Prepared by MERRILL CORPORATION

DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)		23-2908305 (I.R.S. EMPLOYER IDENTIFICATION NO.)
6166 Nancy Ridge Drive, San Diego, CA (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)		92121 (ZIP CODE)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /

Indicate the number of shares outstanding of each of issuer's classes of
common stock, as of the latest practicable date.

COMMON STOCK, $0.0001 PAR VALUE		27,571,671 SHARES
Class		Outstanding at October 31, 2001

		PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets—As of September 30, 2001 and December 31, 2000	3
	Condensed Consolidated Statements of Operations—Three and Nine Month Periods Ended September 30, 2001 and 2000	4
	Condensed Consolidated Statements of Cash Flows—Nine Month Periods Ended September 30, 2001 and 2000	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16
PART II. OTHER INFORMATION
Item 2.	Changes in Securities and Use of Proceeds	17
Item 6.	Exhibits and Reports on Form 8-K	17
Signatures	18

Note: The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the Unites States for complete financial statements.

Arena Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

Arena Pharmaceuticals, Inc.

Condensed Consolidated Cash Flow Statements

(Unaudited)

The accompanying unaudited financial statements of Arena Pharmaceuticals, Inc. have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results for a full year.

The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the audited financial statements and footnotes thereto included in the Annual Report on Form 10-K, for the year ended December 31, 2000, as filed with the Securities and Exchange Commission ("SEC").

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts reported in the condensed financial statements and related footnotes. Changes in the estimates may affect amounts reported in future periods.

Certain reclassifications of prior year balances have been made to conform to the current format.

In accordance with SFAS No. 128, Earnings Per Share, and SEC Staff Accounting Bulletin (or "SAB") No. 98, basic and diluted net loss per share are computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period.

Under the provisions of SAB No. 98, common shares issued for nominal consideration, if any, would be included in the per share calculations as if they were outstanding for all periods presented. No common shares have been issued for nominal consideration.

For the nine months ended September 30, 2001 and the year ended December 31, 2000, in connection with the grant of stock options to employees, the Company recorded deferred stock compensation totaling approximately $226,000 and $11.1 million, respectively, representing the difference between the exercise price and the estimated market value of the Company's common stock as determined by the Company's management, or quoted market value after July 28, 2000, on the date such stock options were granted. Deferred compensation is included as a reduction of stockholders' equity and is being amortized to expense over the vesting period of the options in accordance with FASB Interpretation No. 28, which permits an accelerated amortization methodology. For the nine months ended September 30, 2001 and 2000, the Company recorded amortization of deferred compensation expense of approximately $3.4 million and $3.0 million, respectively. At September 30, 2001, total charges to be recognized in future periods from amortization of deferred stock

compensation are anticipated to be approximately $818,000, $2.5 million, $1.0 million, and $112,000 for the remaining three months of 2001, and for the years ending December 31, 2002, 2003 and 2004, respectively.

In January 2000, March 2000 and April 2000 the Company sold Shares of Series E Convertible Redeemable Preferred Stock, Series F Convertible Redeemable Preferred Stock and Series G Convertible Redeemable Preferred Stock, respectively, at what management believed was fair value. Subsequent to the commencement of the initial public offering process, the Company re-evaluated the fair value of its common stock as of January 2000, March 2000 and April 2000 and determined it to be $4.68, $13.50 and $13.50, respectively. The Company recorded a non-cash preferred stock charge in the amount of approximately $22.4 million in the nine months ended September 30, 2000. The Company recorded the charge at the date of issuance by offsetting charges and credits to preferred stock, without any effect on stockholders' equity. The non-cash preferred stock charge increases the loss applicable to common stockholders in the calculation of basic and diluted net loss per share for the nine months ended September 30, 2000.

On July 28, 2000 the Company completed an initial public offering in which it sold 6,000,000 shares of common stock at $18.00 per share for net proceeds of approximately $98.8 million, net of underwriting discounts, commissions and offering expenses. Upon the closing of the offering, all of the Company's redeemable convertible preferred stock converted into 12,698,578 shares of common stock.

On August 10, 2000 the underwriters exercised an over-allotment option to purchase an additional 900,000 shares resulting in net proceeds to the Company of approximately $15.1 million.

On June 21, 2001 the Company completed a follow-on offering in which it sold 4,000,000 shares of common stock at $27.50 per share for net proceeds of approximately $103.5 million, net of underwriting discounts, commissions and offering expenses.

On June 27, 2001 the underwriters exercised an over-allotment option to purchase an additional 750,000 shares resulting in net proceeds to the Company of approximately $19.5 million. The net proceeds were received by the Company on July 2, 2001.

On February 15, 2001, the Company completed the acquisition of Bunsen Rush Laboratories, Inc. ("Bunsen Rush") for cash of $15.0 million. The net assets, revenues and operations of Bunsen Rush were not material to the Company. Substantially all of the purchase price has been assigned to acquired technology and other intangibles, which are being amortized over 10 years. Had the acquisition been completed on January 1, 2000 or 2001, the Company's pro forma revenues for the periods reported on this Form 10-Q would not have been materially different than as reported herein, and net loss and net loss per share would have been impacted by the amortization of intangible assets described previously and the reduction of interest income as a result of the use of cash to effect the acquisition.

In July 2001, the Financial Accounting Standards Board issued FASB Statements Nos. 141 and 142, Business Combinations and Goodwill and Other Intangible Assets ("FAS 141" and "FAS 142," respectively). FAS 141 replaces Accounting Principles Board Opinion No. 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under FAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. FAS 141 and FAS 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of FAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under FAS 141 will be reclassified to goodwill. Companies are required to adopt FAS 142 for fiscal years beginning after December 15, 2001, but early adoption is permitted under certain circumstances. The adoption of these standards is not expected to have a material impact on the Company's results of operations and financial position.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this report and the financial statements and notes thereto for the year ended December 31, 2000 included in the Company's last Annual Report on Form 10-K, which was filed with the SEC. Operating results are not necessarily indicative of results that may occur in future periods.

Certain statements contained in this report on Form 10-Q and other public statements that are not historical facts, including those statements that refer to our plans, goals, objectives, expectations, strategies, intentions and beliefs, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terminology such as "will," "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or similar words. You should not place undue reliance on these forward-looking statements. These statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in our forward-looking statements. Factors that might cause such differences include, but are not limited to, the following: the ability to complete Project Genesis, if at all, within a reasonable time period; future quarterly or annual financial results; the timing, success and cost of preclinical research, out-licensing endeavors and clinical studies; and receipt of additional milestone payments, if any, from collaborators. Additional risk factors that could cause such differences are discussed elsewhere in this document and in "Risk Factors" in our registration statement filed June 21, 2001 on Form S-1, as amended, and in our last Annual Report on Form 10-K. We assume no obligation to update these forward-looking statements as circumstances change in the future.

We were incorporated on April 14, 1997 in the state of Delaware and commenced operations in July 1997. We are an emerging biopharmaceutical company focused principally on discovering drugs that act on an important class of drug targets called G protein-coupled receptors, or GPCRs. We have developed a technology called Constitutively Activated Receptor Technology, or CART, that can be applied to GPCRs and other classes of receptors to identify drug leads. We believe that CART is a more efficient drug discovery technique than traditional drug discovery techniques. Using CART, we have discovered new drug leads in the areas of obesity and schizophrenia. In both of these programs, drug leads were discovered within 18 months, which is substantially less time than might be required to discover a drug lead using traditional drug discovery techniques. We use CART in conjunction with our Melanophore Technology, a function-based screening technology used to identify compounds that interact with cell surface receptors, including known and orphan GPCRs and tyrosine kinase receptors, or TKRs. The functional nature of Melanophore Technology eliminates the need for radioactive or fluorescent screening techniques and provides a simple and sensitive means to detect cellular signals generated by activated receptors.

In January 2001, we purchased a facility we were leasing along with an adjoining building that was leased to a tenant until the end of August 2001, at 6138-6150 Nancy Ridge Drive in San Diego, California. We paid cash of $5.4 million and will amortize the building cost over the building's useful life, estimated to be 20 years.

In January 2001, we signed an amendment expanding our original May 2000 agreement with Taisho Pharmaceutical Co., Ltd. ("Taisho") whereby Taisho was granted world-wide rights to our 18-F Program, an obesity orphan receptor target and small molecule modulators. In accordance with the amendment, Taisho made a one-time payment in the first quarter of 2001 to us for the 18-F Program based upon work already completed by the Company. In addition, we may receive additional milestone and research funding payments and royalties on drug sales, if any.

In February 2001, for $15.0 million in cash we acquired, through our wholly-owned subsidiary BRL Screening, Inc., all of the outstanding capital stock of Bunsen Rush, a privately-held research-based company that offers receptor screening to the pharmaceutical and biotechnology industries using its proprietary and patented Melanophore Technology.

In April 2001, we signed a binding letter of intent with Axiom Biotechnologies, Inc. for a collaborative research program involving Axiom's proprietary RHACE™ Technology and Human Cell Bank, as well as the purchase by us of $2.0 million of Axiom's preferred stock. Axiom's unique assets include the Axiom Human Cell Bank, a large pharmacologically and genetically characterized collection of human cells. Under the scientific collaboration, we will jointly develop and share information related to the localization of known GPCRs within human cell lines owned by Axiom. Axiom will also profile several thousand of our small molecule compounds using its technologies and we will have exclusive rights to these data. We will exclusively own the information related to the localization of orphan GPCRs within these cell lines. The Axiom stock purchase was completed August 2001.

We have entered into purchase agreements to acquire two properties, for cash, located adjacent to our existing facilities. We expect to complete the acquisition of both of these properties in November of this year. The acquisition price of the first property, located at 6154 Nancy Ridge Drive, is $5.3 million and consists of approximately 51,000 square feet of space suitable for office and laboratory expansion. The acquisition price of the second property, located at 6114 Nancy Ridge Drive, is $1.3 million and consists of approximately 13,000 square feet of space suitable for office and laboratory expansion. The 6154 Nancy Ridge Drive property will continue to be leased to the current tenant until approximately the fourth quarter of 2002, at which time we will begin to occupy the facility. The 6114 Nancy Ridge Drive property will continue to be leased to the current tenant for approximately three months following the purchase before we will begin to occupy the facility.

In June 2001, we entered into an agreement with ICI to apply our CART technology to olfactory and gustatory GPCRs. The initial stage of research under our agreement will last approximately six months. We intend to use our CART technology to develop olfactory and/or gustatory GPCR assays for ICI and then screen using compounds supplied by ICI businesses.

We signed an agreement effective July 2001 with TaiGen Biotechnology Co., Ltd. (TaiGen), a start-up biopharmaceutical organization focused on the discovery and development of innovative therapeutics, which became effective in July 2001. In exchange for equity in TaiGen's Series A preferred financing, TaiGen has the right to select and obtain several GPCRs from us. We will activate, develop a screening assay and transfer selected activated receptors to TaiGen. We may also receive royalty payments based on annual TaiGen licensing revenue. We will not initially receive any cash payments from TaiGen. In the future, however, we expect to recognize revenue upon transfer of selected receptor screens to TaiGen. We account for our ownership interest in TaiGen using the equity method of accounting.

In October 2001, Eli Lilly and Co. (Eli Lilly) exercised its option under our existing agreement to expand the collaboration to include the selection of GPCRs in the area of oncology. We may receive milestone payments for each receptor in connection with the successful application of CART to each receptor and additional milestone payments for each drug candidate discovered using CART. The Company may also receive additional milestone and royalty payments associated with the commercialization of drugs discovered using CART, if any. The Company and Eli Lilly may never achieve the discovery, development or commercialization milestones.

Since our inception, we have devoted substantially all of our resources to the research and development of our technologies. We have incurred significant operating losses since our inception and, as of September 30, 2001, we had an accumulated deficit of $24.8 million. Our prospects should be considered in light of the risks, expenses and difficulties encountered by companies in the early stages

of development, particularly those companies in the rapidly changing pharmaceutical and biotechnology industries.

We plan to pursue several specific objectives during the remainder of 2001, namely:

We have initiated Project Genesis, an internal drug discovery program using a combination of CART, Melanophore Technology and other technologies that we believe will allow us to discover a substantial number of unique small molecule drug leads and drug candidates. With the recent completion of the sequencing of the human genome, we view Project Genesis as a logical extension of our scientific and business capabilities. To the extent that the human genome project has identified all of the genes within humans, we believe that Project Genesis will allow us to discover new drug leads at all of the estimated 800 therapeutically relevant GPCRs.

We may enter into collaborative arrangements at any stage of Project Genesis with respect to any CART-activated receptor, drug leads or drug candidates that we discover.

Our ability to achieve our identified goals or objectives is dependent upon many factors, some of which are out of our control and we may not achieve our identified goals or objectives.

Our quarterly operating results will depend upon many factors, including the expiration or termination of research agreements with our collaborators, the size of future collaborations, the success

rate of our technology collaborations leading to milestones and royalties, and general and industry-specific economic conditions which may affect research and development expenditures. As a consequence, our revenues in future periods are likely to fluctuate significantly from period to period.

Revenues for the quarter ended September 30, 2001 increased $1.2 million, or 50%, to $3.5 million compared to $2.3 million for the same quarter last year. The increase was primarily attributable to collaborations with Eli Lilly and Taisho, both significant customers, which included research funding, milestone payments, and technology access and development fees. Research funding is recognized as revenue when the services are rendered. Revenues from technology access and development fees are recognized over the term of the collaboration. Revenues from milestone payments are recognized when the milestone is achieved as evidenced by written acknowledgement from our collaborator, provided that the milestone event represents the culmination of an earnings process, its achievement was not reasonably assured at the inception of the agreement and the parties performance obligations after the milestone achievement will continue at a level comparable to the level before the milestone achievement. Our collaborators often pay us before we recognize the revenue, and these payments are deferred until earned. As of September 30, 2001, we had current and long-term deferred revenues totaling approximately $4.6 million.

Research and development expenses increased $2.7 million, or 80%, to $6.2 million for the quarter ended September 30, 2001 from $3.5 million for the same quarter last year. The increase was primarily due to an increase in wages and benefits due to an increase in scientific personnel, along with an increase in lab supplies and equipment costs to support the personnel in order to expand the application of our technology. As of September 30, 2001, all research and development costs have been expensed as incurred. We believe that continued investment in research and development is critical to attaining our strategic objectives including Project Genesis, and we expect these expenses to continue to increase in the near and long-term.

General and administrative expenses increased $662,000 to $1.5 million for the quarter ended September 30, 2001 from $800,000 for the quarter ended September 30, 2000. The increase was a result of increased personnel added to support a growing company as well as supporting the needs of a public company. General and administrative expenses consist primarily of salaries and related personnel expenses for executive, finance and administrative personnel, professional fees, and other general corporate expenses. We expect that our general and administrative expenses will continue to increase to support our growth and requirements as a public company.

Deferred compensation for options granted to employees has been determined as the difference between the exercise price and the fair value of our common stock, as estimated by us, or quoted market value after July 28, 2000, for financial reporting purposes, on the date options were granted. Deferred compensation for options granted to consultants was determined in accordance with Statement of Financial Accounting Standards No. 123 as the fair value of the equity instruments issued and is periodically remeasured as the underlying options vest in accordance with EITF 96-18.

For the quarter ended September 30, 2001, we recorded amortization expense for deferred compensation of approximately $1.1 million, compared to $1.1 million for the quarter ended September 30, 2000.

Amortization expense of acquired technology and other intangibles was $384,000 for the quarter ended September 30, 2001 and represented amortization related to our acquisition of Bunsen Rush versus no expense for the quarter ended September 30, 2000.

Interest income increased $891,000 to approximately $2.6 million for the quarter ended September 30, 2001 from $1.7 million for the same quarter last year, due to higher average cash balances primarily related to our follow-on offering in June 2001 through which we raised net cash proceeds of $123.0 million.

Other income, net increased $1.1 million to $1.1 million for the quarter ended September 30, 2001 from $(45,000) for the quarter ended September 30, 2000. The increase was due primarily to a gain of $1.2 million from the sale of an investment offset by $183,000 in expenses attributable to our share of the net loss of TaiGen, which we have accounted for by the equity method of accounting.

Revenues for the nine months ended September 30, 2001 increased $8.6 million, or 238%, to $12.2 million compared to $3.6 million for the same period last year. The revenues for the nine months ended September 30, 2001 were primarily attributable to our collaborations with Eli Lilly and Taisho, both significant customers, which included research funding, milestone payments, and technology access and development fees. Research funding is recognized as revenue when the services are rendered. Revenues from milestone payments are recognized when the milestone is achieved as evidenced by written acknowledgement from our collaborator, provided that the milestone event represents the culmination of an earnings process, its achievement was not reasonably assured at the inception of the agreement and the parties performance obligations after the milestone achievement will continue at a level comparable to the level before the milestone achievement. Revenues from technology access and development fees are recognized over the term of the collaboration. Revenues from milestone payments are recognized when the milestone is achieved. Our collaborators often pay us before we recognize the revenue, and these payments are deferred until earned. As of September 30, 2001, we had current and long-term deferred revenues totaling approximately $4.6 million.

Research and development expenses increased $6.9 million, or 80%, to $15.4 million for the nine months ended September 30, 2001 from $8.5 million for the same period last year. The increase was due primarily to an increase in wages and benefits due to an increase in scientific personnel, along with an increase in lab supplies and equipment costs to support the personnel in order to expand the application of our technology. As of September 30, 2001, all research and development costs have been expensed as incurred. We believe that continued investment in research and development is critical to attaining our strategic objectives including Project Genesis, and we expect these expenses to continue to increase in the near and long-term.

General and administrative expenses increased $2.1 million to approximately $3.8 million for the nine months ended September 30, 2001 from $1.7 million for the nine months ended September 30, 2000. The increase was a result of increased personnel added to support a growing company as well as supporting the needs of a public company. General and administrative expenses consist primarily of salaries and related personnel expenses for executive, finance and administrative personnel, professional fees, and other general corporate expenses. We expect that our general and administrative expenses will continue to increase to support our growth and requirements as a public company.

For the nine months ended September 30, 2001, we recorded amortization expense for deferred compensation of approximately $3.4 million, compared to $3.0 million for the nine months ended September 30, 2000.

Amortization expense of acquired technology and other intangibles was $897,000 for the nine months ended September 30, 2001 and represented amortization related to our acquisition of Bunsen Rush versus no expense for the nine months ended September 30, 2000.

Interest income increased $3.7 million to $6.0 million for the nine months ended September 30, 2001 from $2.3 million for the same period last year, due to higher average cash balances primarily related to our initial public offering in July 2000 and our follow-on offering in June 2001 through which in total we raised net cash proceeds of $236.9 million.

Other income, net increased $1.3 million to $1.2 million for the nine months ended September 30, 2001 from $(137,000) for the nine months ended September 30, 2000. The increase was due primarily to a gain of $1.2 million from the sale of an investment and rental income of $211,000, partially offset by interest expense of $80,000, and $183,000 in expenses attributable to our share of the net loss of TaiGen, which we have accounted for by the equity method of accounting.

At September 30, 2001, we had an accumulated deficit of $24.8 million. Our accumulated deficit is the result of expenses incurred in connection with our research and development activities and general and administrative expenses. To date, we have funded our operations primarily through public and private equity financings and to a lesser extent, through funding from our collaborators.

As of September 30, 2001, we had $239.5 million in cash and cash equivalents compared to $144.4 million in cash and cash equivalents as of December 31, 2000. The increase of $95.1 million was primarily attributable to net proceeds of $123.0 million from our follow-on offering that was completed in June 2001. This increase was partially offset by our acquisition of Bunsen Rush for $15.0 million in

cash in February 2001, the purchase of our facility for $5.4 million in January 2001, equipment purchases totaling $5.9 million and our payment of $2.0 million in connection with our equity investment in Axiom Biotechnologies.

Net cash provided by operating activities was approximately $463,000 during the nine months ended September 30, 2001 compared to net cash used in operating activities of approximately $3.8 million during the same period last year. The primary source of cash in the first nine months of 2001 was related to the net loss for the period, adjusted for non-cash expenses, including amortization of deferred compensation, amortization of acquired technology and other intangibles, and changes in operating assets and liabilities. The primary use of cash in the same period of 2000 was to fund our net losses for the period, adjusted for non-cash expenses, including deferred compensation, and changes in operating assets and liabilities.

Net cash used in investing activities was approximately $28.1 million during the nine months ended September 30, 2001 compared with approximately $2.4 million during the same period last year. Net cash used in investing activities in first nine months of 2001 was primarily the result of the acquisition of Bunsen Rush, our facility purchase, the acquisition of laboratory and computer equipment, leasehold improvements and furniture and fixtures and our equity investment in Axiom Biotechnologies. Net cash used in investing activities in the first nine months of 2000 was primarily the result of the acquisition of laboratory and computer equipment, leasehold improvements and furniture and fixtures as well as prepayments made for directors and officers insurance premiums.

Net cash provided by financing activities was approximately $122.8 million during the nine months ended September 30, 2001 compared with approximately $145.5 million during the same period last year. Net cash provided by financing activities for the first nine months of 2001 was primarily attributable to proceeds received from the issuance of our common stock from our follow-on offering that was completed in June 2001, partially offset by principal payments on our capital leases. The net cash provided by financing activities for the same period last year was primarily attributable to proceeds received from our initial public offering that was completed in July 2001 and the issuance of our preferred and common stock.

We lease a corporate research and development facility under a lease which expires on April 13, 2013. The lease provides us with options to extend for two additional five-year periods. We have also entered into capital lease agreements for various lab and office equipment. The terms of these capital lease agreements range from 48 to 60 months. At December 31, 2000 current total minimum annual payments under these capital leases were approximately $614,000 in 2001, $614,000 in 2002, $480,000 in 2003 and $45,000 in 2004.

In January 2001, we purchased a facility we were previously leasing as well as the adjoining building at 6138-6150 Nancy Ridge Drive in San Diego for cash of $5.4 million.

We have entered into purchase agreements to acquire two additional properties, for cash, located adjacent to our existing facilities. We expect to complete the acquisition of both of these properties in November of this year. The acquisition price of the first property, located at 6154 Nancy Ridge Drive, is $5.3 million and the acquisition price of the second property, located at 6114 Nancy Ridge Drive, is $1.3 million. In February 2001, the Company, through its wholly-owned subsidiary BRL Screening, Inc., acquired all of the outstanding capital stock of Bunsen Rush, a privately-held research-based company, for cash of $15.0 million.

In April 2001, we entered into a binding letter of intent for a research collaboration with Axiom Biotechnologies, Inc. Under the terms of the agreement, we will identify the location and expression of GPCRs contained in Axiom's human cell lines. In addition, we acquired approximately 570,000 shares of Axiom's preferred stock for $2.0 million in August 2001.

In June 2001, we completed a follow-on offering in which we sold 4,000,000 shares of common stock at $27.50 per share for net proceeds of approximately $103.5 million, net of underwriting discounts, commissions and offering expenses. In the same month the underwriters exercised an over-allotment option to purchase an additional 750,000 shares resulting in net proceeds to the Company of approximately $19.5 million. The net proceeds from the over-allotment were received by the Company on July 2, 2001.

Our ability to sustain profitability will be dependent upon, among other things, obtaining additional strategic alliances as well as establishing additional collaborative or licensing arrangements.

Based on the research collaborations we already have in place and our current internal business plan, we expect to hire an additional 15 to 30 employees, primarily scientists, by the end of 2001. While we believe that our current capital resources and anticipated cash flows from collaborations will be sufficient to meet our capital requirements for at least the next two years, we cannot assure you that we will not require additional financing before such time. Our funding requirements may change at any time due to technological advances or competition from other companies. Our future capital requirements will also depend on numerous other factors, including scientific progress in our research and development programs, additional personnel costs, progress in pre-clinical testing, the time and cost related to proposed regulatory approvals, if any, and the costs of filing and prosecution of patent applications and enforcing patent claims. We cannot assure you that adequate funding will be available to us or, if available, that such funding will be available on acceptable terms. Any shortfall in funding could result in the curtailment of our research and development efforts.

Our exposure to market risk for changes in interest rates relates primarily to our cash equivalents and short-term investments. We do not use derivative financial instruments in our investment portfolio. Our cash and investment policy emphasizes liquidity and preservation of principal over other portfolio considerations. We select investments that maximize interest income to the extent possible within these guidelines. If market interest rates were to decrease by 1% from September 30, 2001, we would expect future interest income from our portfolio to decline by less than $2.4 million over the next 12 months. The modeling technique used measures the change in fair values arising from an immediate hypothetical shift in market interest rates and assumes ending fair values include principal plus earned interest.

On July 28, 2000 we completed our initial public offering of 6,000,000 shares of our common stock and on August 10, 2000 the underwriters exercised an over-allotment option for an additional 900,000 shares of our common stock. The shares of common stock sold in the offering were registered under the Securities Act of 1933 in a Registration Statement on Form S-1, as amended (No. 333-35944). The Securities and Exchange Commission declared the Registration Statement effective on July 27, 2000.

Our total net proceeds from the initial public offering were approximately $113.9 million. Of the net proceeds, through September 30, 2001, we have used approximately $5.4 million to acquire facilities at 6138-6150 Nancy Ridge Drive in San Diego, California, $15.0 million to acquire all of the outstanding stock of Bunsen Rush, $2.0 million to acquire stock in Axiom Biotechnologies, Inc. and $5.9 million for lab, equipment and furniture purchases and leasehold improvements. The balance of the net proceeds remains in working capital, held as temporary investments in short-term money funds.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			September 30, 2001			December 31, 2000
			(unaudited)			(Note)
ASSETS
Current assets:
	Cash and cash equivalents		$	239,546,307		$	144,413,176
	Accounts receivable			3,087,083			2,116,146
	Prepaid expenses			2,812,716			1,685,122

		Total current assets		245,446,106			148,214,444
Property and equipment, net				14,436,105			4,265,260
Acquired technology and other intangibles, net				14,481,453			—
Investments and other assets				5,215,420			232,225

Total assets			$	279,579,084		$	152,711,929

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable and accrued expenses		$	1,201,257		$	615,201
	Accrued compensation			556,348			300,339
	Current portion of deferred revenues			4,165,014			220,000
	Current portion of obligations under capital leases			487,064			480,538

		Total current liabilities		6,409,683			1,616,078
Deferred revenues, less current portion				449,829			485,000
Capital lease obligations, less current portion				532,087			960,517
Deferred rent payable				866,209			866,009
Stockholders' equity:
	Common stock			2,757			2,268
	Additional paid-in capital			300,578,412			177,373,030
	Deferred compensation			(4,488,650	)		(7,899,970	)
	Accumulated deficit			(24,771,243	)		(20,691,003	)

Total stockholders' equity				271,321,276			148,784,325

Total liabilities and stockholders' equity			$	279,579,084		$	152,711,929

		Three months ended September 30,						Nine months ended September 30,
		2001			2000			2001			2000
Revenues
	Total revenues	$	3,472,338		$	2,314,126		$	12,194,928		$	3,603,397
Expenses
Research and development			6,230,959			3,465,360			15,375,823			8,546,347
General and administrative			1,462,779			800,383			3,820,335			1,719,883
Amortization of deferred compensation			1,071,653			1,123,358			3,413,050			2,952,402
Amortization of acquired technology and other intangibles			384,249			—			896,581			—

	Total operating expenses		9,149,640			5,389,101			23,505,789			13,218,632
Interest income			2,592,735			1,701,698			6,040,800			2,325,098
Other income (expense), net			1,065,013			(45,317	)		1,189,821			(136,739	)

Net loss			(2,019,554	)		(1,418,594	)		(4,080,240	)		(7,426,876	)
Non-cash preferred stock charge			—			—			—			(22,391,068	)

Net loss applicable to common stockholders		$	(2,019,554	)	$	(1,418,594	)	$	(4,080,240	)	$	(29,817,944	)

Net loss per share, basic and diluted		$	(0.07	)	$	(0.09	)	$	(0.17	)	$	(4.91	)

Shares used in calculating net loss per share, basic and diluted			27,236,326			15,706,593			24,194,049			6,069,278

			Nine months ended September 30,
			2001			2000
Operating Activities
Net loss			$	(4,080,240	)	$	(7,426,876	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Depreciation and amortization			1,085,031			562,230
	Minority interest			183,000			—
	Amortization of acquired technology and other intangibles			896,581			—
	Amortization of deferred compensation			3,413,050			2,952,402
	Interest accrued on note payable to related party			—			40,662
	Deferred rent			200			36,219
	Deferred revenues			169,405			918,854
	Changes in operating assets and liabilities:
		Accounts receivable		(970,937	)		(950,000	)
		Prepaid expenses		(1,127,594	)		(412,985	)
		Accounts payable and accrued expenses		894,065			443,039

Net cash provided by (used in) operating activities				462,561			(3,836,455	)
Investing Activities
	Acquisition of Bunsen Rush			(15,000,000	)		—
	Purchases of land, property and equipment			(11,255,876	)		(1,515,527	)
	Investments and other assets			(1,855,791	)		(876,071	)

Net cash used in investing activities				(28,111,667	)		(2,391,598	)
Financing Activities
	Advances under capital lease obligations			—			377,015
	Principal payments under capital lease obligations			(421,904	)		(406,729	)
	Proceeds from warrants exercised			—			1,123,865
	Proceeds from issuance of common stock			123,204,141			114,315,528
	Proceeds from issuance of redeemable preferred stock			—			30,065,064

Net cash provided by financing activities				122,782,237			145,474,743

Net increase in cash and cash equivalents				95,133,131			139,246,690
Cash and cash equivalents at beginning of period				144,413,176			5,401,508

Cash and cash equivalents at end of period			$	239,546,307		$	144,648,198

Supplemental Disclosures
	Schedule of noncash activities:
		Deferred revenue assumed in Bunsen Rush acquisition	$	430,034		$	—

		Equity investment in TaiGen for services to be performed	$	3,310,404		$	—

10.21		Separation Agreement and Release by and between Arena Pharmaceuticals, Inc., and Richard P. Burgoon, Jr. dated September 11, 2001
10.22		Letter Agreement dated September 13, 2001, by and between Arena Pharmaceuticals, Inc. and Steven W. Spector

	ARENA PHARMACEUTICALS, INC.
Dated: November 14, 2001	By:	/s/ JACK LIEF Name: Jack Lief Title: President and Chief Executive Officer
	By:	/s/ ROBERT HOFFMAN Name: Robert Hoffman Title: Vice President, Finance, Chief Accounting Officer