##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


Form 10-Q

|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|x | Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 
|  |                                                                                          
|  | FOR THE QUARTERLY PERIOD ENDED September 30, 2002                                        
|  |                                                                                          
|  | or                                                                                       
|  |                                                                                          
|o | Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from                      to

Commission File Number 0-29993

INTRABIOTICS PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)


|                                                                        |  |                                                   
|----------------------------------------------------------------------- |  | --------------------------------------------------
|DELAWARE
(State or other jurisdiction of
incorporation or organization) |  | 94-3200380
(I.R.S. Employer Identification Number)

1245 TERRA BELLA AVENUE
MOUNTAIN VIEW, CA 94043
(Address of principal executive offices)

(650) 526-6800
(Registrants telephone number including area 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       Noo

There were 37,784,886 shares of the Companys Common Stock, par value
$.001, outstanding as of November 5, 2002.



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TABLE OF CONTENTS



|                              |                                                                                               |                               |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item I. Financial Statements                                                                 
|                              |                                                                                               | BALANCE SHEETS               
|                              |                                                                                               | STATEMENTS OF OPERATIONS     
|                              |                                                                                               | STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                            
|                              | ITEM 4. CONTROLS AND PROCEDURES.                                                             
|PART II OTHER INFORMATION    
|                              | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|CERTIFICATIONS               
|Index to Exhibits            
|EXHIBIT 10.2                 
|EXHIBIT 10.4                 
|EXHIBIT 10.21                
|EXHIBIT 10.22                
|EXHIBIT 10.35                
|EXHIBIT 10.36                
|EXHIBIT 99.1                 



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##### Table of Contents



INTRABIOTICS PHARMACEUTICALS, INC.

FORM 10-Q
QUARTER ENDED September 30, 2002

TABLE OF CONTENTS

|               |  |                                                                                       |    |                                                                                                                |    |  |   | 
|-------------- |  | ------------------------------------------------------------------------------------- | -- | -------------------------------------------------------------------------------------------------------------- | -- |  | - | 
|               |  |                                                                                       |    |                                                                                                                |    | 
|PART I.        |  | FINANCIAL INFORMATION                                                                 |    |                                                                                                                | 2  | 
|Item 1.        |  | Financial Statements (unaudited)                                                      |    |                                                                                                                | 2  | 
|               |  |                                                                                       |    | Balance Sheets as of September 30, 2002 and December 31, 2001                                                  |    |  | 2 | 
|               |  |                                                                                       |    | Statements of Operations for the Three- and Nine-Month Periods Ended September 30, 2002 and September 30, 2001 |    |  | 3 | 
|               |  |                                                                                       |    | Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2002 and September 30, 2001            |    |  | 4 | 
|               |  |                                                                                       |    | Notes to Financial Statements                                                                                  |    |  | 5 | 
|Item 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |    |                                                                                                                | 9  | 
|Item 3.        |  | Quantitative and Qualitative Disclosure About Market Risk                             |    |                                                                                                                | 20 | 
|Item 4.        |  | Controls and Procedures                                                               |    |                                                                                                                | 20 | 
|PART II.       |  | OTHER INFORMATION                                                                     |    |                                                                                                                | 21 | 
|Item 2.        |  | Changes in Securities and Use of Proceeds                                             |    |                                                                                                                | 21 | 
|Item 6.        |  | Exhibits and Reports on Form 8-K                                                      |    |                                                                                                                | 21 | 
|SIGNATURES     |  |                                                                                       | 22 |                                                                                                               
|CERTIFICATIONS |  |                                                                                       | 23 |                                                                                                               

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PART I. FINANCIAL INFORMATION




Item I. Financial Statements





INTRABIOTICS PHARMACEUTICALS, INC.
BALANCE SHEETS
(IN THOUSANDS)

|                                     |                                                          |                                            |          |               |        |              |          |        |        | 
|------------------------------------ | -------------------------------------------------------- | ------------------------------------------ | -------- | ------------- | ------ | ------------ | -------- | ------ | ------ | 
|                                     |                                                          |                                            |          | SEPTEMBER 30, |        | DECEMBER 31,
|                                     |                                                          |                                            |          | 2002          |        | 2001        
|                                     |                                                          |                                            |          |               |        |             
|                                     |                                                          |                                            |          | (Unaudited)   |        | (Note 1)    
|Assets                               |                                                          |                                            |          |               |        |              |          |       
|Current assets:                      |                                                          |                                            |          |               |        |              |          |       
|                                     | Cash and cash equivalents                                |                                            | $        | 27,803        |        |              | $        | 27,982 |       
|                                     | Restricted cash deposits                                 |                                            |          | 7,488         |        |              |          | 7,488  |       
|                                     | Other current assets, primarily prepayments and deposits |                                            |          | 4,084         |        |              |          | 5,412  |       
|                                     |                                                          |                                            |          |               |        |              |          |       
|                                     |                                                          | Total current assets                       |          |               | 39,375 |              |          |        | 40,882 | 
|Property and equipment, net          |                                                          |                                            | 1,038    |               |        |              | 1,540    |       
|Other assets                         |                                                          |                                            | 218      |               |        |              | 43       |       
|Acquired workforce                   |                                                          |                                            | 1,460    |               |        |              |         |       
|                                     |                                                          |                                            |          |               |        |              |          |       
|                                     |                                                          | Total assets                               |          | $             | 42,091 |              |          | $      | 42,465 | 
|                                     |                                                          |                                            |          |               |        |              |          |       
|Liabilities and Stockholders Equity |                                                          |                                            |          |               |        |              |          |       
|Current liabilities:                 |                                                          |                                            |          |               |        |              |          |       
|                                     | Accounts payable                                         |                                            | $        | 381           |        |              | $        | 339    |       
|                                     | Accrued clinical costs                                   |                                            |          | 1,441         |        |              |          | 1,663  |       
|                                     | Accrued employee liabilities                             |                                            |          | 279           |        |              |          | 579    |       
|                                     | Accrued restructuring charges                            |                                            |          | 5,720         |        |              |          | 2,861  |       
|                                     | Deferred rent                                            |                                            |          | 821           |        |              |          | 618    |       
|                                     | Other accrued liabilities                                |                                            |          | 528           |        |              |          | 818    |       
|                                     | Current financing obligations                            |                                            |          | 4,375         |        |              |          | 4,375  |       
|                                     |                                                          |                                            |          |               |        |              |          |       
|                                     |                                                          | Total current liabilities                  |          |               | 13,545 |              |          |        | 11,253 | 
|Long-term financing obligations      |                                                          |                                            | 3,594    |               |        |              | 5,000    |       
|Stockholders equity:                |                                                          |                                            |          |               |        |              |          |       
|Common stock                         |                                                          |                                            | 38       |               |        |              | 30       |       
|Additional paid-in capital           |                                                          |                                            | 217,506  |               |        |              | 196,575  |       
|Deferred stock compensation          |                                                          |                                            | (2,653   | )             |        |              | (4,577   | )     
|Accumulated deficit                  |                                                          |                                            | (189,939 | )             |        |              | (165,816 | )     
|                                     |                                                          |                                            |          |               |        |              |          |       
|                                     |                                                          | Total stockholders equity                 |          |               | 24,952 |              |          |        | 26,212 | 
|                                     |                                                          |                                            |          |               |        |              |          |       
|                                     |                                                          | Total liabilities and stockholders equity |          | $             | 42,091 |              |          | $      | 42,465 | 
|                                     |                                                          |                                            |          |               |        |              |          |       

See accompanying notes.

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INTRABIOTICS PHARMACEUTICALS, INC
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

|                                                            |                                 |                          |        |                    |         |                   |        |       |        |      |        |        |         |   |        |        |         |  
|----------------------------------------------------------- | ------------------------------- | ------------------------ | ------ | ------------------ | ------- | ----------------- | ------ | ----- | ------ | ---- | ------ | ------ | ------- | - | ------ | ------ | ------- | -
|                                                            |                                 |                          |        | THREE MONTHS ENDED |         | NINE MONTHS ENDED
|                                                            |                                 |                          |        | SEPTEMBER 30,      |         | SEPTEMBER 30,    
|                                                            |                                 |                          |        |                    |         |                  
|                                                            |                                 |                          |        | 2002               |         | 2001              |        | 2002  |        | 2001
|                                                            |                                 |                          |        |                    |         |                   |        |       |        |     
|Operating expenses:                                         |                                 |                          |        |                    |         |                   |        |       |        |      |        |        |         |   |        |       
|                                                            | Research and development        |                          | $      | 3,955              |         |                   | $      | 6,501 |        |      | $      | 17,407 |         |   | $      | 32,382 |        
|                                                            | Arbitration settlement          |                          |        |                   |         |                   |        |      |        |      |        | (3,600 | )       |   |        |       |        
|                                                            | General and administrative      |                          |        | 2,388              |         |                   |        | 580   |        |      |        | 6,295  |         |   |        | 7,164  |        
|                                                            | Restructuring and other charges |                          |        | 5,140              |         |                   |        |      |        |      |        | 5,231  |         |   |        | 21,956 |        
|                                                            |                                 |                          |        |                    |         |                   |        |       |        |      |        |        |         |   |        |       
|                                                            |                                 | Total operating expenses |        |                    | 11,483  |                   |        |       | 7,081  |      |        |        | 25,333  |   |        |        | 61,502  |  
|                                                            |                                 |                          |        |                    |         |                   |        |       |        |      |        |        |         |   |        |       
|                                                            |                                 | Operating loss           |        |                    | (11,483 | )                 |        |       | (7,081 | )    |        |        | (25,333 | ) |        |        | (61,502 | )
|                                                            |                                 |                          |        |                    |         |                   |        |       |        |      |        |        |         |   |        |       
|                                                            | Interest income                 |                          |        | 143                |         |                   |        | 531   |        |      |        | 623    |         |   |        | 2,528  |        
|                                                            | Interest expense                |                          |        | (131               | )       |                   |        | (351  | )      |      |        | (397   | )       |   |        | (954   | )      
|                                                            | Other income                    |                          |        | 200                |         |                   |        |      |        |      |        | 984    |         |   |        |       |        
|                                                            |                                 |                          |        |                    |         |                   |        |       |        |      |        |        |         |   |        |       
|                                                            |                                 | Net loss                 |        | $                  | (11,271 | )                 |        | $     | (6,901 | )    |        | $      | (24,123 | ) |        | $      | (59,928 | )
|                                                            |                                 |                          |        |                    |         |                   |        |       |        |      |        |        |         |   |        |       
|Basic and diluted net loss per share                        |                                 | $                        | (0.30  | )                  |         | $                 | (0.23  | )     |        | $    | (0.67  | )      |         | $ | (2.04  | )     
|                                                            |                                 |                          |        |                    |         |                   |        |       |        |      |        |        |         |   |        |       
|Shares used to compute basic and diluted net loss per share |                                 |                          | 37,719 |                    |         |                   | 29,431 |       |        |      | 36,215 |        |         |   | 29,345 |       
|                                                            |                                 |                          |        |                    |         |                   |        |       |        |      |        |        |         |   |        |       

See accompanying notes.

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INTRABIOTICS PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

(UNAUDITED)

|                                                                            |                                                             |                               |         |                            |       |      |         |         |        |  
|--------------------------------------------------------------------------- | ----------------------------------------------------------- | ----------------------------- | ------- | -------------------------- | ----- | ---- | ------- | ------- | ------ | -
|                                                                            |                                                             |                               |         | PERIOD ENDED SEPTEMBER 30,
|                                                                            |                                                             |                               |         |                           
|                                                                            |                                                             |                               |         | 2002                       |       | 2001
|                                                                            |                                                             |                               |         |                            |       |     
|Operating activities                                                        |                                                             |                               |         |                            |       |      |         |        
|Net loss                                                                    |                                                             | $                             | (24,123 | )                          |       | $    | (59,928 | )      
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                             |                               |         |                            |       |      |         |        
|                                                                            | Amortization of deferred stock compensation                 |                               |         | 848                        |       |      |         | 1,857   |       
|                                                                            | Depreciation and amortization                               |                               |         | 575                        |       |      |         | 1,446   |       
|                                                                            | Acquired workforce amortization                             |                               |         | 234                        |       |      |         |        |       
|                                                                            | Write down of fixed assets                                  |                               |         |                           |       |      |         | 11,835  |       
|                                                                            | Fair value of warrants issued                               |                               |         |                           |       |      |         | 560     |       
|                                                                            | Stock compensation expense                                  |                               |         | 619                        |       |      |         |        |       
|                                                                            | Gain on sale of product pre-clinical program                |                               |         | (975                       | )     |      |         |        |       
|                                                                            | Change in assets and liabilities                            |                               |         |                            |       |      |         |         |       
|                                                                            |                                                             | Other current assets          |         |                            | 2,025 |      |         |         | 4,294  |  
|                                                                            |                                                             | Accounts payable              |         |                            | (33   | )    |         |         | (1,182 | )
|                                                                            |                                                             | Accrued clinical costs        |         |                            | (222  | )    |         |         | (2,223 | )
|                                                                            |                                                             | Accrued employee liabilities  |         |                            | (300  | )    |         |         | (73    | )
|                                                                            |                                                             | Accrued restructuring charges |         |                            | 2,859 |      |         |         | 2,637  |  
|                                                                            |                                                             | Deposits on sale of assets    |         |                            |      |      |         |         | 951    |  
|                                                                            |                                                             | Deferred rent                 |         |                            | 203   |      |         |         | 747    |  
|                                                                            |                                                             | Other accrued liabilities     |         |                            | (396  | )    |         |         | (108   | )
|                                                                            |                                                             |                               |         |                            |       |      |         |        
|Net cash used in operating activities                                       |                                                             |                               | (18,686 | )                          |       |      | (39,187 | )      
|Investing activities                                                        |                                                             |                               |         |                            |       |      |         |        
|                                                                            | Capital expenditures                                        |                               |         | (17                        | )     |      |         | (3,612  | )     
|                                                                            | Proceeds from sale of pre-clinical program                  |                               |         | 400                        |       |      |         |        |       
|                                                                            | Purchase of short term investments                          |                               |         |                           |       |      |         | (6,296  | )     
|                                                                            | Maturities of short-term investments                        |                               |         |                           |       |      |         | 38,220  |       
|                                                                            | Cash received in acquisition of subsidiary                  |                               |         | 58                         |       |      |         |        |       
|                                                                            |                                                             |                               |         |                            |       |      |         |        
|Net cash provided by investing activities                                   |                                                             |                               | 441     |                            |       |      | 28,312  |        
|Financing activities                                                        |                                                             |                               |         |                            |       |      |         |        
|                                                                            | Proceeds from issuance of common stock net of issuance cost |                               |         | 19,472                     |       |      |         | 194     |       
|                                                                            | Proceeds from financing obligations                         |                               |         |                           |       |      |         | 11,209  |       
|                                                                            | Payments on financing obligations                           |                               |         | (1,406                     | )     |      |         | (13,303 | )     
|                                                                            |                                                             |                               |         |                            |       |      |         |        
|Net cash provided by (used in) financing activities                         |                                                             |                               | 18,066  |                            |       |      | (1,900  | )      
|                                                                            |                                                             |                               |         |                            |       |      |         |        
|Net decrease in cash and cash equivalents                                   |                                                             |                               | (179    | )                          |       |      | (12,775 | )      
|Cash and cash equivalents at beginning of period                            |                                                             |                               | 27,982  |                            |       |      | 38,983  |        
|                                                                            |                                                             |                               |         |                            |       |      |         |        
|Cash and cash equivalents at end of period                                  |                                                             | $                             | 27,803  |                            |       | $    | 26,208  |        
|                                                                            |                                                             |                               |         |                            |       |      |         |        
|Supplemental disclosure of cash flow information                            |                                                             |                               |         |                            |       |      |         |        
|                                                                            | Interest paid                                               |                               | $       | 397                        |       |      | $       | 954     |       
|                                                                            |                                                             |                               |         |                            |       |      |         |        
|Supplemental disclosure of non-cash information                             |                                                             |                               |         |                            |       |      |         |        
|                                                                            | Deferred compensation (termination)                         |                               | $       | (1,076                     | )     |      | $       | (2,092  | )     
|                                                                            |                                                             |                               |         |                            |       |      |         |        
|                                                                            | Other assets received from sale of pre-clinical programs    |                               | $       | 575                        |       |      | $       |        |       
|                                                                            |                                                             |                               |         |                            |       |      |         |        
|Cash flow for acquisition of subsidiary                                     |                                                             |                               |         |                            |       |      |         |        
|                                                                            | Acquired workforce                                          |                               | $       | 1,694                      |       |      | $       |        |       
|                                                                            | Other current assets acquired                               |                               |         | 297                        |       |      |         |        |       
|                                                                            | Property and equipment acquired                             |                               |         | 56                         |       |      |         |        |       
|                                                                            | Liabilities assumed                                         |                               |         | (75                        | )     |      |         |        |       
|                                                                            | Acquisition costs incurred                                  |                               |         | (106                       | )     |      |         |        |       
|                                                                            | Common stock issued                                         |                               |         | (1,924                     | )     |      |         |        |       
|                                                                            |                                                             |                               |         |                            |       |      |         |        
|                                                                            | Cash received in acquisition                                |                               | $       | (58                        | )     |      | $       |        |       
|                                                                            |                                                             |                               |         |                            |       |      |         |        

See accompanying notes.

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INTRABIOTICS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The accompanying financial statements are unaudited and have been prepared
by the IntraBiotics Pharmaceuticals, Inc. (the Company) in accordance with
the rules and regulations of the Securities and Exchange Commission for interim
financial information, and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X.

Certain information and footnote disclosures normally included in the
Companys annual audited financial statements (as required by generally
accepted accounting principles) have been condensed or omitted. The interim
financial statements, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair statement of the
Companys financial position as of September 30, 2002 and December 31, 2001,
the results of its operations for the three- and nine-month periods ended
September 30, 2002 and 2001 and cash flows for the nine-month periods ended
September 30, 2002 and 2001.

The results of operations of the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
These interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 2001, which are
contained in the Companys Annual Report on Form 10-K, and filed with the
Securities and Exchange Commission. The accompanying Balance Sheet as of
December 31, 2001 is derived from such audited financial statements.

Comprehensive loss is primarily comprised of net loss and net unrealized
gains or losses on available-for-sale securities. There is no material
difference between the reported net loss and the comprehensive loss for all
periods presented.

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, Business Combinations,
or SFAS 141, and Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, or SFAS 142. SFAS 141 requires the use of the
purchase method for all business combinations initiated after June 30, 2001,
and provides new criteria for determining whether an acquired intangible asset
should be recognized separately from goodwill. SFAS 142 eliminates the
amortization of goodwill and replaces it with an impairment only model. Upon
adoption, goodwill related to acquisitions completed before the date of
adoption would be subject to the new provisions of SFAS 141; amortization of
any remaining book value of goodwill would cease and the new impairment-only
approach would apply. The impairment-only approach does not apply to the
treatment of other intangible assets. The provisions of SFAS 141 and SFAS 142
are effective for the Companys year ending December 31, 2002. The adoption of
these statements did not have a material impact on its results of operations,
financial position, or cash flows.

In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, or SFAS 144, that is applicable to financial statements issued for
fiscal years beginning after December 15, 2001, with transition provisions for
certain matters. The FASBs new rules on asset impairment supersede FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and provides a single accounting model
for long-lived assets to be disposed of. The adoption of this statement did not
have a material impact on the Companys results of operations, financial
position, or cash flows.

In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities, or
SFAS 146. SFAS 146 is applicable to financial statements issued for fiscal
years beginning after December 31, 2002. As such, the Company has not yet
adopted SFAS 146. The Company believes the adoption of this statement will not
have a material impact on its results of operations, financial position, or
cash flows.

5



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Note 2. Lease Commitments

The Company leases its facilities under operating lease agreements, which
expire in October 2002, July 2004 and April 2011. At September 30, 2002 and
December 31, 2001, the Company had restricted cash of $2.0 million in
connection with these leases. Subsequent to September 30, 2002, the Company
entered into agreements to cancel the lease scheduled to expire in April 2011
and one of the two leases scheduled to expire in July 2004.

Note 3. Net Loss Per Common Share

Net loss per share has been computed according to Financial Accounting
Standards Board Statement No. 128, Earnings Per Share, which requires
disclosure of basic and diluted earnings per share. Basic and diluted earnings
per share is calculated using the weighted-average number of shares of common
stock outstanding during the period, less shares subject to repurchase.
Diluted earnings per share include the impact of potentially dilutive
securities. As the Companys potentially dilutive securities (stock options
and warrants) were antidilutive for all periods, they were not included in the
computation of weighted-average shares used in computing diluted net loss per
share.

The following is a reconciliation of the numerator and denominator of
basic and diluted net loss per share (in thousands, except per share amounts):

|                                     |                                                                                |   |                    |         |                   |   |       |        |      |   |       |         |   |   |       |         |  
|------------------------------------ | ------------------------------------------------------------------------------ | - | ------------------ | ------- | ----------------- | - | ----- | ------ | ---- | - | ----- | ------- | - | - | ----- | ------- | -
|                                     |                                                                                |   | THREE MONTHS ENDED |         | NINE MONTHS ENDED
|                                     |                                                                                |   | SEPTEMBER 30,      |         | SEPTEMBER 30,    
|                                     |                                                                                |   |                    |         |                  
|                                     |                                                                                |   | 2002               |         | 2001              |   | 2002  |        | 2001
|                                     |                                                                                |   |                    |         |                   |   |       |        |     
|Basic and diluted                    |                                                                                |   |                    |         |                   |   |       |        |      |   |       |         |   |   |       |        
|                                     | Net loss                                                                       |   | $                  | (11,271 | )                 |   | $     | (6,901 | )    |   | $     | (24,123 | ) |   | $     | (59,928 | )
|                                     |                                                                                |   |                    |         |                   |   |       |        |      |   |       |         |   |   |       |        
|                                     | Weighted-average shares used in computing basic and
diluted net loss per share |   |                    | 37,719  |                   |   |       | 29,431 |      |   |       | 36,215  |   |   |       | 29,345  |  
|                                     |                                                                                |   |                    |         |                   |   |       |        |      |   |       |         |   |   |       |        
|Basic and diluted net loss per share |                                                                                | $ | (0.30              | )       |                   | $ | (0.23 | )      |      | $ | (0.67 | )       |   | $ | (2.04 | )      
|                                     |                                                                                |   |                    |         |                   |   |       |        |      |   |       |         |   |   |       |        

Note 4. Restructuring and Other Charges

On May 31, 2001, the Company implemented a restructuring plan intended to
conserve capital and help direct financial and human resources to the
development of its lead product, iseganan HCl oral solution for the reduction
in incidence and severity of oral mucositis in cancer patients. The Company
recorded restructuring charges of approximately $10.1 million and asset write
down charges of approximately $11.8 million, for a total of approximately
$21.9 million in charges associated with its restructuring plan in the second
quarter of 2001. The $10.1 million restructuring charge was for costs incurred
in work force reduction, the termination of collaboration agreements and
facilities consolidation.

The strategic restructuring included a reduction in force of approximately
90 positions in research and administration, or 71% of the Companys previous
workforce of 127 employees. All of the terminated employees have left the
Company as of December 31, 2001. During the quarter ended March 31, 2002, the
Company received a refund of approximately $75,000 for workmans compensation
related to the terminated employees. No remaining severance amounts are
payable as of September 30, 2002.

The restructuring also includes the terminations of certain research and
development collaborations and the consolidation of operations into one
existing facility in Mountain View, California. The estimated costs associated
with terminated collaboration agreements were increased by $166,000 in the
quarter ended March 31, 2002. There was a $150,000 payment made during the
quarter ended June 30, 2002 for such agreements and costs. No further expenses
have been incurred during the quarter ended September 30, 2002, and there are
no remaining payables at this time in connection with such agreements.

The Company vacated three facilities in Mountain View, California
comprising 142,000 square feet and continues to occupy one facility with 16,000
square feet. One of the vacated facilities has been sub-leased through the end
of 2002, and the landlord took another back with no continuing obligation to
the

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Company. The third building contains approximately 66,000 square feet of
space and was scheduled to expire in April 2011. In the quarter ended
September 30, 2002, the Company accrued an additional $5.1 million to cover
estimated expenses associated with a tentative settlement, which would release
the Companys obligation on the lease of this facility. The tentative
settlement consists of rental payments through December 31,
2002, assignment of $1.6 million under letters of credit held by
the landlord as a security deposit on the building, which is included
in restricted cash as of September 30, 2002, a one-time
payment of $3.3 million, 1.25 million shares of the Companys common stock and
payment of certain consultant fees.

The restructuring charges consist of the following (in thousands):

|                                                    |  |            |     |                |  |            |       |               |  |            |      |   |  |   |       |  
|--------------------------------------------------- |  | ---------- | --- | -------------- |  | ---------- | ----- | ------------- |  | ---------- | ---- | - |  | - | ----- | -
|                                                    |  |            |     |                |  |            |       |               |  | Terminated |      |   |  |  
|                                                    |  | Costs for  |     |                |  |            |       | Collaboration |  |            |      |  
|                                                    |  | Terminated |     | Facilities     |  | Agreements |       |               |  |           
|                                                    |  | Employees  |     | Consolidations |  | and Other  |       | Total        
|                                                    |  |            |     |                |  |            |       |              
|Accrued restructuring charges at December 31, 2001  |  | $          |    |                |  | $          | 2,861 |               |  | $          |     |   |  | $ | 2,861 |  
|Activity for the quarter ended March 31, 2002:      |  |            |     |                |  |            |       |               |  |            |      |   |  |   |       |  
|Cash refunds (payments)                             |  |            | 75  |                |  |            | (738  | )             |  |            | (16  | ) |  |   | (679  | )
|Adjustment to reflect revised estimates             |  |            | (75 | )              |  |            |      |               |  |            | 166  |   |  |   | 91    |  
|                                                    |  |            |     |                |  |            |       |               |  |            |      |   |  |   |       |  
|Accrued restructuring charges at March 31, 2002     |  |            |    |                |  |            | 2,123 |               |  |            | 150  |   |  |   | 2,273 |  
|Activity for the quarter ended June 30, 2002:       |  |            |     |                |  |            |       |               |  |            |      |   |  |   |       |  
|Cash payments                                       |  |            |    |                |  |            | (769  | )             |  |            | (150 | ) |  |   | (919  | )
|                                                    |  |            |     |                |  |            |       |               |  |            |      |   |  |   |       |  
|Accrued restructuring charges at June 30, 2002      |  |            |    |                |  |            | 1,354 |               |  |            |     |   |  |   | 1,354 |  
|Activity for the quarter ended September 30, 2002:  |  |            |     |                |  |            |       |               |  |            |      |   |  |   |       |  
|Cash payments                                       |  |            |    |                |  |            | (774  | )             |  |            |     |   |  |   | (774  | )
|Adjustment to reflect revised estimates             |  |            |    |                |  |            | 5,140 |               |  |            |     |   |  |   | 5,140 |  
|                                                    |  |            |     |                |  |            |       |               |  |            |      |   |  |   |       |  
|Accrued restructuring charges at September 30, 2002 |  | $          |    |                |  | $          | 5,720 |               |  | $          |     |   |  | $ | 5,720 |  
|                                                    |  |            |     |                |  |            |       |               |  |            |      |   |  |   |       |  

Note 5. Financing Obligations

In August 2001, the Company entered into a line of credit of $2.5 million
and a term loan agreement of $7.5 million with Silicon Valley Bank (SVB), as
modified on April 29, 2002 and June 10, 2002. The interest rate for the $7.5
million term loan, which is secured by the assets of the Company and has a term
of 48 months, was prime plus 2.0%. The interest rate for the $2.5 million
cash-secured revolving line-of-credit was 6.25%. The balances on the
outstanding term loan and cash-secured revolving line-of-credit at September
30, 2002 were $5.5 million and $2.5 million, respectively. As part of the
original agreement dated August 20, 2001, the Company pledged a restricted
certificate of deposit in the amount of $2.5 million, which is recorded as a
part of Restricted cash deposits on the balance sheet. The $2.5 million line
of credit and the remaining $5.5 million balance of the $7.5 million term loan
were repaid on October 10, 2002, subsequent to the quarter end at which time
the $2.5 million restricted certificate of deposit was released from the
Restricted cash deposits line on the balance sheet.

Note 6. Acquisition

In April 2002, the Company acquired Apothogen, Inc., a privately held
pharmaceutical in-licensing company based in North Carolina. The Company
issued 450,000 shares of its common stock in exchange for all of Apothogens
outstanding capital stock.

The Company allocated the purchase price based on the relative fair value
of the net tangible and intangible assets acquired. The amount of the purchase
price in excess of the net tangible assets acquired of $1.7 million was
allocated to acquired workforce, which is being amortized over 3 years.

Concurrent with the closing of the acquisition, Ernest Mario, Ph.D. joined the
Company as Chairman and Chief Executive Officer and purchased $5.0 million of
newly issued shares of our common stock in a private placement at a purchase
price per share equal to the closing bid price as reported on the NASDAQ
National Market on April 23, 2002.

Note 7. Stockholders Equity

On February 1, 2002, the Company sold 5,900,000 shares of common stock in
a private placement resulting in net proceeds of approximately $13.9 million.

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On April 23, 2002, the Company sold 1,246,883 shares of common stock in a
private placement to Ernest Mario Ph.D., for $5.0 million, concurrent with the
closing of the acquisition of Apothogen, Inc.

Note 8. Sale of Pre-clinical Programs

On May 20, 2002, the Company completed the sale of two pre-clinical
anti-infective programs to Micrologix Biotech Inc., a Canadian company, for
cash and 750,000 shares of Series A preferred shares of Micrologix, and
recognized other income of $775,000. The Series A preferred shares are
redeemable at $1 per share or convertible into common stock at the election of
Micrologix upon the occurrence of certain time and achievement milestones.
During the quarter ended September 30, 2002, $200,000 of other income was
recognized in connection with the redemption of 400,000 shares of Series A
preferred shares of Micrologix, which was triggered by a milestone set forth in
the sales agreement with Micrologix.

Note 9. Arbitration Settlement

The arbitration between IntraBiotics and the contract vendor relating to a
drug dispensing error in iseganan HCI oral solution phase III clinical trials
was resolved amicably in January 2002. The Company received $3.6 million in
the settlement.

Note 10. Related Party Transaction

The Company leases its office space in North Carolina from Pharmaceutical
Product Development, Inc. (PPD). Ernest Mario, Ph.D. the Companys Chief
Executive Officer, is a director of PPD. For the three and ninemonths ended
September 30, 2002, rentals under the lease, including triple-net expenses,
totaled $11,000 and $19,000 respectively. Remaining rental commitments at
September 30, 2002 totaled approximately $3,700.

In addition, PPD provides consulting and administrative services to the
Company. In the three and nine-months ended September 30, 2002, the Company
paid $31,000 and $61,000 respectively for these services.

Note 11. Subsequent Events

On October 10, 2002, the Company repaid to SVB, the $2.5 million line of
credit and the remaining $5.5 million balance of the $7.5 million term loan at
which time the $2.5 million restricted certificate of deposit was released from
the Restricted cash deposits line on the balance sheet.

On October 14, 2002, the Company announced a restructuring plan, which
included a reduction in force. The goal of the restructuring is to reduce
expenses from approximately $7.5 million per quarter to approximately $1.0
million per quarter. The restructuring plan is expected to be completed by
year-end and will include a reduction of approximately 26 positions, or 70% of
the Companys workforce. In addition, the Company will seek to eliminate some
current contracts, which it believes will not be necessary for future
operations, and will evaluate potential impairments of assets in conjunction
with the Companys evaluation of its current business model and finalization of
its business strategy and restructuring plan during the quarter ending December
31, 2002.

In November 2002, the Company reached a tentative agreement with the
landlord of the leased property at 2011 Steirlin Court to terminate the lease
effective January 1, 2003. The lease on this approximately 66,000 square foot
building was scheduled to expire in April 2011. In the quarter ended September
30, 2002, we accrued an additional $5.1 million to cover estimated expenses
associated with this settlement. The tentative settlement consists of rental
payments through December 31, 2002, assignment of $1.6 million under letters of
credit held by the landlord as a deposit on the building, which is included in
restricted cash as of September 30, 2002, a one time payment of $3.3 million,
1.25 million shares of the Companys common stock and payment of certain
consultant fees. The total estimated costs of $5.7 million associated with
this agreement have been recorded in the current reserve for restructuring on
the balance sheet.

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Also in November 2002, the Company reached a tentative agreement with the
owner of the leased property at 1255 Terra Bella Avenue to terminate the lease.
The cost of early termination will be the loss of the security deposit of
approximately $216,000. The lease on this approximately 18,000 square foot
building expires in July 2004.

Also in November 2002, the Company reached a tentative agreement with
Polypeptide Laboratories A/S, a corporation incorporated under the laws of
Denmark, and Polypeptide Laboratories AB, a corporation incorporated under the
laws of Sweden (collectively, Polypeptide) to terminate their business
relationship with respect to the manufacture of iseganan HCl. Under the terms
of the initial agreements with Polypeptide, the Company had ordered 35 kg of
iseganan HCl, in the form of five, seven kg lots (lots H, I, J, K, and L).
Lots H and I are non-cancelable, while lots J, K and L are cancelable with the
Company being responsible for costs based on percentage of completion. The
Company has prepaid $1.9 million in conjunction with the original agreement to
manufacture (supply) drug substance, which is included in other current
assets on the balance sheet as of September 30, 2002. Delivery of lots H and
I is expected during the three-months ending December 31, 2002 and March 31,
2003, respectively. Under the tentative termination agreement, the Company
will pay Polypeptide $5.0 million upon signing the termination agreement,
$250,000 upon delivery and acceptance of lot H, and $250,000 upon delivery and
acceptance of lot I. The companies have also agreed to cancel the development and
supply agreements which include lots J, K and L of drug substance. In addition, the Company has agreed
to have the drug substance stored at Polypeptide at a cost of $50,000 per year
for five years. The total estimated payments associated with this tentative
termination agreement are approximately $5.75 million.

On November 12, 2002, we received a letter from Nasdaq advising us that
our common stock had not met Nasdaqs minimum bid price requirement for 30
consecutive trading days and that, if we were unable to demonstrate compliance
with this requirement during the 90 calendar days ending February 10, 2003, our
common stock may be subject to delisting from the Nasdaq National Market.




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

The following Managements Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements, which involve
risks, uncertainties and assumptions. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including, but not limited to, those set forth under
RISKS RELATED TO OUR BUSINESS below. The following discussion should be read
in conjunction with the financial statements and notes included elsewhere
herein and our 2001 audited financial statements and notes thereto included in
our 2001 Annual Report on Form 10-K. All forward-looking statements included in
this document are based on information available to us on the date of this
document, and except as required by law, we assume no obligation to update any
of the forward-looking statements contained in this report to reflect any
future events or developments.

Overview

IntraBiotics Pharmaceuticals, Inc. is a biopharmaceutical company focused
on developing and commercializing high-value anti-infectives and oncology
therapeutics.

The top-line results of our 545-patient Phase III clinical trial of
iseganan HCl oral solution to treat patients undergoing radiotherapy to prevent
or reduce ulcerative oral mucositis showed no significant difference between
iseganan and placebo in the primary or secondary end-points. The top-line
results of our 509-patient Phase III clinical trial of iseganan HCl oral
solution to treat patients undergoing aggressive chemotherapy to prevent or
reduce ulcerative oral mucositis showed no significant difference between
iseganan and placebo in the primary end-point. We are not pursuing further
development of iseganan HCl to treat oral mucositis.

We have also completed two earlier stage trials for other indications of
iseganan HCl to prevent pneumonia in patients requiring breathing assistance
from a mechanical ventilator and to treat respiratory infections in patients
with cystic fibrosis. The data from each of these trials support the
advancement to the next stage of human clinical testing for each of these two
indications. We may pursue development of iseganan for these indications,
however, we do not currently have any clinical trials ongoing, and we do not

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plan to conduct any clinical trials in the immediate future. We are
currently evaluating our strategic alternatives, including a sale or merger of
the company or the acquisition or license of additional products or product
candidates.

Since commencing operations in 1994, we have not generated any revenue
from product sales, and we have funded our operations primarily through the
private sale of equity securities, funds received from a terminated
collaboration agreement, the proceeds of equipment financing arrangements and
our initial public offering of common stock in March 2000. During the quarter
ended March 31, 2002, we completed a private placement of 5.9 million shares of
common stock resulting in net proceeds of $13.9 million, and during the quarter
ended June 30, 2002, we completed a private placement of 1.2 million shares of
common stock to Ernest Mario, Ph.D. resulting in proceeds of $5.0 million. In
addition, during the quarter ended June 30, 2002, we sold two pre-clinical
anti-infective programs to Micrologix Biotech Inc. for cash and 750,000 shares
of Series A preferred shares of Micrologix, and recognized other income of
$775,000. During the quarter ended September 30, 2002, we also recognized
$200,000 of other income in connection with the redemption of 400,000 shares of
Series A preferred shares of Micrologix, which was triggered by a milestone set
forth in the sales agreement with Micrologix. We have incurred a loss in each
year since inception, and we expect to incur substantial losses for at least
the next several years. We expect that losses may fluctuate, and that such
fluctuations may be substantial. As of September 30, 2002, our accumulated
deficit was approximately $189.9 million. We will need to raise additional
funds in the future to continue our operations.

In April 2002, we acquired Apothogen, Inc. for 450,000 shares of our
common stock. Concurrently with the closing of the acquisition, Ernest Mario,
Ph.D. joined IntraBiotics as our Chairman and Chief Executive Officer.

On October 14, 2002, we announced a restructuring plan, which included a
reduction in force. The goal of the restructuring is to reduce expenses from
approximately $7.5 million per quarter to approximately $1.0 million per
quarter. The restructuring plan is expected to be completed by year-end and
will include a reduction of approximately 26 positions, or 70% of our
workforce. In addition, we will seek to eliminate some current contracts,
which we believe will not be necessary for our future operations, and will
evaluate potential impairments of assets in conjunction with the our evaluation
of our current business model and finalization of our business strategy and
restructuring plan during the quarter ending December 31, 2002.

RESULTS OF OPERATIONS

Three- and nine-month periods ended September 30, 2002 and 2001
Operating Expenses

Research and Development

Research and development expenses consist of costs related to our current
phase III clinical trials for iseganan HCl oral solution. Research and
development expenses decreased to $4.0 million in the three-month period ended
September 30, 2002 from $6.5 million for the same period in 2001. Research and
development expenses in the nine-month period ended September 30, 2002
decreased to $17.4 million from $32.4 million for the same period in 2001. The
decreases are primarily a result of our May 2001 restructuring, which reduced
both our headcount and the number of projects we have ongoing. Research and
development costs for the quarter ended September 30, 2002 were related to the
iseganan HCl for the prevention of oral mucositis program, and include costs
for salaries of research and development personnel, contractor and clinical
trial site fees, facilities costs, supplies, administrative expenses and
allocations of corporate costs. During the quarter ended September 30, 2002,
approximately 74% of research and development expenses were for various
contractor, consultant and clinical trial site fees. Included in research and
development are non-cash stock compensation charges of $56,000 and $311,000 for
the three-month periods ended September 30, 2002, and 2001, respectively, and
$651,000 and $1.1 million for the nine-month periods ended September 30, 2002
and 2001, respectively.

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Arbitration Settlement

The arbitration between us and a contract vendor relating to a drug
dispensing error in iseganan HCI oral solution phase III clinical trials was
resolved amicably in January 2002. We received $3.6 million in the settlement
during the quarter ended March 31, 2002.

General and Administrative

General and administrative expenses increased to $2.4 million in the
three-month period ended September 30, 2002 from $580,000 for the same period
in 2001. General and administrative expenses in the nine-month period ended
September 30, 2002 decreased to $6.3 million from $7.2 million for the same
period in 2001. The increase in the most current quarter ended September 30,
2002 is primarily a result of the addition of a sales, marketing and business
development team in April 2002 and an increase in facilities expense allocated
to general and administrative. The decrease in the year-to-date number results
from the restructuring in 2001 and is partially offset by the addition of a
sales, marketing and business development team in April 2002. These general
and administrative costs include salaries for administrative personnel, outside
contractors, legal fees, accounting fees, facilities, supplies and general
administrative expenses. Included in general and administrative expenses are
non-cash stock compensation charges of $120,000 and $226,000 for the
three-month periods ended September 30, 2002 and 2001, respectively, and
$816,000 and $782,000 for the nine-month periods ended September 30, 2002 and
2001, respectively.

Deferred Compensation

We expensed $161,000 and $848,000 of deferred compensation during the
three-month and nine-month periods ended September 30, 2002, compared to
$537,000 and $1.9 million for the same periods in 2001. The decrease in
deferred compensation expense was due to the cancellation of options for
terminated employees. These amounts were expensed to research and development
and to general and administrative expense based on the deferred compensation
liability attributed to each department.

The research and development deferred compensation expense in the
three-month period ended September 30, 2002 decreased to $49,000 from $311,000
for the same period in 2001. For the nine-month periods ended September 30,
2002 and 2001, the deferred compensation attributed to research and development
was $426,000 and $1.1 million, respectively. The general and administrative
deferred compensation expense in the three-month period ended September 30,
2002 decreased to $112,000 from $226,000 for the same period in 2001. For the
nine-month periods ended September 30, 2002 and 2001, the deferred compensation
expense attributed to general and administrative was $422,000 and $782,000,
respectively. Deferred compensation represents the difference between the
deemed fair value of the common stock for financial reporting purposes and the
exercise price of these options at the date of grant. Deferred compensation is
presented as a reduction of stockholders equity and is amortized over the
vesting period of the applicable options.

Restructuring and Other Charges

On May 31, 2001, we implemented a restructuring plan intended to conserve
capital and help direct financial and human resources to the development of our
lead product, iseganan HCl oral solution for the reduction in incidence and
severity of oral mucositis in cancer patients. We recorded restructuring
charges of approximately $10.1 million and asset write down charges of
approximately $11.8 million, for a total of approximately $21.9 million in
charges associated with our restructuring plan in the second quarter of 2001.
The $10.1 million restructuring charge was for costs incurred in work force
reduction, the termination of collaboration agreements and facilities
consolidation.

The strategic restructuring included a reduction in force of approximately
90 positions in research and administration, or 71% of our previous workforce
of 127 employees. All of the terminated employees have left IntraBiotics as of
December 31, 2001. During the quarter ended March 31, 2002, we received a
refund of approximately $75,000 for workmans compensation related to the
terminated employees. No remaining severance amounts are payable as of
September 30, 2002 in connection with this restructuring.

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The restructuring also includes the terminations of certain research and
development collaborations and the consolidation of operations into one
existing facility in Mountain View, California. The estimated costs associated
with terminated collaboration agreements were increased by $166,000 in the
quarter ended March 31, 2002. At March 31, 2002, there was $150,000 remaining
payable for such agreements and costs. This payment was made during the quarter
ended June 30, 2002. No further expenses have been incurred during the quarter
ended September 30, 2002, and there are no remaining payables at this time in
connection with such agreements.

We vacated three facilities in Mountain View, California comprising
142,000 square feet and continue to occupy one facility with 16,000 square
feet. One of the vacated facilities has been sub-leased through the end of
2002, and the landlord took another back with no continuing obligation to us.
The third building contains approximately 66,000 square feet of space and was
scheduled to expire in April 2011. In the quarter ended September 30, 2002, we
accrued an additional $5.1 million to cover estimated expenses associated with
a tentative settlement, which would release us from our lease obligation on
this facility. The tentative settlement consists of rental payments through
December 31, 2002, assignment of $1.6 million under letters of credit held by
the landlord as a deposit on the building, which is included in restricted cash
as of September 30, 2002, a one time payment of $3.3 million, 1.25 million
shares of the Companys common stock and payment of certain consultant fees.
The total estimated costs of $5.7 million associated with this agreement have
been recorded in the current reserve for restructuring on the balance sheet.

Interest Income and Expense

Interest income decreased to $143,000 in the three-month period ended
September 30, 2002 from $531,000 for the same period in 2001. Interest income
for the nine-month period ended September 30, 2002 decreased to $623,000 from
$2.5 million for the same period in 2001. The decrease in interest income
resulted from the decrease in average interest earning investment balances as
well as lower interest rates relative to the comparable prior period. Interest
expense decreased to $131,000 for the three-month period ended September 30,
2002 from $351,000 for the same period in 2001. Interest expense for the
nine-month period ended September 30, 2002 decreased to $397,000 from $954,000
for the same period in 2001. The decrease in the three- and nine-month periods
of 2002 was attributed to a reduction of outstanding loan balances and a lower
principal balance on our remaining debt as compared to 2001.

Other Income

Other income primarily reflects the sale of two pre-clinical
anti-infective programs to Micrologix Biotech Inc. for $400,000 cash and
750,000 shares of Series A preferred shares of Micrologix. We also recognized
$200,000 of other income during the quarter ended September 30, 2002 in
connection with the redemption of 400,000 shares of Series A preferred shares
of Micrologix, which was triggered by a milestone set forth in the sales
agreement with Micrologix.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2002, we had cash and cash equivalents of $35.3 million,
including restricted cash deposits of approximately $2.0 million in connection
with standby letters of credit for leased facilities, $3.0 million for
guarantees of product supplies and $2.5 million supporting our line of credit,
as well as approximately $8.0 million of debt to Silicon Valley Bank (SVB).
Subsequent to September 30, 2002, we paid our remaining debt of $8.0 million to
SVB and thus released $2.5 million of restricted cash deposits. We regularly
invest excess funds in short-term money market funds.

Concurrent with our acquisition of Apothogen on April 23, 2002, we
completed a private placement of 1.2 million shares of common stock to Ernest
Mario, Ph.D., resulting in net proceeds of $5.0 million. On February 1, 2002,
we sold 5.9 million shares of common stock in a private placement resulting in
net cash proceeds of approximately $13.9 million. In January 2002, we also
received $3.6 million in settlement of our arbitration with a contract vendor
relating to a drug dispensing error in our phase III clinical trials.

Net cash used in operating activities for the nine-month periods ended
September 30, 2002 and 2001 was $18.7 million and $39.2 million, respectively.
Our cash used by operating activities consisted

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primarily of our loss from operations, excluding non-cash expenses, which
in 2001, included a write off of fixed asset and accrued liabilities associated
with our restructuring plan.

Net cash provided by investing activities for the nine-month periods ended
September 30, 2002 and 2001 was $441,000 and $28.3 million, respectively.
Investing activities for the period ended September 30, 2002 included proceeds
received from the sale of two pre-clinical programs and cash received in the
acquisition of Apothogen, Inc. Cash provided by investing activities in the
nine-month period ended September 30, 2001 was due primarily to the maturities
of short-term investments of $38.2 million, partially offset by capital
expenditures of $3.6 million for equipment, and the purchase of short-term
investments of $6.3 million.

Net cash provided by (used in) financing activities for the nine-month
periods ended September 30, 2002 and 2001 was $18.1 million and $(1.9) million,
respectively. Cash provided by financing activities for the nine-month period
ended September 30, 2002 was from net proceeds of $13.9 million in a private
placement of 5.9 million shares of common stock, $5.0 million from a private
placement of approximately 1.2 million shares of common stock to Ernest Mario,
Ph.D., and from the issuance of common stock through the exercise of stock
options, partially offset by $1.4 million in payments on financing obligations.
Cash used by financing activities for the nine-month period ended September 30,
2001, was as a result of $13.3 million of payments on financing obligations,
partially offset by $11.2 million in proceeds from financing obligations and
$194,000 from the issuance of common stock.

In August 2001, we entered into a line of credit of $2.5 million and a
term loan agreement of $7.5 million with SVB, as modified on April 29, 2002 and
June 10, 2002. The interest rate for the $7.5 million term loan, which was
secured by our assets and had a term of 48 months, was prime plus 2.0%. The
interest rate for the $2.5 million cash-secured revolving line-of-credit was
6.25%. The balances on the outstanding term loan and cash-secured revolving
line-of-credit at September 30, 2002 were $5.5 million and $2.5 million,
respectively. As part of the original agreement dated August 20, 2001, we
pledged a restricted certificate of deposit in the amount of $2.5 million,
which is recorded as a part of Restricted cash deposits on the balance sheet.
The $2.5 million line of credit and the remaining $5.5 million balance of the
$7.5 million term loan were repaid on October 10, 2002, subsequent to the
quarter end at which time the $2.5 million restricted certificate of deposit
was released from the Restricted cash deposits line on the balance sheet.

We lease our facilities under operating lease agreements, which expire in
October 2002, July 2004 and April 2011.

The following are future contractual commitments at September 30, 2002, (in
thousands):

|                              |  |                        |        |      |  |      |       |      |  |            |       |  |  |   |       |  |  |   |        | 
|----------------------------- |  | ---------------------- | ------ | ---- |  | ---- | ----- | ---- |  | ---------- | ----- |  |  | - | ----- |  |  | - | ------ | 
|                              |  | Payments Due by Period
|                              |  |                       
|Contractual commitments       |  | Total                  |        | 2002 |  | 2003 |       | 2004 |  | Thereafter
|                              |  |                        |        |      |  |      |       |      |  |           
|Operating leases              |  | $                      | 29,724 |      |  | $    | 950   |      |  | $          | 3,889 |  |  | $ | 3,571 |  |  | $ | 21,314 | 
|CRO based on current contract |  |                        | 973    |      |  |      | 973   |      |  |            |      |  |  |   |      |  |  |   |       | 
|Drug Substance                |  |                        | 9,575  |      |  |      | 1,883 |      |  |            | 2,367 |  |  |   | 2,125 |  |  |   | 3,200  | 
|Term loan                     |  |                        | 5,469  |      |  |      | 469   |      |  |            | 1,875 |  |  |   | 1,875 |  |  |   | 1,250  | 
|Line of credit                |  |                        | 2,500  |      |  |      | 2,500 |      |  |            |      |  |  |   |      |  |  |   |       | 
|Consulting payments           |  |                        | 330    |      |  |      | 82    |      |  |            | 248   |  |  |   |      |  |  |   |       | 
|                              |  |                        |        |      |  |      |       |      |  |            |       |  |  |   |       |  |  |   |        | 
|Total contractual commitments |  | $                      | 48,571 |      |  | $    | 6,857 |      |  | $          | 8,379 |  |  | $ | 7,571 |  |  | $ | 25,764 | 
|                              |  |                        |        |      |  |      |       |      |  |            |       |  |  |   |       |  |  |   |        | 

Minimum operating lease payments have not been reduced by minimum sublease
rental income of $408,000 due in the future under non-cancelable subleases.

The ongoing consulting payments relate to a former officer of IntraBiotics
who departed in November 2001.

Subsequent to September 30, 2002, we have repaid to SVB the $2.5 million
line of credit and the remaining $5.5 million balance of the $7.5 million term
loan. We also announced a restructuring plan, which included a reduction in
force. The goal of the restructuring is to reduce expenses from approximately
$7.5 million per quarter to approximately $1.0 million per quarter. The
restructuring plan is

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expected to be completed by year-end and will include a reduction of
approximately 26 positions, or 70% of the Companys workforce. In addition, we
have reached tentative agreements with two of the three current landlords to
terminate our current leases, and we have reached a tentative agreement with
Polypeptide Laboratories A/S, a corporation incorporated under the laws of
Denmark, and Polypeptide Laboratories AB, a corporation incorporated under the
laws of Sweden (collectively, Polypeptide) to terminate our manufacturing
contract and cancel future orders included in the contract.

The following are future estimated commitments based on actions subsequent to
September 30, 2002, (in thousands):

|                              |  |                        |        |      |  |      |        |      |  |            |     |  |  |   |     |  |  |   |     | 
|----------------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---------- | --- |  |  | - | --- |  |  | - | --- | 
|                              |  | Payments Due by Period
|                              |  |                       
|Contractual commitments       |  | Total                  |        | 2002 |  | 2003 |        | 2004 |  | Thereafter
|                              |  |                        |        |      |  |      |        |      |  |           
|Operating leases              |  | $                      | 6,791  |      |  | $    | 6,193  |      |  | $          | 396 |  |  | $ | 202 |  |  | $ |    | 
|CRO based on current contract |  |                        | 973    |      |  |      | 973    |      |  |            |    |  |  |   |    |  |  |   |    | 
|Drug Substance                |  |                        | 5,750  |      |  |      | 5,250  |      |  |            | 300 |  |  |   | 50  |  |  |   | 150 | 
|Term loan                     |  |                        | 5,469  |      |  |      | 5,469  |      |  |            |    |  |  |   |    |  |  |   |    | 
|Line of credit                |  |                        | 2,500  |      |  |      | 2,500  |      |  |            |    |  |  |   |    |  |  |   |    | 
|Severance payments            |  |                        | 1,016  |      |  |      | 1,016  |      |  |            |    |  |  |   |    |  |  |   |    | 
|Consulting payments           |  |                        | 330    |      |  |      | 82     |      |  |            | 248 |  |  |   |    |  |  |   |    | 
|                              |  |                        |        |      |  |      |        |      |  |            |     |  |  |   |     |  |  |   |     | 
|Total contractual commitments |  | $                      | 22,829 |      |  | $    | 21,483 |      |  | $          | 944 |  |  | $ | 252 |  |  | $ | 150 | 
|                              |  |                        |        |      |  |      |        |      |  |            |     |  |  |   |     |  |  |   |     | 

The drug substance line represents payments to Polypeptide under a
tentative termination agreement. Under this tentative agreement, the Company
will pay Polypeptide $5.0 million upon signing, $250,000 upon delivery and
acceptance of lot H of drug substance, and $250,000 upon delivery and
acceptance of lot I of drug substance. The
Company has also agreed to cancel the development and supply agreements between
the companies. In addition, the Company has agreed to have the drug substance
stored at Polypeptide at a cost of $50,000 per year for five years. The severance payments relate to the reduction in force in October 2002. The ongoing consulting payments relate to a former officer of IntraBiotics
who departed in November 2001.

We expect there to be a negative impact on cash and restricted cash of
approximately $20 million in the quarter ending December 31, 2002 due to the
above contractual commitments net of prepayments.

We expect to continue to incur substantial operating losses. After our
planned restructuring in October 2002, we believe that existing capital
resources and interest income will be sufficient to fund our currently planned
operations for at least the next twelve months. This forecast is a
forward-looking statement that is based on assumptions that may prove to be
wrong, including that we will not have any products in active clinical
development in the next twelve months. To the extent we pursue the development
of iseganan for other indications or other acquired or licensed products, we
will need to raise additional capital to fund clinical development costs. Our
future liquidity and capital requirements will depend on many factors,
including our evaluation of, and decisions with respect to, our strategic
alternatives, costs associated with, securing in-licensing opportunities,
purchasing additional products or drug candidates and conducting pre-clinical
research and clinical development of those drug candidates.

We do not know whether additional financing will be available when needed or on
acceptable terms, if at all. If we are unable to raise additional financing
when necessary, we may have to delay our product acquisition and development
efforts or be forced to cease operations. Any additional equity financing will
be dilutive to existing stockholders, and debt financing, if available, may
involve restrictive covenants. Collaborative arrangements may require us to
relinquish our rights to certain of our technologies, drug candidates or
marketing territories.

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RISKS RELATED TO OUR BUSINESS

Our business faces significant risks and the risks described below may not
be the only risks we face. Additional risks that we do not know of or that we
currently believe are immaterial may also impair our business operations. If
any of the events or circumstances described in the following risks actually
occurs, our business, financial condition, or results of operations could be
materially adversely affected and the trading price of our common stock could
decline.

We expect to continue to incur future operating losses and may never achieve
profitability.

We have never generated revenue from product sales and have incurred
significant net losses in each year since inception. We incurred net losses of
$23.1 million in 1999, $45.6 million in 2000, $67.4 million in 2001 and $24.1
million in the nine-month period ended September 30, 2002. As of September 30,
2002, our accumulated deficit was approximately $189.9 million. We expect to
continue to incur substantial additional losses for the foreseeable future, and
we may never become profitable. To date, we have financed our operations
primarily through the private sale of equity securities, funds received from a
terminated collaboration agreement, the proceeds of equipment financing
arrangements, our initial public offering of common stock in March 2000 and
private placements of common stock during the quarters ended March 31, 2002 and
June 30, 2002. We are currently
evaluating our strategic alternatives, and we may develop iseganan for other
indications or acquire or license other products. However, we have no clinical trials ongoing at this time, and we do not expect to begin a new trial
in the immediate future.

We will receive product revenues only if we complete clinical trials with
respect to one or more products, receive regulatory approvals and successfully
commercialize such products. We do not know whether we will be successful in
developing other indications for iseganan or in acquiring or licensing other
products.

We must raise capital to continue our operations, and if we fail to obtain the
capital necessary to fund our operations, we will be unable to develop our drug
candidates and may have to cease operations.

At September 30, 2002, our cash balances and cash equivalents were $35.3
million including restricted cash of $7.5 million. Subsequent to the end of
the quarter, we entered into settlement agreements with Polypeptide and two of
our landlords, repaid $8.0 million in outstanding loans to Silicon Valley Bank
and announced a restructuring plan to conserve cash. These actions will result
in estimated cash payments of approximately $20 million subsequent to the end
of the quarter. Payment of these items will enable us to reduce our restricted
cash by approximately $7.1 million. After these actions, we believe that our
existing cash balances and cash equivalents will be sufficient to meet our
current operating and capital requirements for at least the next twelve months.
However, we have based this estimate on assumptions that may prove to be
wrong, including that we will not have any products in active clinical
development in the next twelve months. To the extent we pursue the development
of iseganan for other indications or other acquired or licensed products, we
will need to raise additional capital to fund clinical development costs. For
the years ended December 31, 1999, 2000 and 2001, net cash used for operating
activities was $25.1 million, $50.4 million, and $53.6 million, respectively
and in the nine-month period ended September 30, 2002, net cash used for
operating activities was $18.7 million. Our future liquidity and capital
requirements will depend on many factors, including our evaluation of, and
decisions with respect to, our strategic alternatives, costs associated with,
securing in-licensing opportunities, purchasing additional products or drug
candidates and conducting pre-clinical research and clinical development of
those drug candidates.

We do not know whether additional financing will be available when needed
or on acceptable terms, if at all. If we are unable to raise additional
financing when necessary, we may have to delay our product acquisition and
development efforts or be forced to cease operations. Any additional equity
financing will be dilutive to existing stockholders, and debt financing, if
available, may involve restrictive covenants. Collaborative arrangements may
require us to relinquish our rights to certain of our technologies, drug
candidates or marketing territories.

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Our only late stage clinical candidate failed to meet the primary endpoint in
our Phase III clinical trials, and we are seeking to acquire or license additional
products or seek other strategic alternatives.

We had only one late stage lead product, iseganan HCl, which failed in the
Phase III trial conducted on patients with head and neck cancer receiving
radiotherapy and the Phase III trial conducted on patients with cancer
receiving aggressive chemotherapy. Our other indications for iseganan are in
an early stage of clinical development. We have no clinical trials ongoing at
this time, and we currently do not expect to begin a new trial in the immediate
future. Our strategy is to develop and commercialize pharmaceutical products.
We are currently evaluating our strategic alternatives, including a sale or
merger of the company, the in-licensing or acquisition of other products or
product candidates and/or the continued development of iseganan HCI. We do not know if we will be able to, identify appropriate
products for acquisition or license or that we will be able to conclude any
strategic transaction on favorable terms, if at all. We also do not
know if we will be able to attract additional capital.

We will depend on the outcome of future clinical trials for other indications
for iseganan or for products that we license or acquire, and if they are
unsuccessful, we will not be able to commercialize those products and generate
product revenue.

Before obtaining regulatory approvals for the commercial sale of any
products, we must demonstrate through pre-clinical research and clinical trials
that our drug candidates are safe and effective for use in humans. If we are
unable to demonstrate the safety and efficacy of any drug candidates, we will
be unable to obtain regulatory approval from the FDA and to commercialize the
drug candidate, and we will be unable to generate product revenue from that
candidate for that indication. Clinical trials are expensive and time-consuming
to conduct, and the timing and outcome of these trials is uncertain. A number
of new drugs have shown promising results in clinical trials, but subsequently
failed to establish sufficient safety and efficacy data to obtain necessary
regulatory approvals. A number of companies have suffered significant setbacks
in advanced clinical trials, even after promising results in earlier trials.
For example, in May 2002, we announced that our clinical trial of iseganan HCl
oral solution to treat patients undergoing radiotherapy to prevent or reduce
oral mucositis had failed to demonstrate any difference between iseganan and
placebo in the primary or secondary end-points, and in September 2002, we
announced that our clinical trial of iseganan HCl oral solution to treat
patients undergoing aggressive chemotherapy to prevent or reduce oral mucositis
had failed to demonstrate any difference between iseganan and placebo in the
primary end-point. We believe that iseganan does not provide clinical benefit
for these patients. We have no clinical trials ongoing at this time, and we
currently do not expect to begin a new trial in the immediate future. As a
result of the delay in clinical development of our other drug candidates, our
ability to generate product revenue will be delayed and we do not expect to
generate product revenue in the near term.

If we fail to obtain FDA approvals for any future products that we develop,
acquire or license, we will be unable to commercialize our drug candidates.

We do not have a drug candidate approved for sale in the U.S. or any
foreign market. We must obtain approval from the FDA in order to sell our drug
candidate in the U.S. and from foreign regulatory authorities in order to sell
our drug candidate in other countries. We must successfully complete pivotal
clinical trials and demonstrate manufacturing capability before we can file
with the FDA for approval to sell our products. The FDA could require us to
repeat clinical trials as part of the regulatory review process. Delays in
obtaining or failure to obtain regulatory approvals may:



| |  |  | delay or prevent the successful commercialization of our drug
candidate;
| | - |  | ------------------------------------------------------------------------
|
| |  |  | diminish our competitive advantage; and                                 
|
| |  |  | defer or decrease our receipt of revenues or royalties.                 

The regulatory review and approval process is lengthy, expensive and
uncertain. Extensive pre-clinical and clinical data and supporting information
must be submitted to the FDA for each indication to establish safety and
effectiveness in order to secure FDA approval. We have limited experience in
obtaining such approvals, and cannot be certain when, if ever, we will receive
these regulatory approvals.

In addition to initial regulatory approval, our drug candidate will be
subject to extensive and rigorous ongoing domestic and foreign government
regulation. Any approvals, once obtained, may be

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withdrawn if compliance with regulatory requirements is not maintained or
safety problems are identified. Failure to comply with these requirements may
subject us to stringent penalties.

Development and commercialization of competitive products could reduce or
prevent sales of any future products that we develop, acquire or license.

We may be unable to compete successfully if other companies develop and
commercialize competitive products that are less expensive, more effective,
have fewer side effects or are easier to administer than drug candidates which
we develop, acquire or license. If we are unable to compete successfully with
any future drug candidate, physicians may not recommend and patients may not
buy our drug, which would cause our product revenue to decline.

Many of our competitors and related private and public research and
academic institutions have substantially greater experience, financial
resources and larger research and development staffs than we do. In addition,
many of these competitors, either alone or together with their collaborative
partners, have significantly greater experience than we do in developing drugs,
obtaining regulatory approvals and manufacturing and marketing products. We
also compete with these organizations and other companies for in-licensing
opportunities for future drug candidates, and for attracting scientific and
management personnel.

If we are unable to adequately protect our intellectual property, we may be
unable to sell our products or to compete effectively.

We rely on a combination of patents, trade secrets and contractual
provisions to protect our intellectual property. If we fail to adequately
protect our intellectual property, other companies or individuals may prevent
us from selling our products or may develop competing products based on our
technology. Our success depends in part on our ability to:



| |  |  | obtain patents;                                                      
| | - |  | ---------------------------------------------------------------------
|
| |  |  | protect trade secrets;                                               
|
| |  |  | operate without infringing upon the proprietary rights of
others; and
|
| |  |  | prevent others from infringing on our proprietary rights.            

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 or are effectively maintained as trade secrets.

We try to protect our proprietary position by filing U.S. and foreign
patent applications related to our proprietary technology, inventions and
improvements that are important to the development of our business. For
example, we own or have rights to nine patents and five pending patent
applications in the U.S. However, the patent position of biopharmaceutical
companies involves complex legal and factual questions. We cannot predict the
enforceability or scope of any issued patents or those that may issue in the
future. Patents, if issued, may be challenged, invalidated or circumvented.
Consequently, if any patents that we own or license from third parties do not
provide sufficient protection, our competitive position would be weakened.
Furthermore, others may independently develop similar technologies or duplicate
any technology that we have developed. In addition, we may not be issued
patents for our pending patent applications, those we may file in the future,
or those we may license from third parties.

In addition to patents, we rely on trade secrets and proprietary know-how.
Our contract manufacturers perform the manufacturing processes covered by
these trade secrets. Accordingly, our contract manufacturers and we must
maintain confidentiality. We have confidentiality and proprietary information
agreements with our contract manufacturers and with our employees. These
agreements may not provide meaningful protection or adequate remedies for our
technology in the event of unauthorized use or disclosure of confidential and
proprietary information.

We may be subject to intellectual property litigation that could be costly and
time-consuming.

The biotechnology and pharmaceutical industries have been characterized by
extensive litigation regarding patents and other intellectual property rights.
Although we are not currently a party to any

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lawsuits, third parties may assert infringement or other intellectual
property claims against us. We may have to pay substantial damages, including
treble damages, for past infringement if it is ultimately determined that our
products infringe a third partys proprietary rights. The defense and
prosecution of intellectual property suits, U.S. Patent and Trademark Office
interference proceedings and related legal and administrative proceedings in
the U.S and internationally are costly and time-consuming to pursue and their
outcome is uncertain. If we become involved in any of these proceedings, we
will incur substantial expense and the efforts of our technical and management
personnel will be significantly diverted. An adverse determination may result
in the invalidation of our patents, subject us to significant liabilities or
require us to seek licenses that may not be available from third parties on
satisfactory terms, or at all. Our stock price could decline based on any
public announcements related to litigation or interference proceedings
initiated or threatened against us.

If physicians and patients do not accept our products, we may be unable to
generate significant revenue, if any.

Any future drug candidate that we develop, acquire or license may not gain
market acceptance among physicians, patients and the medical community. If any
future drug candidate fails to achieve market acceptance, we may be unable to
successfully market and sell the product, which would limit our ability to
generate revenue. The degree of market acceptance of any drug candidate depends
on a number of factors, including:



| |  |  | demonstration of clinical efficacy and safety;             
| | - |  | -----------------------------------------------------------
|
| |  |  | cost-effectiveness;                                        
|
| |  |  | convenience and ease of administration;                    
|
| |  |  | potential advantage over alternative treatment methods; and
|
| |  |  | marketing and distribution support.                        

Physicians will not recommend our products until such time as clinical
data or other factors demonstrate the safety and efficacy of our drugs as
compared to other treatments. In practice, competitors may be more effective in
marketing their drugs. Even if the clinical safety and efficacy of our product
is established, physicians may elect not to recommend its use.

The failure to recruit and retain key personnel may delay our ability to
execute our business plan.

We are highly dependent on our management and technical staff. Competition
for personnel is intense. If we lose the services of any of our senior
management, we may be unable to successfully complete a strategic transaction.
We do not maintain key person life insurance and do not have employment
agreements with our management and technical staff. We recently announced a
restructuring, including a reduction in force of approximately 70% of our
workforce. In order to pursue any future product development, marketing and
commercialization, we will need to hire additional qualified scientific
personnel to perform research and development and personnel with expertise in
clinical testing, government regulation, manufacturing, marketing and finance.
We may not be able to attract and retain personnel on acceptable terms given
the competition for such personnel among biotechnology, pharmaceutical and
other companies.

In addition, we rely on consultants to assist us in formulating our
research and clinical development strategy. All of our consultants are employed
by other entities. They may have commitments to, or relationships with, other
entities that may limit their availability to us. The loss of the services of
these personnel may delay our research and development efforts.

Directors, executive officers, principal stockholders and affiliated entities
own a portion of our capital stock and may be able to exert control over our
activities.

Our directors, executive officers, principal stockholders and affiliated
entities beneficially own, in the aggregate, approximately 35% of our
outstanding common stock. These stockholders, if acting together, may be able
to significantly influence any matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combination transactions.

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Antitakeover provisions in our charter documents and under Delaware law may
make an acquisition of us more difficult.

Provisions of our certificate of incorporation and bylaws could make it
more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders.

These provisions:



| |  |  | provide for a classified board of directors of which approximately
one third of the directors will be elected each year;                          
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | allow the authorized number of directors to be changed only by
resolution of the board of directors;                                              
|
| |  |  | require that stockholder actions must be effected at a duly called
stockholder meeting and prohibit stockholder action by written consent;        
|
| |  |  | establish advance notice requirements for nominations to the board of
directors or for proposals that can be acted on at stockholder meetings; and
|
| |  |  | limit who may call stockholder meetings.                                                                                                          

In addition, because we are incorporated in Delaware, we are governed by the
provisions of Section 203 of the Delaware General Corporation Law, which may
prohibit large stockholders from consummating a merger with, or acquisition of
us. These provisions may prevent a merger or acquisition that would be
attractive to stockholders and could limit the price that investors would be
willing to pay in the future for our common stock.

If we are unable to maintain our Nasdaq National Market listing, the liquidity
of our common stock would be seriously impaired and we would become subject to
various statutory requirements, which would likely harm our business.

On November 12, 2002, we received a letter from Nasdaq advising us that
our common stock had not met Nasdaqs minimum bid price requirement for 30
consecutive trading days and that, if we were unable to demonstrate compliance
with this requirement during the 90 calendar days ending February 10, 2003, our
common stock may be subject to delisting from the Nasdaq National Market. If we
are unable to meet the Nasdaq National Market requirements, at the discretion
of Nasdaq our common stock may be transferred to the Nasdaq SmallCap Market.
Transferring to the Nasdaq SmallCap Market would provide us with an additional
grace period to satisfy the minimum bid price requirement; however, we would
nevertheless be subject to certain adverse consequences described below. In
addition, in such event we would still be required to satisfy various listing
maintenance standards for our common stock to be quoted on the Nasdaq SmallCap
Market, including the minimum bid price requirement after expiration of any
grace periods. If we fail to meet such standards, our common stock would
likely be delisted from the Nasdaq SmallCap Market and trade on the
over-the-counter bulletin board, commonly referred to as the pink sheets.
Such alternatives are generally considered as less efficient markets and would
seriously impair the liquidity of our common stock and limit our potential to
raise future capital through the sale of our common stock, which could
materially harm our business.

If we are delisted from the Nasdaq National Market, we will face a variety
of legal and other consequences that will likely negatively affect our business
including, without limitation, the following:



| |  | we may lose our exemption from the provisions of Section 2115 of the California
Corporations Code which imposes aspects of California corporate law on certain
non-California corporations operating within California. As a result, (i) our board of
directors would no longer be classified and our stockholders would elect all of our
directors at each annual meeting, (ii) our stockholders would be entitled to
cumulative voting, and (iii) we would be subject to more stringent stockholder
approval requirements and more stockholder-favorable dissenters rights in connection
with certain strategic transactions;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the state securities law exemptions available to us would be more limited and, as a
result, future issuances of our securities may require time-consuming and costly
registration statements and qualifications;                                                                                                                                                                                                                                                                                                                                                                                                                
| 
| |  | due to the application of different securities law exemptions and provisions, we may
be required to amend our stock option and stock purchase plans and comply with
time-consuming and costly                                                                                                                                                                                                                                                                                                                                                                                                                                   

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|  |  | administrative procedures;                                                             
|- |  | ---------------------------------------------------------------------------------------
| 
| |  | the coverage of IntraBiotics by securities analysts may decrease or cease entirely; and
| 
| |  | we may lose current or potential investors.                                            

Our stock price may be volatile, and the value of your investment may decline.

The market prices for securities of biotechnology companies in general
have been highly volatile and our stock may be subject to volatility. The
following factors, in addition to the other risk factors described in this
section, may have a significant impact on the market price of our common stock:



| |  |  | announcements regarding strategic alternatives, including a merger or sale
of the company or acquisition or license of products or product candidates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | announcements of technological innovations or new commercial products by
our competitors or us;                                                       
|
| |  |  | developments concerning proprietary rights;                                                                                                           
|
| |  |  | publicity regarding actual or perceived adverse events in future clinical
trials or relating to products under development by us or our competitors;  
|
| |  |  | regulatory developments in the United States or foreign countries;                                                                                    
|
| |  |  | litigation;                                                                                                                                           
|
| |  |  | significant short selling in our common stock;                                                                                                        
|
| |  |  | economic and other external factors; and                                                                                                              
|
| |  |  | period-to-period fluctuations in our financial results and changes in
analysts recommendations.                                                      




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The primary objective of our investment activities is to preserve our
capital until it is required to fund operations at the same time maximizing the
income we receive from our investments without significantly increasing risk.
We currently have all of our funds in bank accounts and a money market fund,
which are sensitive to minimal market risk. Due to the short-term nature of
this investment, a 50 basis point movement in market interest rates would not
have a material impact on the fair value of our investment as of September 30,
2002 and the fiscal year ended December 31, 2001. We have no investments
denominated in foreign country currencies and therefore our investments are not
subject to foreign currency exchange risk.




ITEM 4. CONTROLS AND PROCEDURES.

Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
reports filed with the Securities and Exchange Commission. It should be noted
that the design of any systems of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.

In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of our last
evaluation.

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##### Table of Contents






PART II OTHER INFORMATION




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Our registration statement on Form S-1 (No. 333-95461) filed pursuant to
the Securities Act of 1933, as amended, was declared effective on March 27,
2000. We incurred related offering costs of approximately $9.2 million during
the year ended December 31, 2000, of which $7.9 million represented
underwriting discounts and commissions. All initial public offering costs were
direct or indirect payments to others. The net offering proceeds we received
after all expenses were approximately $103.3 million, and, during the quarter
ended September 30, 2002, the balance of these proceeds was used to fund
clinical trials, the development and scale up of manufacturing processes by our
contract manufacturers, research and development activities and other general
corporate purposes.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | List of Exhibits
| | --- |  | ----------------

|       |  |                                                                                                                                                                                                                                                             
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Exhibit Description                                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                             
|10.2   |  | 1995 Stock Option Plan, as amended on August 1, 2002.                                                                                                                                                                                                       
|10.4   |  | 2000 Equity Incentive Plan, as amended on August 1,
2002.                                                                                                                                                                                                   
|10.21  |  | Senior Executive Severance Plan, as amended and restated on August 1, 2002.                                                                                                                                                                                 
|10.22  |  | Executive Severance Benefit Plan, as amended and restated on August 1, 2002.                                                                                                                                                                                
|10.35  |  | 2002 Non-Officer Equity Incentive Plan and related documents.                                                                                                                                                                                               
|10.36  |  | Master Services Agreement by and among the Company, PPD Development, LP and
PPD Global Ltd., dated July 29, 2002.                                                                                                                                           
|99.1   |  | Certification by the Chief Executive Officer and the Chief Financial Officer
of the Company, as required by Section 906 of the Public Company Accounting
Reform and Investor Protection Act of 2002 (18 U.S.C. § 1350, as adopted),
dated November 12, 2002.



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------

None.

21



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##### Table of Contents






SIGNATURES

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.

|                  |  |                                                         
|----------------- |  | --------------------------------------------------------
|                  |  | IntraBiotics Pharmaceuticals, Inc.                      
|                  |  |                                                         
|November 14, 2002 |  | /s/ Ernest Mario, Ph.D.                                 
|                  |  |                                                         
|                  |  | Ernest Mario, Ph.D.
Chairman and Chief Executive Officer
|                  |  |                                                         
|November 14, 2002 |  | /s/ Eric H. Bjerkholt                                   
|                  |  |                                                         
|                  |  | Eric H. Bjerkholt
Chief Financial Officer               

22



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##### Table of Contents






CERTIFICATIONS

I, Ernest Mario, Ph.D., certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of IntraBiotics
Pharmaceuticals, Inc.;                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors
any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 14, 2002

| |  |                                            
| |  | -------------------------------------------
| |  | /s/ Ernest Mario, Ph.D.                    
| |  |                                            
| |  | Ernest Mario, Ph.D.
Chief Executive Officer

23



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##### Table of Contents



I, Eric H. Bjerkholt, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of IntraBiotics
Pharmaceuticals, Inc.;                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors
any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 14, 2002

| |  |                                          
| |  | -----------------------------------------
| |  | /s/ Eric H. Bjerkholt                    
| |  |                                          
| |  | Eric H. Bjerkholt
Chief Financial Officer

24



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##### Table of Contents






Index to Exhibits

|       |  |                                                                                                                                                                                                                                                             
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Exhibit Description                                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                             
|10.2   |  | 1995 Stock Option Plan, as amended on August 1, 2002.                                                                                                                                                                                                       
|10.4   |  | 2000 Equity Incentive Plan, as amended on August 1,
2002.                                                                                                                                                                                                   
|10.21  |  | Senior Executive Severance Plan, as amended and restated on August 1, 2002.                                                                                                                                                                                 
|10.22  |  | Executive Severance Benefit Plan, as amended and restated on August 1, 2002.                                                                                                                                                                                
|10.35  |  | 2002 Non-Officer Equity Incentive Plan and related documents.                                                                                                                                                                                               
|10.36  |  | Master Services Agreement by and among the Company, PPD Development, LP and
PPD Global Ltd., dated July 29, 2002.                                                                                                                                           
|99.1   |  | Certification by the Chief Executive Officer and the Chief Financial Officer
of the Company, as required by Section 906 of the Public Company Accounting
Reform and Investor Protection Act of 2002 (18 U.S.C. § 1350, as adopted),
dated November 12, 2002.