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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, 2003
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                        |  | 94-3200380                             
|(State or other jurisdiction of |  | (I.R.S. Employer Identification Number)
|incorporation or organization)  |  |                                        

2483 East Bayshore Road, Suite 100
Palo Alto, CA 94303

(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 No o

Indicate by checkmark whether registrant is an accelerated filer (as defined in
Rule 12b-2 of Securities Exchange Act of 1934).
Yes o No x

There were 5,253,983 shares of the Companys Common Stock, par value $.001,
outstanding as of October 31, 2003.





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TABLE OF CONTENTS



|                              |                                                                                               |                                         |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM I. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONDENSED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED 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 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 3.3                  
|EXHIBIT 3.4                  
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 



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INTRABIOTICS PHARMACEUTICALS, INC.
FORM 10-Q
QUARTER ENDED September 30, 2003
TABLE OF CONTENTS

|           |  |                                                                                                            |  |     
|---------- |  | ---------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                            |  | Page
|           |  |                                                                                                            |  |     
|PART I.    |  | FINANCIAL INFORMATION                                                                                      |  |     
|Item 1.    |  | Financial Statements (unaudited)                                                                           |  |     
|           |  | Condensed Balance Sheets as of September 30, 2003 and December 31, 2002                                    |  | 3   
|           |  | Condensed Statements of Operations for the Three- and Nine-Month Periods Ended
September 30, 2003 and 2002 |  | 4   
|           |  | Condensed Statements of Cash Flows for the Nine-Month Periods Ended September 30,
2003 and 2002            |  | 5   
|           |  | Notes to Condensed Financial Statements                                                                    |  | 6   
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                      |  | 10  
|Item 3.    |  | Quantitative and Qualitative Disclosure About Market Risk                                                  |  | 22  
|Item 4.    |  | Controls and Procedures                                                                                    |  | 22  
|PART II.   |  | OTHER INFORMATION                                                                                          |  |     
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                           |  | 23  
|SIGNATURES |  |                                                                                                            |  | 24  

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PART I. FINANCIAL INFORMATION




ITEM I. FINANCIAL STATEMENTS




INTRABIOTICS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)

|                                     |                               |                                           |          |               |        |              |          |        |        | 
|------------------------------------ | ----------------------------- | ----------------------------------------- | -------- | ------------- | ------ | ------------ | -------- | ------ | ------ | 
|                                     |                               |                                           |          | SEPTEMBER 30, |        | DECEMBER 31,
|                                     |                               |                                           |          | 2003          |        | 2002        
|                                     |                               |                                           |          |               |        |             
|                                     |                               |                                           |          | (Unaudited)   |        | (Note 1)    
|Assets                               |                               |                                           |          |               |        |              |          |       
|Current assets:                      |                               |                                           |          |               |        |              |          |       
|                                     | Cash and cash
equivalents     |                                           | $        | 10,061        |        |              | $        | 10,170 |       
|                                     | Restricted cash               |                                           |          | 250           |        |              |          | 250    |       
|                                     | Short-term investments        |                                           |          |              |        |              |          | 2,895  |       
|                                     | Prepaid drug substance        |                                           |          |              |        |              |          | 2,375  |       
|                                     | Prepaid expenses              |                                           |          | 467           |        |              |          | 247    |       
|                                     |                               |                                           |          |               |        |              |          |       
|                                     |                               | Total current assets                      |          |               | 10,778 |              |          |        | 15,937 | 
|Property and equipment,
net          |                               |                                           | 31       |               |        |              | 112      |       
|Other assets                         |                               |                                           | 184      |               |        |              | 177      |       
|                                     |                               |                                           |          |               |        |              |          |       
|                                     |                               | Total assets                              |          | $             | 10,993 |              |          | $      | 16,226 | 
|                                     |                               |                                           |          |               |        |              |          |       
|Liabilities and stockholders
equity |                               |                                           |          |               |        |              |          |       
|Current liabilities:                 |                               |                                           |          |               |        |              |          |       
|                                     | Accounts payable              |                                           | $        | 376           |        |              | $        | 345    |       
|                                     | Accrued clinical
liabilities  |                                           |          | 128           |        |              |          |       |       
|                                     | Accrued employee
liabilities  |                                           |          | 91            |        |              |          | 135    |       
|                                     | Accrued restructuring
charges |                                           |          |              |        |              |          | 64     |       
|                                     | Other accrued
liabilities     |                                           |          | 244           |        |              |          | 202    |       
|                                     |                               |                                           |          |               |        |              |          |       
|                                     |                               | Total current liabilities                 |          |               | 839    |              |          |        | 746    | 
|Stockholders
equity:                |                               |                                           |          |               |        |              |          |       
|Preferred stock                      |                               |                                           | 1,886    |               |        |              |         |       
|Common stock                         |                               |                                           | 3        |               |        |              | 3        |       
|Additional paid-in
capital           |                               |                                           | 219,244  |               |        |              | 216,466  |       
|Deferred stock
compensation          |                               |                                           | (180     | )             |        |              | (720     | )     
|Accumulated deficit                  |                               |                                           | (210,799 | )             |        |              | (200,269 | )     
|                                     |                               |                                           |          |               |        |              |          |       
|                                     |                               | Total stockholders equity                |          |               | 10,154 |              |          |        | 15,480 | 
|                                     |                               |                                           |          |               |        |              |          |       
|                                     |                               | Total liabilities and
stockholdersequity |          | $             | 10,993 |              |          | $      | 16,226 | 
|                                     |                               |                                           |          |               |        |              |          |       

See accompanying notes.

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

|                                                                                              |                                 |                          |        |                    |       |                   |         |         |        |      |         |        |       |   |         |         |        | 
|--------------------------------------------------------------------------------------------- | ------------------------------- | ------------------------ | ------ | ------------------ | ----- | ----------------- | ------- | ------- | ------ | ---- | ------- | ------ | ----- | - | ------- | ------- | ------ | 
|                                                                                              |                                 |                          |        | THREE MONTHS ENDED |       | NINE MONTHS ENDED
|                                                                                              |                                 |                          |        | SEPTEMBER 30,      |       | SEPTEMBER 30,    
|                                                                                              |                                 |                          |        |                    |       |                  
|                                                                                              |                                 |                          |        | 2003               |       | 2002              |         | 2003    |        | 2002
|                                                                                              |                                 |                          |        |                    |       |                   |         |         |        |     
|Operating expenses:                                                                           |                                 |                          |        |                    |       |                   |         |         |        |      |         |        |       |   |         |        
|                                                                                              | Research and
development        |                          | $      | 3,641              |       |                   | $       | 3,955   |        |      | $       | 5,261  |       |   | $       | 17,407  |       
|                                                                                              | General and
administrative      |                          |        | 1,125              |       |                   |         | 2,388   |        |      |         | 3,833  |       |   |         | 6,295   |       
|                                                                                              | Arbitration settlement          |                          |        |                   |       |                   |         |        |        |      |         |       |       |   |         | (3,600  | )     
|                                                                                              | Restructuring and other
charges |                          |        |                   |       |                   |         | 5,140   |        |      |         |       |       |   |         | 5,231   |       
|                                                                                              |                                 |                          |        |                    |       |                   |         |         |        |      |         |        |       |   |         |         |       
|                                                                                              |                                 | Total operating expenses |        |                    | 4,766 |                   |         |         | 11,483 |      |         |        | 9,094 |   |         |         | 25,333 | 
|                                                                                              |                                 |                          |        |                    |       |                   |         |         |        |      |         |        |       |   |         |         |       
|                                                                                              | Operating loss                  |                          |        | (4,766             | )     |                   |         | (11,483 | )      |      |         | (9,094 | )     |   |         | (25,333 | )     
|                                                                                              | Interest income                 |                          |        | 28                 |       |                   |         | 143     |        |      |         | 99     |       |   |         | 623     |       
|                                                                                              | Interest expense                |                          |        |                   |       |                   |         | (131    | )      |      |         |       |       |   |         | (397    | )     
|                                                                                              | Other income                    |                          |        |                   |       |                   |         | 200     |        |      |         |       |       |   |         | 984     |       
|                                                                                              |                                 |                          |        |                    |       |                   |         |         |        |      |         |        |       |   |         |         |       
|Net loss                                                                                      |                                 |                          | (4,738 | )                  |       |                   | (11,271 | )       |        |      | (8,995  | )      |       |   | (24,123 | )      
|Non-cash deemed dividend related to
beneficial conversion
feature of Series A preferred stock |                                 |                          |       |                    |       |                   |        |         |        |      | (1,418  | )      |       |   |        |        
|Dividends on Series A preferred
stock                                                         |                                 |                          | (70    | )                  |       |                   |        |         |        |      | (117    | )      |       |   |        |        
|                                                                                              |                                 |                          |        |                    |       |                   |         |         |        |      |         |        |       |   |         |         |       
|Net loss applicable to common
stockholders                                                    |                                 | $                        | (4,808 | )                  |       | $                 | (11,271 | )       |        | $    | (10,530 | )      |       | $ | (24,123 | )      
|                                                                                              |                                 |                          |        |                    |       |                   |         |         |        |      |         |        |       |   |         |         |       
|Basic and diluted net loss per share
applicable to common
stockholders                        |                                 | $                        | (1.46  | )                  |       | $                 | (3.59   | )       |        | $    | (3.22   | )      |       | $ | (7.99   | )      
|                                                                                              |                                 |                          |        |                    |       |                   |         |         |        |      |         |        |       |   |         |         |       
|Shares used to compute basic and diluted
net loss per share
applicable to common stockholders |                                 |                          | 3,283  |                    |       |                   | 3,143   |         |        |      | 3,274   |        |       |   | 3,018   |        
|                                                                                              |                                 |                          |        |                    |       |                   |         |         |        |      |         |        |       |   |         |         |       

See accompanying notes.

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

|                                                                            |                                                                             |                               |        |                                 |       |      |         |        |       |  
|--------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------- | ------ | ------------------------------- | ----- | ---- | ------- | ------ | ----- | -
|                                                                            |                                                                             |                               |        | NINE MONTHS ENDED SEPTEMBER 30,
|                                                                            |                                                                             |                               |        |                                
|                                                                            |                                                                             |                               |        | 2003                            |       | 2002
|                                                                            |                                                                             |                               |        |                                 |       |     
|Operating
activities                                                        |                                                                             |                               |        |                                 |       |      |         |       
|Net loss                                                                    |                                                                             | $                             | (8,995 | )                               |       | $    | (24,123 | )     
|Adjustments to reconcile net loss to net
cash used in operating activities: |                                                                             |                               |        |                                 |       |      |         |       
|                                                                            | Amortization of deferred stock
compensation                                 |                               |        | 110                             |       |      |         | 848    |      
|                                                                            | Depreciation and
amortization                                               |                               |        | 81                              |       |      |         | 575    |      
|                                                                            | Acquired workforce
amortization                                             |                               |        |                                |       |      |         | 234    |      
|                                                                            | Stock compensation
expense                                                  |                               |        | 411                             |       |      |         | 619    |      
|                                                                            | Gain on sale of pre-clinical
programs                                       |                               |        |                                |       |      |         | (975   | )    
|                                                                            | Change in assets and
liabilities:                                           |                               |        |                                 |       |      |         |        |      
|                                                                            |                                                                             | Prepaid expenses              |        |                                 | 2,155 |      |         |        | 2,025 |  
|                                                                            |                                                                             | Other assets                  |        |                                 | (7    | )    |         |        |      |  
|                                                                            |                                                                             | Accounts payable              |        |                                 | 31    |      |         |        | (33   | )
|                                                                            |                                                                             | Accrued clinical liabilities  |        |                                 | 128   |      |         |        | (222  | )
|                                                                            |                                                                             | Accrued employee liabilities  |        |                                 | (44   | )    |         |        | (300  | )
|                                                                            |                                                                             | Accrued restructuring charges |        |                                 | (64   | )    |         |        | 2,859 |  
|                                                                            |                                                                             | Deferred rent                 |        |                                 |      |      |         |        | 203   |  
|                                                                            |                                                                             | Other accrued liabilities     |        |                                 | (28   | )    |         |        | (396  | )
|                                                                            |                                                                             |                               |        |                                 |       |      |         |       
|Net cash used in operating
activities                                       |                                                                             |                               | (6,222 | )                               |       |      | (18,686 | )     
|Investing
activities                                                        |                                                                             |                               |        |                                 |       |      |         |       
|                                                                            | Capital expenditures                                                        |                               |        |                                |       |      |         | (17    | )    
|                                                                            | Proceeds from sale of pre-clinical
programs                                 |                               |        |                                |       |      |         | 400    |      
|                                                                            | Maturities of short-term
investments                                        |                               |        | 2,895                           |       |      |         |       |      
|                                                                            | Cash received in acquisition of
subsidiary                                  |                               |        |                                |       |      |         | 58     |      
|                                                                            |                                                                             |                               |        |                                 |       |      |         |       
|Net cash provided by investing
activities                                   |                                                                             |                               | 2,895  |                                 |       |      | 441     |       
|Financing
activities                                                        |                                                                             |                               |        |                                 |       |      |         |       
|                                                                            | Proceeds from issuance of common stock,
net                                 |                               |        | 6                               |       |      |         | 19,472 |      
|                                                                            | Proceeds from issuance of Series A
preferred stock and warrants, net        |                               |        | 3,212                           |       |      |         |       |      
|                                                                            | Payments on financing
obligations                                           |                               |        |                                |       |      |         | (1,406 | )    
|                                                                            |                                                                             |                               |        |                                 |       |      |         |       
|Net cash provided by financing
activities                                   |                                                                             |                               | 3,218  |                                 |       |      | 18,066  |       
|                                                                            |                                                                             |                               |        |                                 |       |      |         |       
|Net decrease in cash and cash
equivalents                                   |                                                                             |                               | (109   | )                               |       |      | (179    | )     
|Cash and cash equivalents at beginning of
period                            |                                                                             |                               | 10,170 |                                 |       |      | 27,982  |       
|                                                                            |                                                                             |                               |        |                                 |       |      |         |       
|Cash and cash equivalents at end of
period                                  |                                                                             | $                             | 10,061 |                                 |       | $    | 27,803  |       
|                                                                            |                                                                             |                               |        |                                 |       |      |         |       
|Supplemental disclosure of cash flow
information:                           |                                                                             |                               |        |                                 |       |      |         |       
|                                                                            | Interest paid                                                               |                               | $      |                                |       |      | $       | 397    |      
|                                                                            |                                                                             |                               |        |                                 |       |      |         |       
|Supplemental disclosure of non-cash
information:                            |                                                                             |                               |        |                                 |       |      |         |       
|                                                                            | Net deferred stock compensation
(cancellations due to employee termination) |                               | $      | (430                            | )     |      | $       | (1,076 | )    
|                                                                            |                                                                             |                               |        |                                 |       |      |         |       
|                                                                            | Other assets received from sale of
pre-clinical programs                    |                               | $      |                                |       |      | $       | 575    |      
|                                                                            |                                                                             |                               |        |                                 |       |      |         |       
|                                                                            | Beneficial conversion feature on
Series A preferred stock                   |                               | $      | (1,418                          | )     |      | $       |       |      
|                                                                            |                                                                             |                               |        |                                 |       |      |         |       
|                                                                            | Issuance of common stock dividend on
Series A preferred stock               |                               | $      | (117                            | )     |      | $       |       |      
|                                                                            |                                                                             |                               |        |                                 |       |      |         |       
|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 CONDENSED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying condensed financial statements are unaudited
and have
been prepared by 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 accounting
principles generally accepted in the United States) have been condensed or
omitted. The interim condensed financial statements, in the opinion of
management, reflect all adjustments (consisting entirely of normal recurring
adjustments) necessary for a fair presentation of the Companys financial
position as of September 30, 2003, the results of its operations for the three-
and nine-month periods ended September 30, 2003 and 2002 and cash flows for the
nine-month periods ended September 30, 2003 and 2002.

The results of operations of the interim periods are not
necessarily
indicative of the results of operations to be expected for the entire fiscal
year. These interim condensed financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 2002, which are contained in the Companys Annual Report on Form 10-K/A,
and filed with the Securities and Exchange Commission on June 25, 2003. The
condensed balance sheet as of December 31, 2002 is derived from such audited
financial statements.

Use of estimates

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

Recent Accounting Pronouncements

In August 2002, the Financial Accounting Standards Board issued
Statement
No. 146 (SFAS No. 146), Accounting for Costs Associated with Exit or
Disposal Activities.SFAS No. 146 supersedes Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs To Exit an Activity (Including Certain Costs Associated with a
Restructuring)and requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred, as
opposed to when management is committed to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at
fair value. This statement is effective for exit or disposal activities
initiated after December 31, 2002. The provisions of SFAS No. 146 are required
to be applied prospectively after the adoption date to newly initiated exit
activities, and may affect the timing of recognizing future restructuring
costs, as well as the amounts recognized. The adoption of the statement on
January 1, 2003 did not have a material impact on the Companys financial
position, results of operations or disclosure.

In November 2002, the FASB issued Interpretation No. 45
(FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued. FIN 45 is effective on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements of FIN
45 are effective for financial statements for interim and annual periods ending
after December 31, 2002. The adoption of FIN 45 did not have any impact on the
Companys financial position, results of operations or disclosure.

In January 2003, the FASB issued FASB Interpretation No. 46
(FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46, as amended, must be applied for the
first interim or annual period ending after December 15, 2003. The adoption
of FIN 46 did not have any impact on the Companys financial position, results
of operations or disclosure.

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In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 requires that certain financial instruments, which under previous
guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include stock with mandatory
redemption, certain financial instruments that require or may require the
issuer to buy back some of its shares in exchange for cash or other assets and
certain obligations that can be settled with shares of stock. SFAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003 and must be applied to the Companys existing financial instruments
effective July 1, 2003, the beginning of the first fiscal period after June 15,
2003. The adoption of SFAS No. 150 did not have a material impact on the
Companys financial position, results of operations or disclosure.

Note 2. Stock-Based Compensation

As permitted by Statement of Financial Accounting Standards
No. 123 (SFAS
123), Accounting for Stock-Based Compensation,as amended by Statement of
Financial Standards No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure,the Company has elected to follow APB 25 and
related interpretations in accounting for stock-based employee compensation.
Under APB 25, if the exercise price of an employee or director stock option is
set equal or in excess of the fair value of the underlying stock on the
date of grant, no compensation expense is recognized. If the exercise price of
the employee or director stock option is set at less than the fair value
of the underlying stock on the grant date, the Company records deferred
compensation for the difference. Deferred compensation is amortized on a
straight-line basis over the vesting period of the original award, ranging from
four to six years.

Options or stock awards issued to non-employees are recorded at
their fair
value as determined in accordance with SFAS 123, and are recognized over the
related service period and are periodically re-measured as the underlying
options vest.

The following table illustrates the effect on net loss and net
loss per
share applicable to common stockholders if the Company had applied the fair
value recognition provisions of SFAS 123 to stock-based employee compensation
(in thousands, except per share amounts):

|                                                                                                                |                                 |   |                    |       |                   |   |         |       |      |   |         |       |   |   |         |       |  
|--------------------------------------------------------------------------------------------------------------- | ------------------------------- | - | ------------------ | ----- | ----------------- | - | ------- | ----- | ---- | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                |                                 |   | Three Months Ended |       | Nine Months Ended
|                                                                                                                |                                 |   | September 30,      |       | September 30,    
|                                                                                                                |                                 |   |                    |       |                  
|                                                                                                                |                                 |   | 2003               |       | 2002              |   | 2003    |       | 2002
|                                                                                                                |                                 |   |                    |       |                   |   |         |       |     
|Net loss applicable to common
stockholders, as reported                                                         |                                 | $ | (4,808             | )     |                   | $ | (11,271 | )     |      | $ | (10,530 | )     |   | $ | (24,123 | )    
|Add: Stock-based employee compensation
expense included in
reported net loss                                    |                                 |   | 300                |       |                   |   | 161     |       |      |   | 419     |       |   |   | 848     |      
|Deduct: Total stock-based employee
compensation expense
determined under fair value based method for all awards |                                 |   | (384               | )     |                   |   | (720    | )     |      |   | (1,194  | )     |   |   | (1,799  | )    
|                                                                                                                |                                 |   |                    |       |                   |   |         |       |      |   |         |       |   |   |         |      
|Pro forma net loss applicable to common
stockholders                                                            |                                 | $ | (4,892             | )     |                   | $ | (11,830 | )     |      | $ | (11,305 | )     |   | $ | (25,074 | )    
|                                                                                                                |                                 |   |                    |       |                   |   |         |       |      |   |         |       |   |   |         |      
|Net loss per share applicable to common
stockholders:                                                           |                                 |   |                    |       |                   |   |         |       |      |   |         |       |   |   |         |      
|                                                                                                                | Basic and diluted  as
reported |   | $                  | (1.46 | )                 |   | $       | (3.59 | )    |   | $       | (3.22 | ) |   | $       | (7.99 | )
|                                                                                                                |                                 |   |                    |       |                   |   |         |       |      |   |         |       |   |   |         |      
|                                                                                                                | Basic and diluted  pro forma   |   | $                  | (1.49 | )                 |   | $       | (3.76 | )    |   | $       | (3.45 | ) |   | $       | (8.20 | )
|                                                                                                                |                                 |   |                    |       |                   |   |         |       |      |   |         |       |   |   |         |      

The fair value for the Companys options was estimated at the date of grant
using the Black-Scholes option pricing model for the three- and nine-month
periods ended September 30, 2003 and 2002 with the following weighted-average
assumptions:

|                        |  |                    |      |                   |  |         |      |         |  |  |      |   |  |  |      |  
|----------------------- |  | ------------------ | ---- | ----------------- |  | ------- | ---- | ------- |  |  | ---- | - |  |  | ---- | -
|                        |  | Three Months Ended |      | Nine Months Ended
|                        |  | September 30,      |      | September 30,    
|                        |  |                    |      |                  
|                        |  | 2003               |      | 2002              |  | 2003    |      | 2002   
|                        |  |                    |      |                   |  |         |      |        
|Risk-free interest rate |  |                    | 3.20 | %                 |  |         | 3.35 | %       |  |  | 2.81 | % |  |  | 4.08 | %
|Volatility              |  |                    | 1.00 |                   |  |         | 1.00 |         |  |  | 1.00 |   |  |  | 1.00 |  
|Dividend yield          |  |                    |     |                   |  |         |     |         |  |  |     |   |  |  |     |  
|Expected life of option |  | 5 years            |      | 5 years           |  | 5 years |      | 5 years

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Note 3. Comprehensive Loss

Comprehensive loss is solely comprised of the net loss in each
period
presented.

Note 4. Contractual Commitments

In February 2003, the Company entered into an operating lease
agreement
for a facility in Palo Alto, California, which expires in June 2004. Under the
terms of the lease, the Company is committed to pay an aggregate amount of
approximately $84,000 in 2003 and $43,000 in 2004.

Note 5. Stock Options Cancellation and Regrant

In February 2003, the Board of Directors approved a cancellation
and
re-grant of 321,335 unexercised stock options held by existing employees and
directors of the Company. Upon election by the participants, all of the
unexercised stock options were cancelled and new stock options were granted in
a one-for-one exchange. The re-granted options have an exercise price equal to
the closing price of the Companys common stock on the Nasdaq National Market
on February 5, 2003, or $2.76 per share, post-split (see Note 8). The options
vest over a four-year period and will expire in February 2008 if not previously
exercised. Variable accounting is being applied to the re-granted options,
starting from the date of re-grant, and the related compensation expense may
have a significant impact on the Companys future results of operations.
Compensation expense of $285,000 and $309,000 was recorded for these options
during the three- and nine-month periods ended September 30, 2003,
respectively.

Note 6. Net Loss Per Common Share

Basic and diluted net loss per share applicable to common
stockholders is
presented in accordance with Financial Accounting Standards Board Statement No.
128, Earnings Per Share,and is calculated using the weighted-average number
of shares of common stock outstanding during the period. Diluted net loss per
share applicable to common stockholders includes the impact of potentially
dilutive securities (stock options, warrants and convertible preferred stock).
As the Companys potentially dilutive securities were anti-dilutive for all
periods, they are not included in the calculations of diluted net loss per
share applicable to common stockholders. The total number of shares underlying
the stock options, warrants and convertible preferred stock excluded from the
calculations of net loss per common share were 3,200,874 and 623,410 for the
three-month periods ended September 30, 2003 and 2002, respectively, and
2,991,807 and 385,114 for the nine-month periods ended September 30, 2003 and
2002, respectively.

Note 7. Restructuring and Other Charges

In October 2002, the Company announced a restructuring plan as a
result of
the failure of its then recently completed phase III clinical trial for the
prevention of oral mucositis in cancer patients. This restructuring plan
reduced headcount by 26 employees in research and development and general and
administration, or 70% of the Companys workforce. In accordance with
provisions of EITF 94-3 and related interpretations, the Company recorded
restructuring charges of $848,000 for severance costs of which $784,000 were
paid as of December 31, 2002. The remaining severance accrual as of December
31, 2002 of $64,000 was paid in January 2003 to employees who left the Company
in December 2002. No other charges were expensed in 2003 as a result of the
restructuring plan.

Note 8. Reverse Stock Split

On April 3, 2003, the Companys stockholders
authorized a 1-for-12 reverse
stock split of all outstanding shares of the Companys common stock, which was
effected on April 10, 2003. All share and per share amounts have been
retroactively adjusted to reflect the stock split for all periods presented.

Note 9. Stockholders Equity

On May 1, 2003, in a private placement transaction, the
Company sold 350
shares of a newly created Series A convertible preferred stock (the Preferred
Stock), $0.001 par value, and issued warrants to purchase 920,699 shares of
common stock, resulting in net cash proceeds of $3.2 million. The primary
purpose of completing the private placement was to provide funds for a clinical
trial of iseganan HCl for the prevention of ventilator-associated pneumonia
(VAP), as well as for other general corporate purposes and working capital.

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The Preferred Stock is convertible into 1,841,404 shares of
common stock
at any time, at a conversion price of $1.90 per share, subject to adjustment
upon the occurrence of certain events, such as stock splits, payment of
dividends to common stockholders, reorganizations, mergers or consolidations.
Each share of Preferred Stock automatically converts into shares of common
stock on the tenth day after the day that the closing sale price of the
Companys common stock on the Nasdaq National Market has reached at least $8.28
and has remained at such level for 20 consecutive trading days, but only after
the earlier to occur of (1) the unblinding and the public announcement of the
results of the Companys first pivotal clinical trial of iseganan HCl for the
prevention of VAP, or (2) the second anniversary of the date the Preferred
Stock was first issued. The holders of Preferred Stock are also entitled to
receive, but only out of funds legally available for dividends, cumulative
dividends payable quarterly, at the annual rate of eight percent of the
original issue price of $10,000 on each outstanding share of Preferred Stock.
The dividend will be paid in common stock based on the average of the closing
sales prices of the common stock on the Nasdaq National Market for the five
trading days immediately preceding and ending on the last trading day prior to
the date the dividends are payable. The dividends are paid in preference to any
other declared dividends. Upon any liquidation, dissolution or winding up (as
such terms are defined in the Companys Certificate of Designation) of the
Company, before any distribution or payment can be made to the holders of the
Companys common stock, each holder of Preferred Stock is entitled to receive
an amount equal to $10,000 plus all accrued or declared and unpaid dividends.
Each share of Preferred Stock is entitled to a number of votes equal to the
number of shares of common stock issuable based upon a conversion price equal
to the closing bid price of the common stock on the Nasdaq National Market on
the date the Preferred Stock and Warrant Purchase Agreement was signed. The
number of votes is not adjustable except upon a stock split, a reverse stock
split, or other similar event affecting the rights of the Preferred Stock.
Holders of Preferred Stock are also entitled to elect two members of the Board
of Directors, and a majority of the holders of the Preferred Stock must consent
to certain actions prior to the Company taking them.

In connection with the sale of the Preferred Stock, the Company
issued
immediately exercisable warrants to purchase 920,699 shares of the Companys
common stock to the purchasers of the Preferred Stock, at an exercise price of
$2.07 per share, subject to adjustment upon the occurrence of certain events,
such as stock splits, payment of dividends to common stockholders,
reorganizations, mergers or consolidations. Additionally, the exercise price of
the warrants will be reduced by 50% if the Companys common stock is delisted
from the Nasdaq National Market. The warrants will expire on May 1, 2008, if
not previously exercised. The warrants issued to the holders of Preferred Stock
were assigned a value of $1,326,000, which decreased the carrying value of the
Preferred Stock. The warrants were valued using the Black-Scholes method with
the following assumptions: a risk-free interest rate of 2.52%; an expiration
date of May 1, 2008; volatility of 100% and a dividend yield of 0%. In
connection with the issuance of the Preferred Stock and warrants, the Company
recorded $1,418,000 related to the beneficial conversion feature on the
Preferred Stock as a deemed dividend, which increased the loss applicable to
common stockholders in the calculation of basic and diluted net loss per common
share. A beneficial conversion feature is present because the effective
conversion price of the Preferred Stock was less than the fair value of the
common stock on the commitment date. Pursuant to the terms of the Preferred
Stock and Warrant Purchase Agreement, the Company is subject to certain
negative and restrictive covenants, such as limitations on indebtedness and the
issuance of additional equity securities without specific approvals by the
Board of Directors. The Company is currently in compliance with each of the
covenants.

Note 10. Subsequent Events

On October 9, 2003, a holder of 25 shares of Preferred
Stock converted the
shares into 131,529 shares of common stock. On the same date, the same investor
exercised warrants to purchase 65,764 shares of common stock, using the net
exercise method, resulting in the issuance of 55,344 shares of common stock.
There were no cash proceeds to the Company resulting from these transactions.

On October 10, 2003, in a private placement transaction,
the Company sold
1,774,000 shares of newly issued common stock, $0.001 par value, and issued
warrants to purchase 354,800 shares of the Companys common stock, resulting in
net cash proceeds of approximately $18.4 million. Of these shares and warrants,
120,000 shares and 24,000 warrants were sold to an affiliate of a member of the
Companys Board of Directors. The primary purpose of completing the private
placement was to provide additional funding for the two pivotal trials of
iseganan HCl for the prevention of VAP, as well as for other general corporate
purposes and working capital.

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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 those set forth below under RISKS RELATED TO
OUR BUSINESS. The following discussion should be read in conjunction with the
financial statements and notes included elsewhere herein and in our 2002
audited financial statements and notes thereto included in our 2002 Annual
Report on Form 10-K/A, filed with the SEC on June 25, 2003. 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
currently focused on developing an oral solution of iseganan hydrochloride, or
iseganan HCl, for the prevention of ventilator-associated pneumonia, or VAP.
Iseganan HCl is an antimicrobial drug, or a drug capable of destroying
microorganisms, including bacteria and fungi, that cause disease, and is
effective against many drug-resistant, disease-causing bacteria and fungi. VAP
is a bacterial pneumonia that can develop in patients receiving mechanical
(artificial) ventilation and is the most common infection occurring in patients
in intensive care units.

In 2002, we were primarily developing iseganan HCl for the
prevention of
ulcerative oral mucositis, a complication that develops in cancer patients
receiving chemotherapy or radiation therapy that results in painful ulcer-like
sores in the mouth and throat. We were evaluating whether an infectious
component of oral mucositis could be prevented or reduced by this drug
candidate. We concluded two large studies, one in patients receiving radiation
therapy to the head and neck, and a second in patients undergoing aggressive
chemotherapy. In the radiation therapy study, there was no difference between
iseganan HCl and placebo, and in the chemotherapy study, differences in favor
of iseganan HCl were insufficient to achieve statistical significance. Iseganan
HCl appears to be safe when applied to the oral cavity. We are not pursuing
further development of iseganan HCl to prevent oral mucositis, and instead we
are now developing iseganan HCl to prevent VAP.

A phase I/IIa trial of iseganan HCl oral solution evaluating
safety and
antimicrobial activity in mechanically-ventilated patients was completed in
February 2001. A phase I/IIa trial attempts to obtain preliminary indicators of
safety and efficacy of a drug candidate in a smaller patient population. The
trial demonstrated that single doses of iseganan HCl reduced the level of
bacteria in the oral cavity by more than 100-fold compared to pre-treatment
baseline levels in patients who required mechanical ventilation. In this study,
we also selected the optimal formulation and dosage strength of iseganan HCl,
and demonstrated that administration every four hours progressively reduced the
level of bacteria in the oral cavity.

We have met with members of our Steering Committee and Data
Monitoring
Committee, which are comprised of doctors and statisticians who are experienced
in the care of mechanically-ventilated patients and/or the design of clinical
trials. Together, we designed a pivotal study to test the effectiveness of
iseganan HCl in preventing VAP. A pivotal study attempts to establish the
safety and efficacy of a drug candidate in an expanded patient population.

In September 2003, we reached a Special Protocol Assessment, or
SPA,
agreement with the FDA on the requirements for registration of iseganan HCl for
the prevention of VAP. Under our agreement with the FDA, we are required to
conduct two identical pivotal, randomized, double-blind, placebo-controlled,
multinational clinical trials. These pivotal trials are designed to assess the
safety and efficacy of iseganan HCl and to demonstrate iseganan HCls ability
to reduce the incidence of pneumonia in patients who are receiving mechanical
ventilation. In each trial, approximately 900 patients will be enrolled and
will be randomized to receive either iseganan HCl or placebo six times per day
for up to 14 days, while being mechanically ventilated. Enrollment in the first
pivotal trial commenced in September 2003, and we expect to announce its
results by the end of 2004. We cannot be certain that iseganan HCl will prove
to be safe or effective in the prevention of VAP, or will receive regulatory
approvals.

On October 10, 2003, we completed a private placement in
which we sold
shares of common stock and warrants to purchase common stock resulting in
aggregate net cash proceeds of approximately $18.4 million. The primary purpose
of the financing was to provide additional funding for the two pivotal trials
of iseganan HCl for the prevention of VAP, as well as for other general
corporate purposes and working capital. We expect that we will need to raise
additional funds in the future to complete these trials and to continue our
operations.

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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. The aggregate costs
incurred for the development of iseganan HCl for the prevention of VAP during
2000, 2001, 2002 and the first nine months of 2003, were approximately $5.0
million.

The Company has in the past ordered and received, and may in the
future
receive, significant quantities of iseganan HCl. The Companys policy is to
record any prepayments of such orders as Prepaid drug substance. Upon formal
acceptance by the Company of each delivery, the purchase price, including
prepaid amounts, is accounted for as a research and development expense. As a
result, the Company may at times hold a significant amount of iseganan HCl
inventory for which there is no net carrying value on the Companys balance
sheet. At September 30, 2003, the Company held over seven kilograms of finished
iseganan HCl drug substance and a significant amount of partially completed
iseganan HCl that has been charged to research and development expense in line
with this policy.

During 2002, we prepaid $2.4 million for an order of seven
kilograms of
iseganan HCl bulk drug substance that was expected to be delivered in the
second half of 2003. An additional $250,000 is payable when and if this order
is accepted by us. Our general practice is that when we accept the delivery of
the order, we expense the prepaid amount to research and development expense.
Although the product is not expected to be needed for clinical trials, it was
expected to be used by us to validate our manufacturing process. However, we
have not yet been satisfied that the lot was manufactured in accordance with a
validation plan or that related documentation will be adequate, and we are
currently discussing this with our contract manufacturer. Due to significant
uncertainty over the timing and outcome of these discussions, we have written
off the entire $2.4 million prepaid amount as of September 30, 2003. The
financial statements for the three- and nine-month periods ended September 30,
2003 reflect a corresponding research and development expense of $2.4 million.

In February 2003, the Board of Directors approved a cancellation
and
re-grant of 321,335 unexercised stock options held by existing employees and
directors of the Company. Upon election by the participants, all of the
unexercised stock options were cancelled and new stock options were granted in
a one-for-one exchange. The re-granted options have an exercise price equal to
the closing price of the Companys common stock on the Nasdaq National Market
on February 5, 2003, or $2.76 per share, post-split. The options vest over a
four-year period and will expire in February 2008 if not previously exercised.
Variable accounting is being applied to the re-granted options, starting from
the date of re-grant, and the related compensation expense may have a
significant impact on the Companys future results of operations. Compensation
expense of $285,000 and $309,000 was recorded for these options during the
three- and nine-month periods ended September 30, 2003, respectively.

On April 3, 2003, the Companys stockholders
authorized a 1-for-12 reverse
stock split of all outstanding shares of the Companys common stock, which was
effected on April 10, 2003. All share and per share amounts have been
retroactively adjusted to reflect the stock split for all periods presented.

Critical Accounting Policies

There have been no material changes to the Companys
critical accounting
policies, which are included and described in our Form 10-K/A, for the year
ended December 31, 2002 filed with the Securities and Exchange Commission on
June 25, 2003.

Results of Operations

Three- and Nine-Month Periods Ended September 30, 2003 and 2002

Research and Development

Research and development expenses were $3.6 million in the
three-month
period ended September 30, 2003, including a write-off of $2.4 million for
prepaid iseganan HC1 drug substance, compared to $4.0 million in the prior year
period, and $5.3 million and $17.4 million in the nine-month periods ended
September 30, 2003 and 2002, respectively. The lower amounts in 2003 are
primarily due to the lower cost of preparations for the first pivotal trial of
iseganan HC1 for the prevention of VAP compared to the cost of enrolling
patients for phase III oral mucositis trials in 2002.

Of the research and development expenses above,
$1.0 million and $2.9
million for the three-month periods ended September 30, 2003 and 2002,
respectively, and $2.1 million and $13.3 million for the nine-month periods
ended September 30, 2003 and 2002,

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respectively, were related to clinical trial activities performed by
clinical trial service providers. Other research and development expenses
primarily include research and development payroll expense, drug substance
expense, allocated facilities costs and non-cash stock compensation charges.
Non-cash stock compensation charges were $20,000 and $56,000 for the
three-month periods ended September 30, 2003 and 2002, respectively, and
$23,000 and $651,000 for the nine-month periods ended September 30, 2003 and
2002, respectively. The decrease between periods is primarily due to the
cancellation of options for terminated employees and consultants.

We expect research and development expense, excluding the
write-off of the
$2.4 million prepaid for iseganan HC1, to increase significantly as patients
are enrolled in the first pivotal trial of iseganan HCl for the prevention of
VAP.

General and Administrative

General and administrative expenses were $1.1 million and
$2.4 million in
the three-month periods ended September 30, 2003 and 2002, respectively, and
$3.8 million and $6.3 million in the nine-month periods ended September 30,
2003 and 2002 respectively. The decreases in general and administrative expense
in both periods are a result of reduced headcount, decreased outside service
costs, decreased facility-related costs such as depreciation and rent, and an
overall decrease in other general operating expenses.

General and administrative costs primarily include
administrative payroll
expense, outside contractors, legal and accounting fees, insurance, non-cash
stock compensation charges, facilities, supplies and other general
administrative expenses. Non-cash stock compensation charges were $362,000 and
$120,000 for the three-month periods ended September 30, 2003 and 2002,
respectively, and $498,000 and $816,000 for the nine-month periods ended
September 30, 2003 and 2002, respectively. The increase between the three-month
periods is primarily due to stock compensation charges for variable accounting
of options that were cancelled and re-granted in February 2003. The decrease
between the nine-month periods is primarily due to the cancellation of options
for terminated employees and consultants.

Arbitration Settlement

During the nine-month period ended September 30, 2002, we
received $3.6
million from a contract vendor as a result of an arbitration settlement
relating to a drug dispensing error in iseganan HCl oral solution phase III
clinical trials. We had no comparable item in the same period of 2003.

Restructuring and Other Charges

There were no expenses recorded for restructuring during the
three- and
nine-month periods ended September 30, 2003, compared to $5.1 million and $5.2
million for the same periods in 2002, respectively. The decrease in
restructuring and other charges was due to the fact that there were no
restructurings during the first nine-months of 2003.

Interest Income and Interest Expense

Interest income was $28,000 and $143,000 in the three-month
periods ended
September 30, 2003 and 2002, respectively, and $99,000 and $623,000 in the
nine-month periods ended September 30, 2003 and 2002, respectively. The
decrease in interest income resulted from the decrease in average interest
earning investment balances as well as lower interest rates in 2003 relative to
the comparable prior year periods. Interest expense decreased to zero for the
three- and nine-month periods ended September 30, 2003, from $131,000 and
$397,000 for the same periods in 2002, respectively. The decrease in interest
expense is attributed to the repayment of our line of credit and bank loan in
October 2002.

Other Income

In May 2002, we 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 stock of Micrologix, and recognized other income
of $200,000 and $975,000 in the three- and nine-month periods ended September
30, 2002, respectively. We had no comparable items for the same periods in
2003. The Micrologix 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 as follows: (1) shares
converted into common stock with a value of $400,000 upon the four month
anniversary of the effective date of the agreement; (2) shares will convert
into common stock with a value of $100,000 upon commencement of certain
toxicology studies; and (3) shares will convert into common stock with a value
of $250,000 upon filing for marketing approval for certain drugs in certain
countries. During the quarter ended September 30,

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2002, $200,000 of other income was recognized in connection with the
redemption of 400,000 shares of Series A preferred stock of Micrologix at $1
per share, which was triggered by the first milestone set forth above.

Net Loss and Net Loss Applicable to Common Stockholders

Net loss was $4.7 million in the three-month period ended
September 30,
2003, compared to $11.3 million in the prior year period, and $9.0 million and
$24.1 million in the nine-month periods ended September 30, 2003 and 2002,
respectively. Net loss applicable to common stockholders was $4.8 million and
$10.5 million for the three- and nine-month periods ended September 30, 2003,
respectively, and included the impact of a non-cash deemed dividend related to
a beneficial conversion feature on our Series A preferred stock of $1.4 million
in the nine-month period ended September 30, 2003, and Series A preferred stock
dividends of $70,000 and $117,000 in the three- and nine-month periods ended
September 30, 2003, respectively. A beneficial conversion feature is present
because the effective conversion price of the preferred stock was less than the
fair value of the common stock on the commitment date. Preferred stock
dividends represent the accrual of the 8% annual dividends payable quarterly to
the holders of our Series A preferred stock in the form of our common stock.
Net loss applicable to common stockholders was the same as net loss for the
three- and nine-month periods ended September 30, 2002.

Liquidity and Capital Resources

Cash, cash equivalents, short-term investments and restricted
cash were
$10.3 million as of September 30, 2003, compared to $13.3 million as of
December 31, 2002. At September 30, 2003, we had restricted cash deposits of
$250,000 in connection with a standby letter of credit issued to a contract
manufacturer in relation to an order of iseganan HC1. We had no debt
outstanding as of September 30, 2003. We currently invest excess funds in
short-term money market funds.

Net cash used in operating activities for the nine-month periods
ended
September 30, 2003 and 2002 was $6.2 million and $18.7 million, respectively.
Our cash used for operating activities in each period consisted primarily of
the net loss for each period, adjustments for non-cash items and changes in
prepaid expenses and accrued liabilities. Non-cash items consisted primarily of
stock-related compensation expenses, and in 2002, non-cash income of $975,000
related to the gain on the sale of the two pre-clinical programs to Micrologix.

Net cash provided by investing activities for the nine-month
periods ended
September 30, 2003 and 2002 was $2.9 million and $441,000, respectively. The
cash provided in 2003 related to the maturity of short-term investments of $2.9
million, and in 2002 primarily related to the proceeds from the sale of the two
pre-clinical programs to Micrologix of $400,000.

Net cash provided by financing activities for the nine-month
periods ended
September 30, 2003 and 2002 was $3.2 million and $18.1 million, respectively.
The cash provided in 2003 related to the private placement transaction in May
2003, in which the Company sold 350 shares of a newly created Series A
convertible preferred stock and issued warrants to purchase 920,699 shares of
common stock, resulting in net cash proceeds of $3.2 million.

The Preferred Stock is convertible into 1,841,404 shares of
common stock
at any time, at a conversion price of $1.90 per share, subject to adjustment
upon the occurrence of certain events, such as stock splits, payment of
dividends to common stockholders, reorganizations, mergers or consolidations.
The shares of Preferred Stock carry with them certain rights and privileges as
set forth in the Companys Certificate of Designation and the Preferred Stock
and Warrant Purchase Agreements governing the sale of the Preferred Stock and
the issuance of the warrants. Each share of Preferred Stock automatically
converts into shares of common stock on the tenth day after the day that the
closing sale price of the Companys common stock on the Nasdaq National Market
has reached at least $8.28 and has remained at such level for 20 consecutive
trading days, but only after the earlier to occur of (1) the unblinding and the
public announcement of the results of the Companys first pivotal clinical
trial of iseganan HCl for the prevention of VAP, or (2) the second anniversary
of the date the Preferred Stock was first issued. The holders of Preferred
Stock are also entitled to receive cumulative dividends payable quarterly, at
the annual rate of eight percent of the original issue price of $10,000 on each
outstanding share of Preferred Stock. The dividend will be paid in common stock
based on the average of the closing sales prices of the common stock on the
Nasdaq National Market for the five trading days immediately preceding and
ending on the last trading day prior to the date the dividends are payable. The
dividends are paid in preference to any other declared dividends. Upon any
liquidation, dissolution or winding up (as such terms are defined in the
Companys Certificate of Designation) of the Company, before any distribution
or payment can be made to the holders of the Companys common stock, each
holder of Preferred Stock is entitled to receive an amount equal to $10,000
plus all accrued or declared and unpaid dividends. Each share of Preferred
Stock is entitled to a number of votes equal to the number of shares of common
stock issuable based upon a conversion price equal to the closing bid price of
the common stock on the Nasdaq National Market on the date the Preferred Stock
and Warrant Purchase Agreement was signed. The number of

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votes is not adjustable except upon a stock split, a reverse stock split,
or other similar event affecting the rights of the Preferred Stock. Holders of
Preferred Stock are also entitled to elect two members of the Board of
Directors, and a majority of the holders of the Preferred Stock must consent to
certain actions prior to the Company taking them.

In connection with the sale of the Preferred Stock, the Company
issued
immediately exercisable warrants to purchase 920,699 shares of the Companys
common stock to the purchasers of the Preferred Stock, at an exercise price of
$2.07 per share, subject to adjustment upon the occurrence of certain events,
such as stock splits, payment of dividends to common stockholders,
reorganizations, mergers or consolidations. Additionally, the exercise price of
the warrants will be reduced by 50% if the Companys common stock is delisted
from the Nasdaq National Market. The warrants will expire on May 1, 2008 if not
previously exercised. Pursuant to the terms of the Preferred Stock and Warrant
Purchase Agreement, the Company is subject to certain negative and restrictive
covenants, such as limitations on indebtedness and the issuance of additional
equity securities without specific Board approvals. The Company is currently in
compliance with each of the covenants.

Cash provided by financing activities for the nine-month period
ended
September 30, 2002 was primarily from net proceeds of $13.9 million and $5.0
million from two private placements of common stock, partially offset by $1.4
million in payments on financing obligations to a bank.

The following are future contractual commitments at
September 30, 2003,
(in thousands):

|                              |  |                        |     |      |  |      |     |      |  |      |    |      |  |   |    |  |  |   |    |  |  |   |    | 
|----------------------------- |  | ---------------------- | --- | ---- |  | ---- | --- | ---- |  | ---- | -- | ---- |  | - | -- |  |  | - | -- |  |  | - | -- | 
|                              |  | Payments Due by Period
|                              |  |                       
|Contractual Commitments       |  | Total                  |     | 2003 |  | 2004 |     | 2005 |  | 2006 |    | 2007
|                              |  |                        |     |      |  |      |     |      |  |      |    |     
|Drug substance                |  | $                      | 463 |      |  | $    | 263 |      |  | $    | 50 |      |  | $ | 50 |  |  | $ | 50 |  |  | $ | 50 | 
|Operating leases              |  |                        | 68  |      |  |      | 25  |      |  |      | 43 |      |  |   |   |  |  |   |   |  |  |   |   | 
|                              |  |                        |     |      |  |      |     |      |  |      |    |      |  |   |    |  |  |   |    |  |  |   |    | 
|Total contractual commitments |  | $                      | 531 |      |  | $    | 288 |      |  | $    | 93 |      |  | $ | 50 |  |  | $ | 50 |  |  | $ | 50 | 
|                              |  |                        |     |      |  |      |     |      |  |      |    |      |  |   |    |  |  |   |    |  |  |   |    | 

The $463,000 drug substance amount represents total commitments
to the
same contract manufacturer to which we prepaid $2.4 million for an order of
seven kilograms of iseganan HCl bulk drug substance. In 2003, the commitment
represents the potential payment of $250,000 upon acceptance of this order,
when and if this occurs, and a $12,500 fee for storage of iseganan HC1. The
remaining $200,000 represents storage fees for iseganan HC1 in future periods.

Operating leases relate to the lease for our facility in Palo
Alto,
California, which expires in June 2004. Under the terms of the lease we have
committed to pay an aggregate amount of $84,000 and $43,000 in 2003 and 2004,
respectively.

We expect to continue to incur substantial operating losses. We
currently
anticipate our cash, cash equivalents and investments, including approximately
$18.4 million in net proceeds from the private placement completed on October
10, 2003, to be sufficient to fund operations for at least the next 12 months.
We expect that we will need to raise additional funds in the future to complete
our pivotal trials and to continue operations.

This forecast is a forward-looking statement that involves risks
and
uncertainties, and actual results could vary. Our future capital requirements
will depend on many factors, including:



| |  |  | the timing, delay, cost, extent and results of clinical
trials;              
| | - |  | -----------------------------------------------------------------------------
|
| |  |  | future opportunities for raising capital;                                    
|
| |  |  | payments to third parties for manufacturing scale up;                        
|
| |  |  | the costs and timing of regulatory approvals;                                
|
| |  |  | the costs of establishing sales, marketing and distribution
capabilities; and
|
| |  |  | the progress of our development activities.                                  

Until we can generate sufficient cash from our operations, which we do not
expect for the foreseeable future, we expect to finance

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future cash needs
through private and public financings, including equity financings. We cannot
be certain that additional funding will be available when needed or on
favorable terms. If additional funding is not available, we may need to delay
or curtail our
development and clinical trial activities to a significant extent, or we may be
forced to cease operations.

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Risks Related to Our Business

Our business faces significant risks. In evaluating our
business you
should carefully consider the risks described below. 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 we have
incurred
significant net losses in each year since inception. We incurred net loss
applicable to common stockholders of $34.5 million in 2002 and $10.5 million in
the nine-month period ended September 30, 2003. As of September 30, 2003, our
accumulated deficit was approximately $210.8 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, and
our initial public offering of common stock in March 2000. 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 iseganan
HCl for our currently planned VAP indication or other indications, or in
acquiring or licensing other products.

We depend on the outcome of our clinical trials of iseganan HCl for the
prevention of VAP and any future clinical trials of iseganan HCl for other
indications, or for products that we may license or acquire. If these trials
are unsuccessful, we will not be able to commercialize any products and may be
forced to cease operations.

We currently have only one product candidate, iseganan HCl. In
2002, we
completed two Phase III clinical trials of iseganan HCl for the prevention of
ulcerative oral mucositis, a complication that develops in certain cancer
patients receiving chemotherapy or radiation therapy that results in painful
ulcer-like sores in the mouth and throat. Both of these clinical trials failed
to meet their primary endpoints and we are no longer pursuing iseganan HCl for
the prevention of ulcerative oral mucositis. We are currently pursuing
iseganan HCl for the prevention of VAP. In September 2003, we reached an SPA
agreement with the FDA on the design of our pivotal trials to be conducted in
support of registration of iseganan HCl for the prevention of VAP. However,
the SPA agreement does not guarantee that we will receive approval from the
FDA. Enrollment in the first pivotal trial commenced in September 2003, and we
expect to announce its results by the end of 2004. If this pivotal trial fails
to meet its primary endpoint, and we do not acquire or license any additional
product candidates, we may not be able to commercialize any products and we may
be forced to cease operations.

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.

For the year ended December 31, 2002 and the nine-month
period ended
September 30, 2003, net cash used for operating activities was $26.3 million
and $6.2 million, respectively. At September 30, 2003, our cash and cash
equivalents, including short-term investments, were $10.3 million, which
included restricted cash of $250,000. On October 10, 2003, we completed a
private placement in which we sold shares of common stock and warrants to
purchase common stock resulting in aggregate net cash proceeds of approximately
$18.4 million.

Our future liquidity and capital requirements will depend on
many factors,
including the timing, cost, and progress of our current VAP trial, the rate of
patient enrollment, our evaluation of, and decisions with respect to, our
strategic alternatives, costs associated with the regulatory approvals,
securing in-licensing opportunities, purchasing additional products or drug
candidates and conducting pre-clinical research and clinical development of
those drug candidates.

We expect that we will need to raise additional funds in the
future to
complete the pivotal trials of iseganan HCl for the prevention of VAP, and we
believe that additional financing will be required in the future to fund our
operations, conduct any other possible trials of iseganan HC1, or commercialize
our current and any future product 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 development efforts or any product acquisitions or be
forced to cease operations.

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If we raise additional capital by issuing securities or through collaboration
and licensing arrangements, our existing stockholders may experience dilution
or we may be required to relinquish rights to our technologies or product
candidates.

We may raise additional financing through public or private
equity
offerings, debt financings or additional corporate collaboration and licensing
arrangements. To the extent we raise additional capital by issuing equity
securities, our stockholders may experience dilution. To the extent that we
raise additional funds through collaboration and licensing arrangements, it may
be necessary to relinquish some rights to our technologies or product
candidates, or grant licenses on terms that are not favorable to us.

We are dependent on a third party contract manufacturer for the future
production of iseganan HCl and for producing information required to register
iseganan HCl with the FDA if our trials are successful. If our manufacturing
partner fails to manufacture iseganan HCl in accordance with set specifications
or fails to produce the necessary information, our operations could be
adversely affected.

During 2002, we prepaid $2.4 million for an order of seven
kilograms of
iseganan HCl bulk drug substance that was expected to be delivered in the
second half of 2003. An additional $250,000 is payable when and if this order
is accepted by us. We currently have recorded restricted cash of $250,000 on
our balance sheet in relation to the payable. Our general practice is that
when we accept the delivery of the order, we expense the prepaid amount to
research and development expense. Although the product is not expected to be
needed for clinical trials, it is expected to be used by us to validate our
manufacturing process. However, we have not yet been satisfied that the lot
was manufactured in accordance with a validation plan or that related
documentation will be adequate, and we are currently discussing this with our
contract manufacturer. Due to significant uncertainty over the timing and
outcome of these discussions, we have written off the entire $2.4 million
prepaid amount as of September 30, 2003. The financial statements for the
quarter ended September 30, 2003 reflect a corresponding research and
development expense of $2.4 million.

We have relied on a single contract manufacturer to manufacture
the
iseganan HCl bulk drug substance for our pivotal clinical trials. We currently
maintain a sufficient inventory of iseganan HCl to complete planned clinical
trials. However, we currently depend on this manufacturer to produce iseganan
HCl and information required for FDA registration. In addition, we will depend
on this manufacturer in the future to produce iseganan HCl for future
commercial use if our pivotal trials are successful. If this manufacturer is
unable to validate the manufacturing process, both producing iseganan HCl and
the required information for registration and commercial use on a timely basis
in accordance with set specifications, and we experience similar
issues to those experienced on the current order, we may not have sufficient quantities of
iseganan HCl and sufficient information to meet registration requirements or
for future commercial use.

If our contract research organizations assisting in our clinical trials fail to
appropriately manage our clinical trials, the trials could be delayed or could
fail.

We rely on contract research organizations to assist us in
managing and
monitoring our clinical trial. We have entered into agreements with Amarex,
LLC, Orion Clinical Services, Ltd and Advanced Clinical Trials, Inc., among
others, to provide clinical research services. The FDA may inspect some of our
clinical investigational sites, our contract research organizations records
and our facility and files to determine if the clinical trial is conducted
according to good clinical practices. If the FDA determines that the trial is
not in compliance with good clinical practices, we may be required to repeat
the clinical trial. If our contract research organizations fail to perform
under our agreements with them, we may face delays in completing our clinical
trial or failure of our clinical program.

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 approved for sale in the United States or
any
foreign market. We must obtain approval from the FDA in order to sell iseganan
HCl or any future drug candidate in the United States and from foreign
regulatory authorities in order to sell iseganan HCl or any future 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 any competitive advantage we may have; and                     

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| |  | 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. A number of new drugs for
certain indications, iseganan HCl for the prevention of oral mucositis
included, have shown promising results in early 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. We have limited experience in obtaining such approvals, and
cannot be certain when, if ever, we will receive these regulatory approvals.
If we are unable to demonstrate the safety and efficacy of our drug candidate,
we will be unable to obtain the required regulatory approvals and we will be
unable to commercialize the drug candidate and generate product revenue.

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 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.

We are not aware of any products that compete with iseganan HCl
for the
prevention of VAP. However, pharmaceutical companies and biotechnology
companies may develop products in the future that compete with iseganan HCl for
the prevention of VAP. Many of these companies have substantially greater
experience, financial resources and larger research and development staffs than
we do. In addition, many of these companies, 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 expect 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 United States. 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

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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 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 because of 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 drug candidate that we develop, acquire or license
may not gain
market acceptance among physicians, patients and the medical community. If any
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, in particular
with iseganan HCls anticipated application for the prevention
of VAP;
| 
| |  | 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. For
example, physicians may be reluctant to prescribe widespread use of our product
because of concern about developing bacterial strains that are resistant to our
drugs, or because of the cost of our drug.

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 or technical staff, we may be unable to successfully complete
our planned clinical trials for VAP. In particular, the loss of the services of
Henry J. Fuchs, our President and Chief Executive Officer, or Steven Ketchum,
our Vice President, Regulatory Affairs, could significantly impede our research
and development efforts, our relations with potential collaborators and
completion of our planned clinical trials for VAP. We do not have employment
agreements with Mr. Fuchs or Mr. Ketchum. We do not maintain key person life
insurance and do not have employment agreements with our other members of
management and technical staff. In October 2002, we completed a restructuring
that included a reduction in force of approximately 70% of our workforce. As of
September 30, 2003, we had nine full-time employees. In order to pursue any
future product

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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 these 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
beneficially own approximately 55% of our capital stock and may be able to
exert control over our activities.

As of October 10, 2003, our directors, executive officers,
principal
stockholders and affiliated entities beneficially own, in the aggregate,
approximately 55% of our outstanding common stock. These stockholders, if
acting together, will be able to control the outcome of any matter requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions.

Anti-takeover 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.

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. After
accounting for the effect of our 1-for-12 reverse stock split on April 10,
2003, during 2002 our closing stock prices ranged from a low of $3.24 to a high
of $57.60, and ranged from a low of $1.71 to a high of $14.00 during the
nine-month period ended September 30, 2003. 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;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | publicity regarding actual or perceived adverse events in our clinical trial or relating
to products under development by
us or our competitors;      
| 
| |  | announcements of technological innovations or new commercial products by our competitors
or us;                                                       

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| |  | developments concerning proprietary rights;                                                     
|- |  | ------------------------------------------------------------------------------------------------
| 
| |  | 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.

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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 while at the same time
maximizing the income we receive from our investments without significantly
increasing risk. As of September 30, 2003, all of our funds were held in bank
accounts and a money market fund, which are minimally sensitive to 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, 2003. 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

(a) Evaluation of disclosure controls and procedures

Based on their evaluation as of the end of the period covered by
this
report, our principal executive officer and principal financial officer have
concluded that IntraBiotics disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended, were sufficiently effective to ensure that the information required to
be disclosed by IntraBiotics in this quarterly report on Form 10-Q was
adequately recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and Form 10-Q.

(b)  Changes in internal controls

There have been no changes in our internal control over
financial
reporting during the quarter ended September 30, 2003 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

A control system, no matter how well conceived and operated, can
provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Because of inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues,
if any, within a company have been detected.

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PART II. OTHER INFORMATION




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) List of Exhibits

|       |  |                                                                                                                                                                                                                                      |  |  |  | 
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  | 
|Number |  |                                                                                                                                                                                                                                      |  |  |  | 
|       |  |                                                                                                                                                                                                                                      |  |  |  | 
|3.1    |  | Amended and Restated Certificate of Incorporation.(1)                                                                                                                                                                               
|       |  |                                                                                                                                                                                                                                     
|3.2    |  | Bylaws.(2)                                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                     
|3.3    |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation filed
with the Delaware Secretary of State on April 10, 2003.                                                                                         
|       |  |                                                                                                                                                                                                                                     
|3.4    |  | Certificate of Designation filed with the Delaware Secretary of State on May 1, 2003.                                                                                                                                               
|       |  |                                                                                                                                                                                                                                     
|4.1    |  | Amended and Restated Investor Rights Agreement dated October 15, 1999.(2)                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                     
|4.2    |  | Form of Stock Purchase Agreement by and between the Company and each selling
stockholder, dated January 29, 2002.(3)                                                                                                                
|       |  |                                                                                                                                                                                                                                     
|4.3    |  | Form of Preferred Stock and Warrant Purchase Agreement, dated February 5, 2003, as
amended on February 11, 2003.(4)                                                                                                                 
|       |  |                                                                                                                                                                                                                                     
|4.4    |  | Form of Second Amendment to Preferred Stock and Warrant Purchase Agreement of
February 5, 2003, dated April 10, 2003.(5)                                                                                                            
|       |  |                                                                                                                                                                                                                                     
|4.5    |  | Form of Warrant issued by the Company pursuant to Preferred Stock and Warrant
Purchase Agreement of February 5, 2003, as amended of February 11, 2003 and April
10, 2003.(5)                                                        
|       |  |                                                                                                                                                                                                                                     
|4.6    |  | Form of Common Stock and Warrant Purchase Agreement, dated October 6, 2003. (6)                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                     
|4.7    |  | Form of Warrant issued by the Company pursuant to the Common Stock and Warrant
Purchase Agreement of October 6, 2003. (6)                                                                                                           
|       |  |                                                                                                                                                                                                                                     
|31.1   |  | Certification required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                     
|31.2   |  | Certification required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                     
|32.1   |  | Certification by the Chief Executive Officer and the Chief Financial Officer of the
Company, as required by Rule 13a14(b) or Rule 15d-14(b) and Section 1350 of Chapter
63 of Title 18 of the United States. Code (18 U.S.C. 1350).



|(1) |  | Incorporated by reference to exhibit to our Form 10-K (File No.
000-29993) filed with the Securities and Exchange Commission on March 31,
2003.                                                              
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference to exhibit to our Registration Statement on
Form S-1 (File No. 333-95461) initially filed with the Securities and
Exchange Commission on January 27, 2000, as subsequently amended.
|   
|(3) |  | Incorporated by reference to exhibit to our Registration Statement on
Form S-3 (File No. 333-82934) filed with the Securities and Exchange
Commission on February 15, 2002.                                  
|   
|(4) |  | Incorporated by reference to Appendix B to the Definitive Proxy Statement
for the Special Meeting of Stockholders (File No. 000-29993) filed with
the Securities and Exchange Commission on March 3, 2003.   
|   
|(5) |  | Incorporated by reference to exhibit to our Form 10-Q (File No.
000-29993) filed with the Securities and Exchange Commission on May 14,
2003.                                                                
|   
|(6) |  | Incorporated by reference to exhibit to our Form 8-K (File No. 000-29993)
filed with SEC on October 9, 2003.                                                                                                 

(b)  Reports on Form 8-K

We furnished a report on Form 8-K, dated August 14,
2003, announcing the
dissemination of a press release announcing certain financial results for the
quarter ended June 30, 2003 and filed a report on Form 8-K, dated September 19,
2003, announcing the dissemination of a press release announcing our Special
Protocol Assessment agreement with the FDA.

23



---



##### 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.   
|                  |  |                                      
|                  |  | /s/ Henry J. Fuchs                   
|                  |  |                                      
|November 12, 2003 |  | Henry J. Fuchs, M.D.                 
|                  |  | President and Chief Executive Officer
|                  |  |                                      
|                  |  | /s/ Eric H. Bjerkholt                
|                  |  |                                      
|November 12, 2003 |  | Eric H. Bjerkholt                    
|                  |  | Chief Financial Officer              

24



---



##### Table of Contents






EXHIBIT INDEX

|       |  |                                                                                                                                                                                                                                      |  |  |  | 
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  | 
|Number |  |                                                                                                                                                                                                                                      |  |  |  | 
|       |  |                                                                                                                                                                                                                                      |  |  |  | 
|3.1    |  | Amended and Restated Certificate of Incorporation.(1)                                                                                                                                                                               
|       |  |                                                                                                                                                                                                                                     
|3.2    |  | Bylaws.(2)                                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                     
|3.3    |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation filed
with the Delaware Secretary of State on April 10, 2003.                                                                                         
|       |  |                                                                                                                                                                                                                                     
|3.4    |  | Certificate of Designation filed with the Delaware Secretary of State on May 1, 2003.                                                                                                                                               
|       |  |                                                                                                                                                                                                                                     
|4.1    |  | Amended and Restated Investor Rights Agreement dated October 15, 1999.(2)                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                     
|4.2    |  | Form of Stock Purchase Agreement by and between the Company and each selling
stockholder, dated January 29, 2002.(3)                                                                                                                
|       |  |                                                                                                                                                                                                                                     
|4.3    |  | Form of Preferred Stock and Warrant Purchase Agreement, dated February 5, 2003, as
amended on February 11, 2003.(4)                                                                                                                 
|       |  |                                                                                                                                                                                                                                     
|4.4    |  | Form of Second Amendment to Preferred Stock and Warrant Purchase Agreement of
February 5, 2003, dated April 10, 2003.(5)                                                                                                            
|       |  |                                                                                                                                                                                                                                     
|4.5    |  | Form of Warrant issued by the Company pursuant to Preferred Stock and Warrant
Purchase Agreement of February 5, 2003, as amended of February 11, 2003 and April
10, 2003.(5)                                                        
|       |  |                                                                                                                                                                                                                                     
|4.6    |  | Form of Common Stock and Warrant Purchase Agreement, dated October 6, 2003.(6)                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                     
|4.7    |  | Form of Warrant issued by the Company pursuant to the Common Stock and Warrant
Purchase Agreement of October 6, 2003.(6)                                                                                                            
|       |  |                                                                                                                                                                                                                                     
|31.1   |  | Certification required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                     
|31.2   |  | Certification required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                     
|32.1   |  | Certification by the Chief Executive Officer and the Chief Financial Officer of the
Company, as required by Rule 13a14(b) or Rule 15d-14(b) and Section 1350 of Chapter
63 of Title 18 of the United States. Code (18 U.S.C. 1350).



|(1) |  | Incorporated by reference to exhibit to our Form 10-K (File No.
000-29993) filed with the Securities and Exchange Commission on March 31,
2003.                                                              
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference to exhibit to our Registration Statement on
Form S-1 (File No. 333-95461) initially filed with the Securities and
Exchange Commission on January 27, 2000, as subsequently amended.
|   
|(3) |  | Incorporated by reference to exhibit to our Registration Statement on
Form S-3 (File No. 333-82934) filed with the Securities and Exchange
Commission on February 15, 2002.                                  
|   
|(4) |  | Incorporated by reference to Appendix B to the Definitive Proxy Statement
for the Special Meeting of Stockholders (File No. 000-29993) filed with
the Securities and Exchange Commission on March 3, 2003.   
|   
|(5) |  | Incorporated by reference to our Form 10-Q (File No. 000-29993) filed
with the Securities and Exchange Commission on May 14, 2003.                                                                           
|   
|(6) |  | Incorporated by reference to exhibit to our Form 8-K (File No.
000-29993) filed with SEC on October 9, 2003.                                                                                                 

25