 31,
                          --------------------------  ---------------------------------------
                               2000         1999          1999          1998         1997
                          -------------- -----------  ------------  ------------  -----------
                          (consolidated)
                                 (unaudited)
<S>                       <C>            <C>          <C>           <C>           <C>
Grant and research
 revenue................   $ 1,484,000   $ 1,379,000  $  4,489,000  $  5,095,000  $ 3,580,000
                           -----------   -----------  ------------  ------------  -----------
Costs and expenses:
  Research and
   development..........     3,425,000     2,975,000    12,136,000    10,984,000    6,517,000
  General and
   administrative.......     1,537,000     1,155,000     6,525,000     4,458,000    3,000,000
  Litigation
   settlement...........                                 1,500,000
                           -----------   -----------  ------------  ------------  -----------
                             4,962,000     4,130,000    20,161,000    15,442,000    9,517,000
                           -----------   -----------  ------------  ------------  -----------
Loss from operations....    (3,478,000)   (2,751,000)  (15,672,000)  (10,347,000)  (5,937,000)
Interest income.........        87,000       125,000       328,000       868,000      521,000
Interest expense........      (351,000)     (114,000)     (625,000)     (232,000)    (149,000)
                           -----------   -----------  ------------  ------------  -----------
Net loss................    (3,742,000)   (2,740,000)  (15,969,000)   (9,711,000)  (5,565,000)
Declared and accrued
 cumulative dividends on
 preferred stock........      (167,000)     (167,000)     (669,000)     (144,000)
                           -----------   -----------  ------------  ------------  -----------
Net loss applicable to
 common stock...........   $(3,909,000)  $(2,907,000) $(16,638,000) $ (9,855,000) $(5,565,000)
                           ===========   ===========  ============  ============  ===========
Basic and diluted net
 loss per common share--
 historical.............   $     (2.11)  $     (1.79) $      (9.78) $      (7.93) $     (9.83)
                           -----------   -----------  ------------  ------------  -----------
Weighted average common
 shares outstanding--
 historical.............     1,849,000     1,624,000     1,701,000     1,243,000      566,000
                           -----------   -----------  ------------  ------------  -----------
Basic and diluted net
 loss per common share--
 pro forma..............   $      (.13)               $       (.56)
                           ===========                ============
Weighted average common
 shares outstanding--pro
 forma..................    28,808,000                  28,555,000
                           ===========                ============
</TABLE>



                       See notes to financial statements

                                      F-4
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                  STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY

<TABLE>
<CAPTION>
                          Preferred Stock    Common Stock
                          ---------------- ----------------- Additional                                Total
                                     Par               Par    Paid-in    Accumulated     Deferred     Capital
                           Shares   Value   Shares    Value   Capital      Deficit     Compensation  Deficiency
                          --------- ------ ---------  ------ ----------  ------------  ------------ ------------
<S>                       <C>       <C>    <C>        <C>    <C>         <C>           <C>          <C>
Balance--December 31,
 1996...................  1,000,000 $1,000 1,166,128  $1,000 $2,663,000  $(13,864,000)              $(11,199,000)
Common stock issued
 pursuant to exercise of
 stock options, warrants
 and stock grants.......                   1,105,467   1,000    324,000                                  325,000
Issuance of Series C
 preferred stock, net of
 offering costs of
 $12,000................    400,000                             988,000                                  988,000
Net loss for the year...                                                   (5,565,000)                (5,565,000)
                          --------- ------ ---------  ------ ----------  ------------   ---------   ------------
Balance--December 31,
 1997...................  1,400,000  1,000 2,271,595   2,000  3,975,000   (19,429,000)               (15,451,000)
Common stock issued
 pursuant to exercise of
 stock options, warrants
 and stock grants.......                     296,211             93,000                                   93,000
Common stock reacquired
 from former chief
 executive officer......                    (512,667)          (116,000)                                (116,000)
Dividend declared on
 Series A-1 preferred...                                       (144,000)                                (144,000)
Compensation charge in
 connection with
 acceleration of vesting
 terms on restricted
 shares and options.....                                         66,000                                   66,000
Net loss for the year...                                                   (9,711,000)                (9,711,000)
                          --------- ------ ---------  ------ ----------  ------------   ---------   ------------
Balance--December 31,
 1998...................  1,400,000  1,000 2,055,139   2,000  3,874,000   (29,140,000)               (25,263,000)
Common stock issued
 pursuant to exercise of
 stock options..........                      32,029             11,000                                   11,000
Value of options issued
 as compensation to
 consultants............                                         18,000                                   18,000
Value of warrants issued
 in connection with
 Bridge loan............                                         26,000                                   26,000
Dividends declared on
 Series A-1 preferred...                                       (501,000)                                (501,000)
Net loss for the year...                                                  (15,969,000)               (15,969,000)
                          --------- ------ ---------  ------ ----------  ------------   ---------   ------------
Balance--December 31,
 1999...................  1,400,000  1,000 2,087,168   2,000  3,428,000   (45,109,000)               (41,678,000)
Common stock issued
 pursuant to exercise of
 stock options, warrants
 and stock grants.......                     533,755   1,000    535,000                                  536,000
Value of options issued
 to consultants.........                                        111,000                                  111,000
Deferred compensation
 charge in connection
 with option grant......                                        516,000                 $(516,000)             0
Net loss for the
 period.................                                                   (3,742,000)                (3,742,000)
                          --------- ------ ---------  ------ ----------  ------------   ---------   ------------
Balance--March 31, 2000
 (unaudited)............  1,400,000 $1,000 2,620,923  $3,000 $4,590,000  $(48,851,000)  $(516,000)  $(44,773,000)
                          ========= ====== =========  ====== ==========  ============   =========   ============
</TABLE>

                       See notes to financial statements

                                      F-5
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                             Three Months Ended
                                 March 31,                 Year Ended December 31,
                         --------------------------  --------------------------------------
                              2000         1999          1999         1998         1997
                         -------------- -----------  ------------  -----------  -----------
                         (consolidated)
                                (unaudited)
<S>                      <C>            <C>          <C>           <C>          <C>
Cash flows from
 operating activities:
Net loss...............   $(3,742,000)  $(2,740,000) $(15,969,000) $(9,711,000) $(5,565,000)
Adjustments to
 reconcile net loss to
 net cash used in
 operating activities:
 Depreciation and
  amortization.........       364,000       405,000     1,565,000    1,486,000      860,000
 Amortization of
  premium of short-term
  investments..........                      11,000        19,000       62,000       43,000
 Valuation of options
  and warrants.........       111,000                      44,000
 Interest paid with
  preferred stock......       353,000                                                23,000
 Compensation charge in
  connection with
  acceleration of
  vesting of options
  and stock............                                                 66,000
 Changes in:
  Grants and contracts
   receivable..........      (163,000)       46,000       284,000      (78,000)    (247,000)
  Other assets.........       (60,000)     (202,000)       (3,000)     336,000     (461,000)
  Accounts payable and
   accrued expenses....      (917,000)      (64,000)    1,620,000      106,000      356,000
  Settlement accrual...      (500,000)                  1,500,000
  Deferred income......       951,000      (194,000)      345,000     (675,000)   1,217,000
                          -----------   -----------  ------------  -----------  -----------
   Net cash used in
    operating
    activities.........    (3,603,000)   (2,738,000)  (10,595,000)  (8,408,000)  (3,774,000)
                          -----------   -----------  ------------  -----------  -----------
Cash flows from
 investing activities:
 Purchases of
  investment
  securities...........                                             (8,334,000)  (9,558,000)
 Sale and maturities of
  investment
  securities...........                   1,500,000     7,267,000    7,500,000    3,000,000
 Capital expenditures..       (48,000)      (84,000)     (278,000)  (3,999,000)    (686,000)
 Loan made to officer..      (520,000)                                             (251,000)
                          -----------   -----------  ------------  -----------  -----------
   Net cash provided by
    (used in) investing
    activities.........      (568,000)    1,416,000     6,989,000   (4,833,000)  (7,495,000)
                          -----------   -----------  ------------  -----------  -----------
Cash flows from
 financing activities:
 Proceeds from sale of
  stock and exercise of
  options and
  warrants.............    18,898,000                      11,000   10,490,000   13,235,000
 Payment for stock
  repurchased..........                                                (49,000)
 Proceeds from issuance
  of long-term debt and
  notes payable........                                              3,924,000
 Proceeds from issuance
  of short-term debt...                                10,000,000
 Reduction of long-term
  debt and notes
  payable..............      (309,000)     (323,000)   (1,224,000)  (1,123,000)    (840,000)
                          -----------   -----------  ------------  -----------  -----------
   Net cash (used in)
    provided by
    financing
    activities.........    18,589,000      (323,000)    8,787,000   13,242,000   12,395,000
                          -----------   -----------  ------------  -----------  -----------
Net increase (decrease)
 in cash and cash
 equivalents...........    14,418,000    (1,645,000)    5,181,000        1,000    1,126,000
Cash and cash
 equivalents--beginning
 of period.............     7,620,000     2,439,000     2,439,000    2,438,000    1,312,000
                          -----------   -----------  ------------  -----------  -----------
Cash and cash
 equivalents--end of
 period................   $22,038,000   $   794,000  $  7,620,000  $ 2,439,000  $ 2,438,000
                          ===========   ===========  ============  ===========  ===========
Supplemental
 disclosures of cash
 flow information:
 Cash paid for
  interest.............   $    95,000   $   110,000  $    446,000  $   232,000  $   139,000
 Noncash investing and
  financing activities:
 Equipment purchased
  under capital
  leases...............                 $   390,000  $    390,000               $ 1,044,000
 Dividend declared but
  not paid.............                 $   167,000  $    501,000  $   144,000
 Note receivable
  exchanged for common
  stock................                                            $    66,000
 Notes payable
  (including interest
  due of $23,000)
  exchanged for
  redeemable preferred
  stock................                                                         $   523,000
 Notes payable
  (including interest
  due of $353,000)
  exchanged for
  redeemable preferred
  stock................   $10,353,000
</TABLE>

                       See notes to financial statements

                                      F-6
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                         NOTES TO FINANCIAL STATEMENTS

                           December 31, 1999 and 1998
  (Unaudited with respect to March 31, 2000 and the three-month periods ended
                            March 31, 2000 and 1999)

NOTE A--DESCRIPTION OF BUSINESS

  3-Dimensional Pharmaceuticals, Inc. (the "Company") was incorporated on March
11, 1993. The Company is integrating advanced technologies in structural
biology, combinatorial chemistry, high throughput screening and computerized
drug design, for the cost-effective discovery of small molecule
pharmaceuticals.

  The Company has incurred net losses since inception and may incur additional
losses for at least the next several years. Through March 31, 2000,
substantially all of the Company's revenue has been derived from corporate
collaborations, license agreements and government grants. The Company expects
that substantially all of its revenue for the foreseeable future will result
from payments from these sources and from the outlicensing of technologies and
of internally developed preclinical and clinical drug candidates. The Company
expects to spend significant amounts to enhance its drug discovery technologies
and to fund research and development of its internal pipeline of drug
candidates. In order to achieve profitability the Company must continue to
develop products and technologies from which it can derive revenue, including
through existing and future collaborations. Accordingly, the Company may never
achieve profitability.

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

[1] Principles of Consolidation

  The consolidated financial statements at December 31, 1999 and March 31, 2000
and for the three months ended March 31, 2000 include the accounts of the
Company and its wholly-owned subsidiary. All material intercompany balances and
transactions have been eliminated in consolidation.

[2] Cash and cash equivalents and marketable securities:

  The Company considers all highly liquid investment instruments purchased with
a maturity of three months or less to be cash equivalents.

  Marketable securities include investments with original maturities of greater
than three months having a remaining maturity of less than 24 months. These
marketable securities are treated for accounting purposes as available-for-sale
and as such are reported at their fair market values. At December 31, 1998 the
securities are carried at amortized cost which approximates fair market value.

[3] Property and equipment:

  Property and equipment are recorded at cost and depreciated using the
straight-line method over estimated useful lives of 2 to 5 years. Equipment
acquired under capital lease agreements is amortized over the term of the
lease. Leasehold improvements are amortized over the lesser of the economic
useful life of the improvement or the term of the lease.

[4] Concentration of credit risk:

  The Company invests its excess cash in U.S. and U.S. Government agency
securities and debt instruments of financial institutions and corporations with
strong credit ratings. The Company has established guidelines regarding
diversification of its investments and their maturities which should maintain
safety and liquidity. The Company has not experienced any losses on its
investments. At December 31, 1998, marketable securities consisted of corporate
debt securities with maturities of one year or less.

[5] Research and development:

  Research and development costs are expensed as incurred.


                                      F-7
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                           December 31, 1999 and 1998
  (Unaudited with respect to March 31, 2000 and the three-month periods ended
                            March 31, 2000 and 1999)

[6] Patent costs:

  Patent application costs are expensed as incurred.

[7] Revenue recognition:

  Revenue from corporate collaborations, including periodic payments for
research and development activities and related nonrefundable up-front
technology access fees and/or technology or software licensing fees, is
recognized over the period that the Company performs research and development
activities under the terms of the agreements. Revenue from nonrefundable up-
front fees for the licensing of technology, products or software under
agreements which do not require the Company to perform research or development
activities or other significant future performance obligations is recognized at
the time the agreement is executed or the software is delivered. Revenue
resulting from the achievement of milestone events stipulated in the agreements
is recognized when the milestone is achieved. Up-front fees and other amounts
received in excess of revenue recognized are recorded as deferred income.

  In the year ended December 31, 1999, the Company changed its method of
recognizing revenue with respect to nonrefundable up-front fees received under
corporate collaboration research agreements to the method described above to
conform with the requirements of an accounting bulletin on revenue recognition
issued by the staff of the Securities and Exchange Commission in December 1999
and retroactively restated its prior years financial statements to reflect the
application of the new method. Prior to the change the Company recognized
revenue from such fees upon the execution of the agreement.

[8] Accounting for stock-based compensation:

  The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." In
October 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which
establishes a fair value-based method of accounting for stock-based
compensation plans. The Company has adopted the disclosure-only alternative
under SFAS No. 123, which requires disclosure of the pro forma effects on net
loss and net loss per share as if stock-based employee compensation was
measured under SFAS No. 123, as well as certain other information (see Note
J[2]). The Company accounts for stock based compensation to nonemployees using
the fair value method in accordance with SFAS No. 123 and Emerging Issues Task
Force (EITF) 96-18. The Company has recognized deferred stock compensation
related to certain stock option grants (see Note J[2]).

[9] 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 the 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.

[10] Per share data:

  Historical basic and diluted net loss per common share is computed by
dividing the net loss increased by declared and accrued cumulative dividends on
the Series A-1 preferred stock for the period by the weighted average number of
common shares outstanding during the period, exclusive of outstanding common
stock

                                      F-8
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                           December 31, 1999 and 1998
  (Unaudited with respect to March 31, 2000 and the three-month periods ended
                            March 31, 2000 and 1999)

which are subject to repurchase and are nonvested. As their effects would be
anti-dilutive, shares of common stock issuable upon conversion of preferred
stock and exercise of outstanding options and warrants as well as outstanding
common shares which are nonvested during the periods were not included in
computing diluted net loss per common share. Securities and the related number
of common shares not included in the diluted computation that could potentially
dilute basic earnings per share, if any, in the future are as follows:

<TABLE>
<CAPTION>
                                                           Dilutive Potential
                                                              Common Shares
                                                         -----------------------
                                                         March 31,  December 31,
                                                            2000        1999
                                                         ---------- ------------
   <S>                                                   <C>        <C>
   Preferred stock (see below).......................... 36,297,488  26,725,240
   Options..............................................  5,835,911   5,664,005
   Warrants.............................................  5,160,101   5,160,101
   Common stock--subject to repurchase..................    686,488     321,875
                                                         ----------  ----------
                                                         47,979,988  37,871,221
                                                         ==========  ==========
</TABLE>

  The preferred stock will automatically convert into common stock on a 1 for 1
basis and certain nonvested common stock will automatically become vested upon
completion of an initial public offering of the Company's common stock.
Accordingly, pro forma basic and diluted net loss per common share has been
calculated by dividing net loss by the weighted average outstanding common
shares as if the preferred stock were converted into common stock, and certain
nonvested common stock was vested, as of the original date of issuance. Unpaid
cumulative dividends converted into notes payable together with accrued
interest will also automatically convert into common stock upon completion of
an initial public offering based on the initial public offering price. No
common stock issuable in connection therewith have been included in the pro
forma computation as their effect could not be significant.

[11] Comprehensive loss:

  Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" requires the reporting of all changes in equity of an enterprise that
result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. The Company
had no such other comprehensive items to report.

[12] Unaudited interim financial statements:

  The financial information presented as of March 31, 2000 and for the three-
month periods ended March 31, 2000 and 1999 is unaudited, but in the opinion of
management contains all adjustments (consisting only of normally recurring
adjustments) necessary for a fair presentation of such financial information.
Results of operations for interim periods are not necessarily indicative of
those to be achieved for full fiscal years.

NOTE C--RESEARCH AND COLLABORATION AGREEMENTS

  In August 1995, the Company commenced a research project in which it was the
recipient of a three-year Advanced Technology Program ("ATP") award totalling
up to $2 million. The ATP is sponsored by the National Institute of Standards
and Technology. During 1998, the project was completed and all available
funding was utilized.


                                      F-9
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                           December 31, 1999 and 1998
  (Unaudited with respect to March 31, 2000 and the three-month periods ended
                            March 31, 2000 and 1999)

  In September 1996, the Company commenced a research project in which it was
the recipient of a two-year Small Business Innovative Research ("SBIR") award
totalling $750,000. The SBIR is sponsored by the National Institute of Health.
During 1998, the project was completed and all available funding was utilized.

  In October 1996, the Company entered into a research collaboration with Merck
KGaA ("Merck"). During the initial two year term of the agreement and
subsequent one year extension, Merck provided research and development funding.
In addition, Merck agreed to pay the Company product development milestone
payments and royalties on the sales of certain resulting products. In 1996,
Merck made an equity investment in the Company, purchasing 1,000,000 shares of
preferred stock at $2.25 per share. The agreement expired in October 1999.

  In June 1997, the Company entered into license agreements with Wyeth-Ayerst
Laboratories ("Wyeth"), for the development and marketing of the Company's
small molecule thrombin inhibitors. On June 1, 1999 the parties agreed to
terminate the agreements with all rights to the program returning to the
Company. Upon the signing of the original agreements, Wyeth made a $1 million
equity investment in the Company, consisting of 400,000 shares of preferred
stock at $2.50 per share. During the term of the agreements, the Company also
received additional monies for research and development funding.

  In December 1997, the Company entered into a research collaboration with
Heska Corporation ("Heska") to assist in the discovery and development of new
veterinary therapeutic agents. The agreement originally had a two year term and
has been extended until July 2000. The Company has received up-front payments
and research funding. In addition, Heska has agreed to pay the Company certain
additional research funding and product development milestone payments and
royalties on the sales of certain resulting products.

  In October 1998, the Company entered into a collaborative research and
license agreement with the Agricultural Products Division of E.I. DuPont de
Nemours ("DuPont") which allows DuPont to utilize the Company's
DirectedDiversity(R) Technology to develop and refine agrochemicals. The
Company received an up-front license fee and is eligible to receive additional
technology licensing fees, potential milestone payments and royalties on the
sales of any resulting products.

  In October 1999, the Company entered into a research collaboration and
license agreement with AgrEvo GmbH, now known as Aventis Crop Protection GmbH
("Aventis") pursuant to which the Company will utilize its DirectedDiversity(R)
Technology in the discovery of compounds applicable to plant and pest
management and animal health. The initial term of the agreement is for two
years. Under the terms of the agreement, the Company is to receive payments for
delivery of compounds, research and development funding and license fees
totaling $3.6 million. In addition, AgrEvo has agreed to pay the Company
royalties on the sales of certain resulting products.

  In December 1999, the Company granted an option to Boehringer Ingelheim
Pharmaceuticals, Inc. ("BIPI") to enter into an alliance with the Company to
use DirectedDiversity(R) Technology to assist BIPI in the discovery of new
drugs. In February 2000 BIPI exercised its option and entered into an agreement
with an initial term of two years. During the initial term of agreement, the
Company is to receive payments for technology access and research funding
totaling $3.25 million. In addition, BIPI has agreed to pay the Company product
development milestone payments and royalties on the sales of certain resulting
products.


                                      F-10
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                           December 31, 1999 and 1998
  (Unaudited with respect to March 31, 2000 and the three-month periods ended
                            March 31, 2000 and 1999)

  On February 11, 2000, the Company entered into a collaboration with DuPont
Pharmaceuticals Company ("Dupont Pharmaceuticals") pursuant to which the
Company would utilize its DirectedDiversity(R) Technology to develop new drugs
for specific biological targets. The agreement provides for the Company to
receive payments for technology access, research funding and milestone and
royalty payments on any resulting products. The Company also entered into an
additional agreement, which gives Dupont Pharmaceuticals an option for a non-
exclusive license to the Company's DirectedDiversity(R) patents in support of
their internal and collaborative research programs.

  On March 1, 2000, the Company was awarded and commenced a research project in
which it was the recipient of a two-year Small Business Innovative Research
("SBIR") Award totaling up to $1 million. The SBIR is sponsored by the National
Institutes of Health.

  Revenue from foreign corporate collaborators comprised 25%, 23%, 17% and 20%
of total collaboration revenues for the three months ended March 31, 2000 and
the years ended December 31, 1999, 1998 and 1997, respectively.

NOTE D--PROPERTY AND EQUIPMENT

  Property and equipment, stated at cost, is summarized as follows:

<TABLE>
<CAPTION>
                                                            December 31,
                                             March 31,  ---------------------
                                                2000       1999       1998
                                             ---------- ---------- ----------
   <S>                                       <C>        <C>        <C>
   Laboratory equipment, computer software
    and office equipment.................... $7,122,000 $7,075,000 $6,438,000
   Leasehold improvements...................  2,340,000  2,340,000  2,308,000
                                             ---------- ---------- ----------
                                              9,462,000  9,415,000  8,746,000
   Less accumulated depreciation and
    amortization............................  5,465,000  5,101,000  3,536,000
                                             ---------- ---------- ----------
                                             $3,997,000 $4,314,000 $5,210,000
                                             ========== ========== ==========
</TABLE>

NOTE E--NOTES RECEIVABLE FROM OFFICERS

  At December 31, 1999 the Company has notes receivable from three officers
aggregating $70,000 which are collateralized by the officers' beneficial
interest in an aggregate of 166,250 shares of common stock of the Company.
Under the terms of the notes, interest accrues on the unpaid principal at
approximately 6% per annum. Principal and accrued interest is to be paid in
four equal installments on the anniversary dates of the loans. In February
1998, 1999 and 2000, the Company forgave the first, second and third
installments of the principal and interest due on two of the loans. In
September 1998 and 1999, the Company forgave the first and second installment
on the third loan. In connection with forgiving certain portions of principal
and interest related to these loans, compensation expense was recorded in 1999
and 1998, respectively, in the amount of approximately $58,000 and $77,000.

  The notes mature as follows:

<TABLE>
   <S>                                                                   <C>
   2000................................................................. $19,000
   2001.................................................................  51,000
</TABLE>


                                      F-11
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                           December 31, 1999 and 1998
  (Unaudited with respect to March 31, 2000 and the three-month periods ended
                            March 31, 2000 and 1999)

  In March 2000, the Company made a loan to an additional officer in the amount
of $520,000 to purchase 495,238 restricted shares of the Company's common
stock. The loan is collateralized by the officer's beneficial interest in such
shares. Under the terms of the note, interest accrues on the unpaid principal
at approximately 7% per annum. Principal and accrued interest is to be paid in
four equal installments, with the first installment due six months from the
date of the loan and subsequent installments due on the anniversary dates of
the first loan payment.

NOTE F--ACCOUNTS PAYABLE AND ACCRUED EXPENSES

  Accounts payable and accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                              December 31,
                                               March 31,  ---------------------
                                                  2000       1999       1998
                                               ---------- ---------- ----------
   <S>                                         <C>        <C>        <C>
   Professional fees.......................... $  981,000 $1,454,000 $  186,000
   Equipment..................................    119,000    120,000    100,000
   Payroll and related expenses...............    366,000    739,000    393,000
   Trade......................................    451,000    424,000    593,000
                                               ---------- ---------- ----------
                                               $1,917,000 $2,737,000 $1,272,000
                                               ========== ========== ==========
</TABLE>

NOTE G--DEBT

[1] Convertible notes payable:

  On November 18, 1999, the Company closed on a convertible note financing for
$10 million. The notes bear interest at the rate of prime + 1% per annum (9.5%
through December 31, 1999). Principal and interest are due on the first
anniversary of the closing date (the "Maturity Date"). If prior to the Maturity
Date, the Company raises an additional $10 million through the sale of
preferred stock, the notes and any unpaid accrued interest will convert into
the preferred stock on the same terms and conditions as given to the new
investors. In the event of any consolidation or merger of the Company or in the
event of any sale of substantially all of the assets of the Company, at the
election of the holders of the notes the Company will (a) repay any unpaid
amount, or (b) convert the notes into preferred stock with terms substantially
comparable to the currently outstanding Series A-4 preferred stock. In the
event that the holders of the notes elect for the notes to be repaid, (option
(a) above), the Company must pay the holder of the notes a premium equal to 25%
of the outstanding principal amount of the notes. The Company has granted to
the buyers of the notes a security interest in certain property and assets of
the Company, including all accounts, equipment and fixtures and all patents,
patent licenses, trademarks and trademark licenses. This security interest was
terminated upon conversion of the notes in March 2000 into Series A-5 preferred
shares (see below) and all rights granted under the security interest have
reverted to the Company. In connection with this transaction, the Company
issued warrants to purchase 3,500,000 shares of common stock exercisable at
$1.25 per share for a period of one year. The Company recorded a noncash
interest charge in connection with these warrants of $26,000 for the year ended
December 31, 1999.

  On March 31, 2000, the Company raised $18.4 million through the sale of
6,121,083 shares of Series A-5 preferred stock at $3.00 per share. In
connection therewith, the holders of the convertible notes of $10 million of
principal converted their notes and $353,000 of accrued interest into 3,451,165
of Series A-5 preferred

                                      F-12
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                           December 31, 1999 and 1998
  (Unaudited with respect to March 31, 2000 and the three-month periods ended
                            March 31, 2000 and 1999)

shares. Accordingly, the convertible notes and accrued interest of $115,000
have been reclassified to noncurrent liabilities as of December 31, 1999.

[2] Long-term debt:

  Long-term debt, including capital lease obligations was as follows:

<TABLE>
<CAPTION>
                                                              December 31,
                                               March 31,  ---------------------
                                                  2000       1999       1998
                                               ---------- ---------- ----------
   <S>                                         <C>        <C>        <C>
   Loans payable.............................. $2,676,000 $2,889,000 $3,290,000
   Capital lease obligations (Note I).........    484,000    580,000  1,013,000
                                               ---------- ---------- ----------
                                                3,160,000  3,469,000  4,303,000
   Current portion of long-term debt..........  1,140,000  1,139,000  1,033,000
                                               ---------- ---------- ----------
   Long-term debt............................. $2,020,000 $2,330,000 $3,270,000
                                               ========== ========== ==========
</TABLE>

  During 1998 and 1999, the Company entered into a series of 48-month loans to
finance an aggregate of $4,005,000 of laboratory equipment, office equipment
and certain tenant improvements at interest rates varying between 10.68% and
11.65%. The loans are payable in monthly installments of principal and interest
aggregating $98,000 with final payments in 2002 and 2003 aggregating $362,000
and $39,000. Borrowings related to the purchase of laboratory and office
equipment are collateralized by the equipment.

  Long-term debt at December 31, 1999 is payable as follows:

<TABLE>
   <S>                                                                <C>
   2000.............................................................. $1,139,000
   2001..............................................................  1,231,000
   2002..............................................................  1,052,000
   2003..............................................................     47,000
                                                                      ----------
   Total............................................................. $3,469,000
                                                                      ==========
</TABLE>

NOTE H--FAIR VALUE OF FINANCIAL INSTRUMENTS

  Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires the Company to disclose estimated
fair value for its financial instruments. The carrying amounts reported in the
balance sheet for cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate fair value because of the short-term
duration of those items. The carrying amounts of convertible notes, debt and
notes payable--dividends approximate fair value because the interest rates on
such debt approximate the market rate.

NOTE I--CAPITAL LEASE OBLIGATIONS

  The Company has entered into a series of 48-month lease agreements to finance
$3,183,000 of laboratory and office equipment purchases. All of the equipment
leased under these agreements are accounted for as capital leases. The net book
value of the equipment held under capital leases was $463,000, $555,000 and
$993,000 at March 31, 2000, December 31, 1999 and 1998, respectively.


                                      F-13
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                           December 31, 1999 and 1998
  (Unaudited with respect to March 31, 2000 and the three-month periods ended
                            March 31, 2000 and 1999)

  Future lease payments as of December 31, 1999 are as follows:

<TABLE>
<CAPTION>
      Year Ending
      December 31,                                                      Amount
      ------------                                                     --------
      <S>                                                              <C>
        2000.......................................................... $383,000
        2001..........................................................  251,000
                                                                       --------
      Total minimum lease payments....................................  634,000
      Less amounts representing interest..............................   54,000
                                                                       --------
      Present value of future lease payments at end of year........... $580,000
                                                                       ========
</TABLE>

  In conjunction with these agreements, the Company granted its leasing
companies warrants expiring in 2004 to purchase 187,625 shares of Series A-1
preferred stock at an exercise price of $1.00 per share and 12,600 shares of
common stock at an exercise price of $2.50 per share. The value of these
warrants was not considered significant at the dates of grant.

NOTE J--REDEEMABLE PREFERRED STOCK AND EQUITY SECURITIES

[1] Preferred stock:

  Redeemable convertible preferred Series A consists of:

<TABLE>
<CAPTION>
                                                            December 31,
                                            March 31,  -----------------------
                                              2000        1999        1998
                                           ----------- ----------- -----------
<S>                                        <C>         <C>         <C>
Redeemable convertible Series A-1--$.001
 par value;
 6,926,461 shares authorized, 6,686,986
 shares issued and outstanding,
 (liquidating preference $6,686,986)...... $ 6,611,000 $ 6,611,000 $ 6,611,000
Redeemable convertible Series A-2--$.001
 par value;
 4,333,990 shares authorized, 4,333,990
 shares issued and outstanding,
 (liquidating preference $5,417,488)......   5,405,000   5,405,000   5,405,000
Redeemable convertible Series A-3--$.001
 par value;
 10,304,264 shares authorized, 10,304,264
 shares issued and outstanding,
 (liquidating preference $12,500,000).....  12,446,000  12,446,000  12,446,000
Redeemable convertible Series A-4--$.001
 par value;
 4,000,000 shares authorized, 4,000,000
 shares issued and outstanding,
 (liquidating preference $10,400,000).....  10,372,000  10,372,000  10,372,000
Redeemable convertible Series A-5, $.001
 par value;
 9,572,248 shares authorized, 9,572,248
 shares issued and outstanding,
 (liquidating preference $28,716,744).....  28,716,000
                                           ----------- ----------- -----------
                                           $63,550,000 $34,834,000 $34,834,000
                                           =========== =========== ===========
</TABLE>

  Convertible preferred stock consists of convertible Series B--$.001 par
value, 1,000,000 shares authorized, 1,000,000 shares issued and outstanding,
liquidating preference of $2,250,000 and convertible Series C--$.001 par value,
5,000,000 shares authorized, 400,000 shares issued and outstanding, liquidating
preference of $1,000,000.


                                      F-14
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                           December 31, 1999 and 1998
  (Unaudited with respect to March 31, 2000 and the three-month periods ended
                            March 31, 2000 and 1999)

  The Series A-1, A-2, A-3, A-4, A-5, B, and C preferred shares have a
liquidation preference of $1.00, $1.25, $1.21, $2.60, $3.00, $2.25 and $2.50
per share, respectively, plus an amount equal to any accrued but unpaid
cumulative dividends and any declared but unpaid dividends. The Series A-1, A-
2, A-3, A-4 and A-5 shares are redeemable at the option of the stockholder in
25% annual increments commencing on March 12, 2002 at their original purchase
price, plus an amount equal to any accrued but unpaid cumulative dividends and
any declared but unpaid dividends. The shares of all series are convertible
into common shares of the Company on a 1 to 1 basis, subject to certain
adjustments based on future issuances of common stock. In addition, all
outstanding Series A, B and C preferred shares will automatically convert into
common shares of the Company on a 1 to 1 basis upon completion of an initial
public offering of the Company's common stock. The shares of all series are
entitled to one vote per share. The Series A shares provide for cumulative
dividends of 10% per share per annum (based on the original issue price), first
commencing for the Series A-1 shares on October 14, 1998. The Series A-2
through A-5 shares, which were issued from 1996 through 2000, provide for 10%
annual cumulative dividends from and after the fifth anniversary of the date
each such series was originally issued.

  In December 1998, the Company declared a 10% per share dividend (based on the
original issue price) payable on January 1, 1999 for the Series A-1 shares for
the portion of the quarterly period beginning October 14, 1998 and ending
December 31, 1998. Thereafter the Company has declared dividends at each
calendar quarter through September 30, 1999. The Company's board did not
declare a dividend at December 31, 1999, therefore dividends of $167,000 were
in arrears at year-end 1999. On April 20, 2000, the Company's board declared a
dividend for $334,000 covering the period beginning October 1, 1999 and ending
March 31, 2000 and issued a note payable for such dividend. All dividends
declared during 1999 were paid during 1999 by issuing to each holder of Series
A-1 stock a note payable for the amount of the declared dividend. The notes
bear interest at 10% per annum and principal and interest are due no later than
five years from the date of issuance. Principal and interest are convertible
into common stock at the closing date of an initial public offering ("IPO"), as
defined, at the IPO price.

[2] Equity compensation plan:

  The Company's equity compensation plan (the "Plan"), as amended, provides for
the issuance of restricted stock and the granting of both incentive stock
options and nonqualified stock options to purchase a total of 8,075,000 shares
of common stock. The options vest over various periods, not exceeding five
years, and expire no later than ten years from date of grant. On March 30,
2000, the Company increased the number of shares under the Plan by 1,250,000 to
9,325,000 shares of common stock.

  The Plan is administered by a committee of the Board of Directors. The
committee has the authority to determine the term during which an option may be
exercised (provided that no option may have a term of more than 10 years), the
exercise price of an option and the rate at which options may be exercised.
Incentive stock options may be granted only to employees of the Company.
Nonqualified stock options may be granted to employees, directors, or
consultants of the Company. For incentive stock options, the exercise price may
not be less than the fair value of the stock on the date of grant.

  The Company applies APB 25 in accounting for its employee stock options
awards, which requires the recognition of compensation expense for the
difference between the fair value of the underlying common stock and the
exercise price of the option at the grant date.

                                      F-15
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                           December 31, 1999 and 1998
  (Unaudited with respect to March 31, 2000 and the three-month periods ended
                            March 31, 2000 and 1999)


  Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The
weighted average fair value of options granted during years ended December 31,
1999 and 1998 is estimated to be $.35 and $.30, respectively. The fair value of
these options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                          Three Months
                                              Ended            Year Ended
                                            March 31,         December 31,
                                         --------------- -----------------------
                                          2000    1999    1999    1998    1997
                                         ------- ------- ------- ------- -------
   <S>                                   <C>     <C>     <C>     <C>     <C>
   Risk-free interest rate..............   6%     5.5%    6.6%    5.5%     6%
   Expected life........................ 6 years 6 years 6 years 6 years 7 years
   Expected volatility..................   10%     10%     10%     10%     10%
   Dividend yield.......................   0%      0%      0%      0%      0%
</TABLE>

  Had compensation cost for the Company's stock options been determined based
upon the fair value at the grant date for awards under the Plan consistent with
the methodology prescribed under SFAS No. 123, the Company's net loss and net
loss per share would be as follows:

<TABLE>
<CAPTION>
                          Three Months Ended                Year Ended
                               March 31,                   December 31,
                         ----------------------  -----------------------------------
                            2000        1999        1999         1998        1997
                         ----------  ----------  -----------  ----------  ----------
<S>                      <C>         <C>         <C>          <C>         <C>
Net loss:
  Historical............ $3,742,000  $2,740,000  $15,969,000  $9,711,000  $5,565,000
  Pro forma.............  3,877,000   2,847,000   16,398,000   9,880,000   5,670,000
Basic and diluted net
 loss per share:
  Historical............ $    (2.11) $    (1.79) $     (9.78) $    (7.93) $    (9.83)
  Pro forma............. $    (2.19) $    (1.86) $    (10.03) $    (8.06) $   (10.02)
</TABLE>


                                      F-16
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                           December 31, 1999 and 1998
  (Unaudited with respect to March 31, 2000 and the three-month periods ended
                            March 31, 2000 and 1999)

  The following table summarizes information about stock option activity
  during the periods indicated:

<TABLE>
<CAPTION>
                                     Incentive Options   Nonqualified Options
                                     ------------------- ------------------------
                                                Weighted              Weighted
                                                Average                Average
                                                Exercise              Exercise
                                      Shares     Price     Shares       Price
                                     ---------  -------- -----------  -----------
<S>                                  <C>        <C>      <C>          <C>
Balance--December 31, 1996..........   691,820   $0.198      194,100   $  0.143
Granted............................. 1,760,516    0.665       55,000      0.414
Exercised...........................   (63,767)   0.178      (16,700)     0.084
Terminated..........................   (71,464)   0.233
                                     ---------           -----------

Balance--December 31, 1997.......... 2,317,105   $0.550      232,400   $  0.210
Granted............................. 1,138,588    1.050      248,662      1.050
Exercised...........................  (239,511)   0.268      (31,700)     0.079
Terminated..........................  (359,766)   0.802
                                     ---------           -----------

Balance--December 31, 1998.......... 2,856,416    0.743      449,362      0.685
Granted.............................   441,237    1.050    2,037,333      1.312
Exercised...........................   (32,029)   0.345
Terminated..........................   (88,314)   0.946
                                     ---------           -----------

Balance--December 31, 1999.......... 3,177,310    0.784    2,486,695      1.198
Granted.............................   596,500    2.234      177,500      2.250
Exercised...........................  (127,088)   0.891     (406,667)     1.038
Terminated..........................   (68,339)   0.844
                                     ---------           -----------

Balance--March 31, 2000............. 3,578,383    1.020    2,257,528      1.310
                                     =========           ===========
</TABLE>

                                      F-17
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                           December 31, 1999 and 1998
  (Unaudited with respect to March 31, 2000 and the three-month periods ended
                            March 31, 2000 and 1999)


  In addition to the stock option activity, the Company issued net of 512,667
and 52,500 shares that were reacquired in 1998 and 1994, respectively,
1,585,333 shares of restricted stock at $.01-$1.05 per share under the Plan
through March 31, 2000.

  As of March 31, 2000 and December 31, 1999, options and restricted stock for
880,140 and 335,801 common shares, respectively, were available for future
grant under the Plan.

  At March 31, 2000 and December 31, 1999, the weighted average remaining
contractual life of options outstanding was 8.33 years and 7.95 years,
respectively.

  The following table presents information relating to stock options
outstanding and exercisable at December 31, 1999 and March 31, 2000:

<TABLE>
<CAPTION>
                                             December 31, 1999
                          -------------------------------------------------------
                                 Options Outstanding         Options Exercisable
                          ---------------------------------- --------------------
                                        Weighted
                                         Average    Weighted             Weighted
                                        Remaining   Average              Average
                            Number     Contractual  Exercise   Number    Exercise
                          Outstanding Life in Years  Price   Exercisable  Price
                          ----------- ------------- -------- ----------- --------
<S>                       <C>         <C>           <C>      <C>         <C>
Incentive stock options:
  $0.01 to $1.00........   1,756,649      7.15       $0.568     919,207   $0.544
  $1.01 to $1.05........   1,420,661      8.58       $1.05      288,640   $1.05
                           ---------                          ---------
                           3,177,310                 $0.784   1,207,847   $0.665
                           =========                 ======   =========   ======
Nonqualified stock
 options:
  $0.01 to $1.00........     200,700      5.85       $0.232     172,367   $0.205
  $1.01 to $2.60........   2,285,995      9.56       $1.283     150,745   $1.05
                           ---------                          ---------
                           2,486,695                 $1.198     323,112   $0.599
                           =========                 ======   =========   ======
</TABLE>

<TABLE>
<CAPTION>
                                             March 31, 2000
                           ---------------------------------------------------
                                Options Outstanding       Options Exercisable
                           ------------------------------ --------------------
                                       Weighted
                                        Average  Weighted             Weighted
                                       Remaining Average              Average
                             Number     Life in  Exercise   Number    Exercise
Range of Exercise Price    Outstanding   Years    Price   Exercisable  Price
-----------------------    ----------- --------- -------- ----------- --------
<S>                        <C>         <C>       <C>      <C>         <C>
Incentive stock options:
  $0.01 to $1.00..........  1,700,442    6.91     $0.573     956,416   $0.534
  $1.01 to $2.25..........  1,877,941    8.80     $1.426     431,275   $1.050
                            ---------                      ---------
                            3,578,383             $1.020   1,387,691   $0.694
                            =========             ======   =========   ======
Nonqualified stock
 options:
  $0.01 to $1.00..........    194,033    5.55     $0.230     179,033   $0.207
  $1.01 to $2.60..........  2,063,495    9.34     $1.412     150,745   $1.050
                            ---------                      ---------
                            2,257,528             $1.310     329,778   $0.593
                            =========             ======   =========   ======
</TABLE>


                                      F-18
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                           December 31, 1999 and 1998
  (Unaudited with respect to March 31, 2000 and the three-month periods ended
                            March 31, 2000 and 1999)

  In 1998, the Company entered into an agreement with a former officer in which
the Company repurchased 265,625 shares of common stock, which collateralized a
note receivable held by the Company. In addition, the Company also accelerated
vesting on 90,791 shares of restricted stock and incentive stock options in
connection with the termination of this officer. In conjunction with this
modification of terms to the original grants, the Company recorded a charge to
compensation expense of $66,000 as of the date of termination.

  During the three months ended March 31, 2000 in connection with the grant of
options to employees, the Company recorded deferred stock compensation of
$516,000, representing the difference between the exercise price and the fair
value of the Company's common stock as estimated by the Company's management
for financial reporting purposes on the date such stock options were granted.
Deferred compensation is included as a component of stockholders deficit and is
being amortized to expense over the vesting period of the stock options.

[3] Warrants:

  At March 31, 2000 and December 31, 1999, the Company has outstanding
warrants, all of which are exercisable, as follows:

<TABLE>
<CAPTION>
      Exercise                                             Expiration Number of
      Price                                                   Date    Warrants
      --------                                             ---------- ---------
      <S>                                                  <C>        <C>
       $1.25..............................................    2000    3,500,000
       $1.00..............................................    2004       60,125*
       $1.00..............................................    2004      179,350*
       $0.01..............................................    2005      300,000
       $0.01..............................................    2006    1,008,026
       $0.01..............................................    2007      100,000
       $2.50..............................................    2004       12,600
                                                                      ---------
                                                                      5,160,101
                                                                      =========
</TABLE>
     --------
     * Exercisable into Series A-1 preferred stock.

  The weighted average exercise price at March 31, 2000 and December 31, 1999
was $.90. At March 31, 2000 and December 31, 1999, the weighted average
remaining contractual life of warrants outstanding was 2.30 and 2.55 years,
respectively.

[4] Common stock subject to repurchase:

  As of March 31, 2000 and December 31, 1999, respectively, 686,488 and 321,875
shares of common stock are subject to repurchase by the Company. The shares are
subject to repurchase at the original purchase prices, ranging from $.25 to
$1.05, in the event that the purchaser's relationship with the Company is
terminated. The number of shares subject to repurchase by the Company decreases
by 25% on the one-year anniversary of the sale, and further reduces upon
subsequent anniversary dates. In addition, 128,750 shares of the 686,488 shares
subject to repurchase, vest with the purchaser at the completion of the
Company's initial public offering.

                                      F-19
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                           December 31, 1999 and 1998
  (Unaudited with respect to March 31, 2000 and the three-month periods ended
                            March 31, 2000 and 1999)


NOTE K--401(K) PLAN

  The Company maintains a defined contribution 401(k) plan available to
eligible employees. Employee contributions are voluntary and are determined on
an individual basis, limited to the maximum amount allowable under federal tax
regulations. The Company at its discretion may make certain contributions to
the plan. However, no such contributions have been made through December 31,
1999 and for the three-month period ended March 31, 2000.

NOTE L--COMMITMENT

  During 1995, the Company entered into a 10-year operating lease for office
and laboratory facilities. In November 1997, the Company amended and restated
its lease to provide additional office and laboratory space. The amended and
restated lease will expire in June 2008. In connection with this transaction,
the Company agreed to pay for one half of the anticipated leasehold improvement
costs. The Company's portion of these costs was approximately $900,000, which
has been recorded as leasehold improvements, to be amortized over the term of
the lease. The amended and restated lease provides for minimum annual rentals
as follows:

<TABLE>
<CAPTION>
                            Year Ending
                            December 31,                                Amount
                            ------------                              ----------
<S>                                                                   <C>
      2000........................................................... $  516,000
      2001...........................................................    516,000
      2002...........................................................    516,000
      2003...........................................................    516,000
      2004...........................................................    516,000
      Thereafter.....................................................  1,545,000
                                                                      ----------
                                                                      $4,125,000
                                                                      ==========
</TABLE>

  The lease provides for escalations for increases in real estate taxes and
certain operating expenses.

  Rent expense was $129,000, $129,000, $516,000, $401,000 and $267,000 for the
three months ended March 31, 2000 and 1999 and the years ended December 31,
1999, 1998 and 1997, respectively.

NOTE M--CONTINGENCY

  In October 1998, a complaint was filed in the United States District Court
for the District of Delaware, by Scriptgen Pharmaceuticals, Inc. alleging that
the Company infringed two Scriptgen U.S. Patents. On March 7, 2000 (the
"Effective Date"), the Company and Scriptgen entered into a Settlement
Agreement for a total of $1.5 million for settlement of the litigation. The
amount is payable by the Company in three equal installments of $500,000 on
each of the following dates: (a) the Effective Date; (b) six months after the
Effective Date; and (c) the first anniversary of the Effective Date. The amount
payable was accrued as of December 31, 1999.

NOTE N--INCOME TAXES

  At December 31, 1999 the Company has a net operating loss carryforward and a
research and development credit carryforward for federal income tax purposes of
approximately $40,370,000 and $831,000, respectively, which expires through
2019.

                                      F-20
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                           December 31, 1999 and 1998
  (Unaudited with respect to March 31, 2000 and the three-month periods ended
                            March 31, 2000 and 1999)


  Temporary differences at December 31, 1999 and March 31, 2000 result
primarily from certain operating expenses, which were capitalized and amortized
as start-up costs for federal income tax purposes and expensed for financial
reporting purposes. At December 31, 1999 and March 31, 2000 the Company has
deferred tax assets of approximately $19,168,000 and $20,894,000, respectively.
The Company has not recorded a benefit from its net operating loss or research
and development credit carryforwards or capitalized start-up costs, because
realization of the benefit is uncertain and, therefore, a valuation allowance
of $19,168,000 and $20,894,000 has been provided for the deferred tax asset at
December 31, 1999 and March 31, 2000, respectively. The difference between the
statutory tax rate of 34% and the Company's effective tax rate of 0% is due to
the increase in the valuation allowance of $6,805,000 (1999), $4,040,000
(1998), $2,415,000 (1997), $1,726,000 (3 months--2000) and $997,000 (3 months--
1999).

  The Company may be subject to an annual limitation on the utilization of its
net operating loss and research and development tax credit carryforwards
pursuant to Section 382 of the Internal Revenue Code.

NOTE O--SUBSEQUENT EVENT (UNAUDITED)

  In May 2000, the Company entered into a license and research agreement with
Schering AG, Germany, in which Schering AG obtained, for human therapeutic
uses, exclusive worldwide rights to our urokinase inhibitor compounds. During
the initial two year research and development term the Company is to receive
payments for research funding totaling $5 million. In addition, Schering AG has
agreed to pay the Company product development milestone payments and royalties
on the sales of resulting products. In conjunction with the agreement, an
affiliate of Schering AG made a $5 million equity investment consisting of
625,000 shares of Series D preferred stock at $8.00 per share.

                                      F-21
<PAGE>

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

You should only rely on the information contained in this prospectus. We have
not authorized any person to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only
as of the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of our common stock.

Until       , 2000, all dealers that effect transactions of these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a pro-
spectus when acting as underwriters and with respect to their unsold allot-
ments or subscriptions.

                             ---------------------
                               TABLE OF CONTENTS
                             ---------------------

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Summary..................................................................   1
Risk Factors.............................................................   7
Forward-Looking Statements...............................................  21
Use of Proceeds..........................................................  21
Dividend Policy..........................................................  22
Capitalization...........................................................  23
Dilution.................................................................  24
Selected Consolidated Financial Information..............................  25
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  26
Our Business.............................................................  30
Management...............................................................  52
Certain Relationships and Related Transactions...........................  63
Principal Stockholders...................................................  65
Description of Capital Stock.............................................  68
Shares Eligible for Future Sale..........................................  71
Underwriting.............................................................  73
Legal Matters............................................................  76
Experts..................................................................  76
Additional Information About Us..........................................  76
Financial Statements..................................................... F-1
</TABLE>

-------------------------------------------------------------------------------
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                                    [LOGO]

                                 Common Stock

                                  -----------
                                  PROSPECTUS
                                  -----------

                           Bear, Stearns & Co. Inc.

                                   Chase H&Q

                          U.S. Bancorp Piper Jaffray

                                       , 2000

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

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

  The expenses (other than underwriting discounts and commissions) payable in
connection with this offering are as follows:

<TABLE>
   <S>                                                                 <C>
   Securities and Exchange Commission registration fee................ $18,480
   NASD filing fee....................................................   7,500
   Nasdaq filing fee..................................................       *
   Printing and engraving expenses....................................       *
   Legal fees and expenses............................................       *
   Accounting fees and expenses.......................................       *
   Blue Sky fees and expenses (including legal fees)..................       *
   Transfer agent and rights agent and registrar fees and expenses....       *
   Premium paid on policy that indemnifies directors and officers
    against liabilities in this offering..............................       *
   Miscellaneous......................................................       *
                                                                       -------
     Total............................................................       *
                                                                       =======
</TABLE>
--------
*To be filed by amendment

  All expenses are estimated except for the SEC fee and the NASD fee.

Item 14. Indemnification of Directors and Officers

  The Registrant's Certificate of Incorporation permits indemnification to the
fullest extent permitted by Delaware law. The Registrant's bylaws require the
Registrant to indemnify any person who was or is an authorized representative
of the Registrant, and who was or is a party or is threatened to be made a
party to any corporate proceeding, by reason of the fact that such person was
or is an authorized representative of the Registrant, against judgments,
penalties, fines and amounts paid in settlement and expenses actually and
reasonably incurred by such person in connection with such third party
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, the best interests of the
Registrant and, with respect to any criminal third party proceeding (including
any action or investigation which could or does lead to a criminal third party
proceedings) had no reasonable cause to believe such conduct was unlawful. The
Registrant shall also indemnify any person who was or is an authorized
representative of the Registrant and who was or is a party or is threatened to
be made a party to any corporate proceeding by reason of the fact that that
such person was or is an authorized representative of the Registrant, against
expenses actually and reasonably incurred by such person in connection with the
defense or settlement of such corporate action if such person acted in good
faith and in a manner reasonably believed to be in, or not opposed to, the best
interests of the Registrant, 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 Registrant unless and only to the extent that the
Delaware Court of Chancery or the court in which such corporate proceeding was
pending shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such authorized
representative is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper. Such
indemnification is mandatory under the Registrant' bylaws as to expenses
actually and reasonably incurred to the extent that an authorized
representative of the Registrant had been successful on the merits or otherwise
in defense of any third party or corporate proceeding or in defense of any
claim, issue or matter therein. The determination of whether an

                                      II-1
<PAGE>

individual is entitled to indemnification may be made by a majority of
disinterested directors, independent legal counsel in a written legal opinion
or the stockholders. Delaware law also permits indemnification in connection
with a proceeding brought by or in the right of the Registrant to procure a
judgment in its favor. Insofar as indemnification for liabilities arising under
the Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that Act and is
therefore unenforceable.

  The Underwriting Agreement provides that the underwriters are obligated,
under certain circumstances, to indemnify directors, officers, and controlling
persons of the Registrant against certain liabilities, including liabilities
under the Act. Reference is made to the form of Underwriting Agreement which
will be filed by amendment as Exhibit 1.1 hereto.

Item 15. Recent Sales of Unregistered Securities

  Since our inception, we have issued the following securities that were not
registered under the Act:

  Since our inception, we have issued an aggregate of 2,645,881 shares of
common stock, par value $0.001 per share. These shares include 11,974 shares of
common stock issued in July 1996 at a purchase price per share of $0.01 for a
total of $120, 1,028,574 shares of common stock issued upon exercise of options
granted under our equity compensation plan at a weighted average exercise price
of $0.63 per share and 2,170,500 shares of common stock issued in the form of
restricted stock grants under our equity compensation plan at a weighted
average purchase price of $0.24 per share, of which 565,167 shares have been
repurchased by the Company. All such sales and issuances were deemed to be
exempt from registration under Section 4(2) of the Act and/or Rule 701, or
Regulation D or Regulation S promulgated thereunder.

  Since our inception we have also issued an aggregate of 36,922,488 shares of
preferred stock, par value of $0.001 per share. These shares include (i)
6,686,986 shares of series A-1 preferred stock prior to 1996 at a purchase
price per share of $1.00, for a total of approximately $6.7 million; (ii)
4,333,990 shares of series A-2 preferred stock issued in October 1996 at a
purchase price per share of $1.25, for a total of approximately $5.4 million;
(iii) 10,304,264 shares of series A-3 preferred stock issued in March 1997 at a
purchase price per share of $1.21, for a total of approximately $12.5 million;
(iv) 4,000,000 shares of series A-4 issued in January 1998 at a purchase price
per share of $2.60 for a total of approximately $10.4 million; (v) 9,572,248
shares of series A-5 preferred stock issued in March 2000 at a purchase price
per share of $3.00, for a total of approximately $28.7 million, which amount
includes 3,451,165 shares issued upon the conversion of convertible promissory
notes issued in November 1999; (vi) 1,000,000 shares of series B preferred
stock issued in October 1996 at a purchase price per share of $2.25 for a total
of approximately $2.3 million; (viii) 400,000 shares of series C preferred
stock issued in June 1997 at a purchase price per share of $2.50 for a total of
approximately $1.0 million; and (ix) 625,000 shares of series D preferred stock
issued in May 2000 at a purchase price per share of $8.00 for a total of
approximately $5.0 million. All such sales and issuances were deemed to be
exempt from registration under the Securities Act by virtue of Section 4(2),
Regulation D or Regulation S promulgated thereunder.

  Since our inception, we have issued warrants to purchase a total of 4,932,600
shares of common stock and 239,475 shares of series A-1 preferred stock which
will either be exercised prior to the completion of this offering or become
exercisable for 239,475 shares of common stock upon the completion of this
offering.

  The warrants we have issued consist of warrants to purchase a total of
1,320,000 shares of common stock issued prior to 1997 at an exercise price of
$0.01 per share, including warrants to purchase 11,974 shares which were
exercised in July 1996, and warrants to purchase (i) 3,500,000 shares of common
stock at an exercise price of $1.25 per share issued in November 1999; (ii)
12,600 shares of common stock at an exercise price of $2.50 per share issued in
June 1997; (iii) 239,475 shares of series A-1 preferred stock, which will
either be

                                      II-2
<PAGE>

exercised prior to the completion of this offering or become exercisable for
239,475 shares of common stock at an exercise price of $1.00 per share reissued
in July 1998; and (iv) 100,000 shares of common stock at an exercise price of
$0.01 per share issued in March 1997. All such sales and issuances were deemed
to be exempt from registration under the Securities Act by virtue of Section
4(2), Regulation D or Regulation S promulgated thereunder.

  Pursuant to our equity compensation plan, as of May 23, 2000, 5,797,124
shares are issuable upon the exercise of options outstanding under the plan at
a weighted average exercise price of $1.14 per share and 2,633,907 shares have
been issued under the plan, including 706,488 shares subject to repurchase at a
weighted average purchase price of $0.92 per share. For a more detailed
description of our equity compensation plan, see Management--Equity
Compensation Plan. In granting the options and selling the underlying
securities upon exercises of the options, we are relying upon exemption from
registration set forth in Section 4(2) of the Act and/or Rule 701, Regulation D
or Regulation S promulgated thereunder.

Item 16. Exhibits and Financial Statement Schedules

  (a) Exhibits:

<TABLE>
<CAPTION>
 Exhibit
 Number                               Description
 -------                              -----------
 <C>     <S>
  1.1    Form of Underwriting Agreement.#

  3.1    Amended and Restated Certificate of Incorporation of the Company.#

  3.2    Amended and Restated Bylaws of the Company.#

  4.1    Form of Common Stock Certificate of Company.#

  5.1    Opinion of Morgan, Lewis & Bockius LLP.#

 10.1    3-Dimensional Pharmaceuticals, Inc. Equity Compensation Plan, as
         amended.#

 10.2    Third Amended and Restated Stockholders' Agreement by and among the
         Company and the Stockholders identified therein, dated March 31,
         2000.*

 10.3    Series B Preferred Stock Purchase Agreement between the Company and
         Merck KgaA, dated October 11, 1996.*

 10.4    Series C Preferred Stock Purchase Agreement between the Company and
         American Home Products Corporation, dated June 13, 1997.*

 10.5    Series D Preferred Stock Purchase Agreement between the Company and
         Schering Berlin Venture Corporation, dated May 17, 2000.#

 10.6    Warrant to Purchase Common Stock of the Company issued to HealthCare
         Ventures III, L.P., dated November 18, 1999.*

 10.7    Warrant to Purchase Common Stock of the Company issued to HealthCare
         Ventures IV, L.P., dated November 18, 1999.*

 10.8    Warrant to Purchase Common Stock of the Company issued to Rho
         Management Trust II, dated November 18, 1999.*

 10.9    Warrant to Purchase Common Stock of the Company issued to Aetna Life
         Insurance Company, dated November 18, 1999.*

 10.10   Warrant to Purchase Common Stock of the Company issued to Henry
         Rothman, dated November 18, 1999.*

 10.11   Warrant to Purchase Common Stock of the Company issued to Abingworth
         Bioventures SICAV, dated November 18, 1999.*
</TABLE>


                                      II-3
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
 10.12   Warrant to Purchase Common Stock of the Company issued to Sentron
         Medical, Inc., dated November 18, 1999.*

 10.13   Warrant to Purchase Common Stock of the Company issued to Biotech
         Growth S.A., dated November 18, 1999.*

 10.14   Employment Offer Letter to David C. U'Prichard, dated September 1,
         1999.#

 10.15   Settlement Agreement between the Company and Scriptgen
         Pharmaceuticals, Inc., dated March 7, 2000.*@

 10.16   Research Collaboration Agreement between the Company and Biocryst
         Pharmaceuticals, Inc., dated October 18, 1996, and Amendment No.1
         thereto, dated October 18, 1996.*@

 10.17   Collaborative Discovery and Lead Optimization Agreement between the
         Company and Boehringer Ingelheim Pharmaceuticals, Inc., dated December
         17, 1999.*@

 10.18   Collaborative Research and License Agreement between the Company and
         Hoechst Schering AgrEvo GmbH, now a part of Aventis Crop Science CmbH,
         dated October 18, 1999.*@

 10.19   Collaborative Research and License Agreement between the Company and
         E.I. DuPont de Nemours & Co., dated October 12, 1998.*@

 10.20   Collaborative Discovery and Lead Optimization Agreement between the
         Company and DuPont Pharmaceuticals Company, dated February 11, 2000.#@

 10.21   Nonexclusive Patent License Agreement between the Company and DuPont
         Pharmaceuticals Company, dated February 11, 2000.#@

 10.22   Research and License Agreement between the Company and the Heska
         Corporation, dated December 18, 1997, and Amendment No.1 thereto,
         dated December 18, 1997.*@

 10.23   License and Research Agreement between the Company and Schering AG,
         Germany, dated May 17, 2000.#@

 10.24   Master Loan and Security Agreement between the Company and Phoenixcor,
         Inc., dated June 18, 1998.#

 10.25   Amended and Restated Lease for Combination Office/Laboratory/Light
         Manufacturing Space at Eagleview Corporate Center Lot 28 between the
         Company and Eagleview Technology Partners, dated December 12, 1997.#

 10.26   Master Lease Agreement between the Company and Transamerica Business
         Credit Corporation, dated June 12, 1997.#

 10.27   Warrant to Purchase Common Stock of the Company issued to Transamerica
         Business Credit Corporation, dated June 12, 1997.#

 10.28   Master Lease Agreement, Loan Agreement and Subordination Agreement
         between the Company and Comdisco, Inc., dated March 7, 1994.#

 10.29   Warrant to Purchase Series A Preferred Stock, originally dated March
         7, 1994 and reissued to CDC Realty, Inc., dated July 21, 1998.#
</TABLE>


                                      II-4
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                               Description
 -------                              -----------
 <C>     <S>
 10.30   Warrant to Purchase Series A Preferred Stock, originally dated March
         7, 1994 and reissued to Gregory Stento, dated July 21, 1998.#

 10.31   Warrant to Purchase Series A Preferred Stock, originally dated April
         25, 1995 and reissued to Comdisco, Inc., dated July 21, 1998.#

 10.32   Warrant to Purchase Series A Preferred Stock, originally dated April
         25, 1995 and reissued to Gregory Stento, dated July 21, 1998.#

 21.1    Subsidiaries of the Registrant.*

 23.1    Consent of Richard A. Eisner & Company, LLP.*

 23.2    Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit
         5.1).#

 24.1    Power of Attorney (included on signature page).*

 27.1    Financial Data Schedule.*
</TABLE>
--------
*  Filed herewith.
#  To be filed by amendment.
@  Confidential treatment will be requested with respect to portions of this
   exhibit. Omitted portions will be filed separately with the Securities and
   Exchange Commission.

  (b) Financial Statement Schedules

     Schedule II--Valuation and Qualifying accounts.

  All other information for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission is either
included in the financial statements or is not required under the related
instructions or is inapplicable, and therefore has been omitted.

Item 17. Undertakings.

  Insofar as indemnification for liabilities arising under the Securities Act
of 1933, the Act, may be permitted to directors, officers and controlling
persons of the registrant pursuant to provisions described in Item 14 above, 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.

  The undersigned registrant hereby undertakes (1) to provide to the
underwriter at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser; (2) for purposes
of determining any liability under the Act, the information omitted from the
form of prospectus filed as part of a registration statement in reliance upon
Rule 430(A) and contained in the form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be
part of this registration statement as of the time it was declared effective;
and (3) that for the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus 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-5
<PAGE>

                                   SIGNATURES

  Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has duly reasonable grounds to believe that it meets all of
the requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Exton, Pennsylvania, on May 23, 2000.

                                          3-Dimensional Pharmaceuticals, Inc.

                                                /s/ David C. U'Prichard
                                          By___________________________________
                                                    David C. U'Prichard
                                                  Chief Executive Officer

  Pursuant to the requirements of the Securities Exchange Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated. Each person whose signature appears
below in so signing also makes, constitutes and appoints David C. U'Prichard
and F. Raymond Salemme and each of them acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to execute
and cause to be filed with the Securities and Exchange Commission any and all
amendments and post-effective amendments to this Registration Statement and a
related registration statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, and in each case to file the
same, with all exhibits thereto and other documents in connection therewith,
and hereby ratifies and confirms all that said attorney-in-fact or his
substitute or substitutes may do or cause to be done by virtue hereof.

  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>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
     /s/ David C. U'prichard           Chief Executive Officer       May 23, 2000
______________________________________  and Director (Principal
         David C. U'Prichard            Executive Officer)

      /s/ Michael J. Wassil            Vice President and Chief      May 23, 2000
______________________________________  Financial Officer
          Michael J. Wassil             (Principal Financial
                                        Officer)

       /s/ Scott M. Horvitz            Vice President, Finance       May 23, 2000
______________________________________  and Administration
           Scott M. Horvitz             (Principal Accounting
                                        Officer)

      /s/ F. Raymond Salemme           President, Chief              May 23, 2000
______________________________________  Scientific Officer and
          F. Raymond Salemme            Director

       /s/ Stephen Bunting             Director                      May 23, 2000
______________________________________
           Stephen Bunting
</TABLE>

                                      II-6
<PAGE>

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
       /s/ Bernard Canavan             Director                      May 23, 2000
______________________________________
           Bernard Canavan

      /s/ James H. Cavanaugh           Director                      May 23, 2000
______________________________________
          James H. Cavanaugh

       /s/ Zola P. Horovitz            Director                      May 23, 2000
______________________________________
           Zola P. Horovitz

        /s/ David R. King              Director                      May 23, 2000
______________________________________
            David R. King

         /s/ Joshua Ruch               Director                      May 23, 2000
______________________________________
             Joshua Ruch

       /s/ Harold R. Werner            Director                      May 23, 2000
______________________________________
           Harold R. Werner
</TABLE>

                                      II-7
<PAGE>

                  INDEPENDENT AUDITORS' REPORT ON SCHEDULE II

Board of Directors and Stockholders
3-Dimensional Pharmaceuticals, Inc.

  Our audits were conducted for the purpose of forming an opinion on the basic
financial statements of 3-Dimensional Pharmaceuticals, Inc. as of December 31,
1999 (consolidated) and 1998 and for each of the years in the three-year period
ended December 31, 1999 taken as a whole. The information included on Schedule
II is presented for purposes of additional analysis and is not a required part
of the basic financial statements. Such information has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole. Also, such schedule presents
fairly the information set forth therein in compliance with the applicable
accounting regulations of the Securities and Exchange Commission.

New York, New York
February 25, 2000
<PAGE>

                      3-DIMENSIONAL PHARMACEUTICALS, INC.

                 Schedule II--Valuation and Qualifying Accounts
                                 (in thousands)

<TABLE>
<CAPTION>
        Column A           Column B           Column C             Column D   Column E
        --------          ---------- --------------------------- ------------ ---------
                          Balance at Charged in    Charge to                   Balance
                          Beginning  Costs and  Other Accounts-- Deductions-- at End of
      Description         of Period   Expenses      Describe       Describe    Period
      -----------         ---------- ---------- ---------------- ------------ ---------
<S>                       <C>        <C>        <C>              <C>          <C>
Accumulated depreciation
 and amortization:
  Year ended December
   31, 1997.............   $ 1,190     $  860        $  --          $  --      $ 2,050
  Year ended December
   31, 1998.............     2,050      1,486           --             --        3,536
  Year ended December
   31, 1999.............     3,536      1,565           --             --        5,101
Tax asset valuation
 allowance:
  Year ended December
   31, 1997.............   $ 5,908     $2,415        $  --          $  --      $ 8,323
  Year ended December
   31, 1998.............     8,323      4,040           --             --       12,363
  Year ended December
   31, 1999.............    12,363      6,805           --             --       19,168
</TABLE>

                                       2
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  1.1    Form of Underwriting Agreement.#

  3.1    Amended and Restated Certificate of Incorporation of the Company.#

  3.2    Amended and Restated Bylaws of the Company.#

  4.1    Form of Common Stock Certificate of Company.#

  5.1    Opinion of Morgan, Lewis & Bockius LLP.#

 10.1    3-Dimensional Pharmaceuticals, Inc. Equity Compensation Plan, as
         amended.#

 10.2    Third Amended and Restated Stockholders' Agreement by and among the
         Company and the Stockholders identified therein, dated March 31,
         2000.*

 10.3    Series B Preferred Stock Purchase Agreement between the Company and
         Merck KgaA, dated October 11, 1996.*

 10.4    Series C Preferred Stock Purchase Agreement between the Company and
         American Home Products Corporation, dated June 13, 1997.*

 10.5    Series D Preferred Stock Purchase Agreement between the Company and
         Schering Berlin Venture Corporation, dated May 17, 2000.#

 10.6    Warrant to Purchase Common Stock of the Company issued to HealthCare
         Ventures III, L.P., dated November 18, 1999.*

 10.7    Warrant to Purchase Common Stock of the Company issued to HealthCare
         Ventures IV, L.P., dated November 18, 1999.*

 10.8    Warrant to Purchase Common Stock of the Company issued to Rho
         Management Trust II, dated November 18, 1999.*

 10.9    Warrant to Purchase Common Stock of the Company issued to Aetna Life
         Insurance Company, dated November 18, 1999.*

 10.10   Warrant to Purchase Common Stock of the Company issued to Henry
         Rothman, dated November 18, 1999.*

 10.11   Warrant to Purchase Common Stock of the Company issued to Abingworth
         Bioventures SICAV, dated November 18, 1999.*

 10.12   Warrant to Purchase Common Stock of the Company issued to Sentron
         Medical, Inc., dated November 18, 1999.*

 10.13   Warrant to Purchase Common Stock of the Company issued to Biotech
         Growth S.A., dated November 18, 1999.*

 10.14   Employment Offer Letter to David C. U'Prichard, dated September 1,
         1999.#

 10.15   Settlement Agreement between the Company and Scriptgen
         Pharmaceuticals, Inc., dated March 7, 2000.*@

 10.16   Research Collaboration Agreement between the Company and Biocryst
         Pharmaceuticals, Inc., dated October 18, 1996, and Amendment No.1
         thereto, dated October 18, 1996.*@

 10.17   Collaborative Discovery and Lead Optimization Agreement between the
         Company and Boehringer Ingelheim Pharmaceuticals, Inc., dated December
         17, 1999.*@

 10.18   Collaborative Research and License Agreement between the Company and
         Hoechst Schering AgrEvo GmbH, now a part of Aventis Crop Science CmbH,
         dated October 18, 1999.*@
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
 10.19   Collaborative Research and License Agreement between the Company and
         E.I. DuPont de Nemours & Co., dated October 12, 1998.*@

 10.20   Collaborative Discovery and Lead Optimization Agreement between the
         Company and DuPont Pharmaceuticals Company, dated February 11, 2000.#@

 10.21   Nonexclusive Patent License Agreement between the Company and DuPont
         Pharmaceuticals Company, dated February 11, 2000.#@

 10.22   Research and License Agreement between the Company and the Heska
         Corporation, dated December 18, 1997, and Amendment No.1 thereto,
         dated December 18, 1997.*@

 10.23   License and Research Agreement between the Company and Schering AG,
         Germany, dated May 17, 2000.#@

 10.24   Master Loan and Security Agreement between the Company and Phoenixcor,
         Inc., dated June 18, 1998.#

 10.25   Amended and Restated Lease for Combination Office/Laboratory/Light
         Manufacturing Space at Eagleview Corporate Center Lot 28 between the
         Company and Eagleview Technology Partners, dated December 12, 1997.#

 10.26   Master Lease Agreement between the Company and Transamerica Business
         Credit Corporation, dated June 12, 1997.#

 10.27   Warrant to Purchase Common Stock of the Company issued to Transamerica
         Business Credit Corporation, dated June 12, 1997.#

 10.28   Master Lease Agreement, Loan Agreement and Subordination Agreement
         between the Company and Comdisco, Inc., dated March 7, 1994.#

 10.29   Warrant to Purchase Series A Preferred Stock, originally dated March
         7, 1994 and reissued to CDC Realty, Inc., dated July 21, 1998.#

 10.30   Warrant to Purchase Series A Preferred Stock, originally dated March
         7, 1994 and reissued to Gregory Stento, dated July 21, 1998.#

 10.31   Warrant to Purchase Series A Preferred Stock, originally dated April
         25, 1995 and reissued to Comdisco, Inc., dated July 21, 1998.#

 10.32   Warrant to Purchase Series A Preferred Stock, originally dated April
         25, 1995 and reissued to Gregory Stento, dated July 21, 1998.#

 21.1    Subsidiaries of the Registrant.*

 23.1    Consent of Richard A. Eisner & Company, LLP.*

 23.2    Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit
         5.1).#

 24.1    Power of Attorney (included on signature page).*

 27.1    Financial Data Schedule.*
</TABLE>
--------
*  Filed herewith.
#  To be filed by amendment.
@  Confidential treatment will be requested with respect to portions of this
   exhibit. Omitted portions will be filed separately with the Securities and
   Exchange Commission.
