<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

(Mark One)
   [ x ]  Annual Report Pursuant to Section 13 or 15(d) of the Securities
   Exchange Act of 1934
                  For the Fiscal Year Ended December 31, 2001

                                      or

   [  ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
   Exchange Act of 1934
                        Commission File Number: 0-19171

                               ICOS CORPORATION
            (Exact name of registrant as specified in its charter)

                 Delaware (State of        91-1463450 (I.R.S.
                   incorporation)        Employer Identification
                                                  No.)

                            22021-20th Avenue S.E.
                           Bothell, Washington 98021
                                (425) 485-1900
  (Address, including zip code, and telephone number, including area code, of
                         principal executive offices)

       Securities registered pursuant to Section 12(b) of the Act: None
          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $.01 par value

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

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

State the aggregate market value of voting and non-voting stock held by
non-affiliates of the registrant as of January 31, 2002.

                                $2,338,760,546
   Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock as of January 31, 2002.

                   Title of Class           Number of Shares
                   --------------           ----------------
               Common Stock, $.01 par
                         value                 59,967,161

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement for the annual meeting
of stockholders to be held on May 17, 2002, relating to "Security Ownership of
Certain Beneficial Owners and Management," "Election of Directors," "Continuing
Class 1 Directors (until 2003)," "Continuing Class 2 Directors (until 2004),"
"Other Executive Officers," "Compensation of Directors," "Executive
Compensation," "2001 Option Grants," "2001 Option Exercises and Year-end Option
Values," "Compensation Committee Interlocks and Insider Participation,"
"Employment Contracts, Termination of Employment and Change of Control
Arrangements," and "Section 16(a) Beneficial Ownership Reporting Compliance"
are incorporated by reference in Part III of this Form 10-K.

<PAGE>

                               ICOS CORPORATION

                               TABLE OF CONTENTS

<TABLE>
<C>          <S>                                                                                   <C>
Part I
   Item 1.   Business                                                                               3
   Item 2.   Properties                                                                            26
   Item 3.   Legal Proceedings                                                                     26
   Item 4.   Submission of Matters to a Vote of Security Holders                                   26

Part II
   Item 5.   Market for the Registrant's Common Equity and Related Stockholder Matters             27
   Item 6.   Selected Consolidated Financial Data                                                  28
   Item 7.   Management's Discussion and Analysis of Results of Operations and Financial Condition 29
   Item 7A.  Quantitative and Qualitative Disclosure about Market Risk                             35
   Item 8.   Consolidated Financial Statements and Supplementary Data                              36
   Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   *

Part III
   Item 10.  Directors and Executive Officers of the Registrant                                    55
   Item 11.  Executive Compensation                                                                55
   Item 12.  Security Ownership of Certain Beneficial Owners and Management                        55
   Item 13.  Certain Relationships and Related Transactions                                         *

Part IV
   Item 14.  Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K         56
</TABLE>

* Not Applicable

                                      2

<PAGE>

                                    PART I

Item 1.  Business

Overview

ICOS is a product-driven company that has expertise in both protein-based and
small molecule therapeutics. We combine our capabilities in molecular, cellular
and structural biology, high throughput drug screening, medicinal chemistry and
gene expression profiling to develop highly innovative products with
significant commercial potential. We apply our integrated approach to erectile
dysfunction and other urologic disorders, sepsis, pulmonary arterial
hypertension and other cardiovascular diseases, and inflammatory diseases. We
believe our strategy of targeting multiple therapeutic areas with drugs that
act through distinct molecular mechanisms increases our chances of successfully
developing commercial products.

We have established collaborations with pharmaceutical and biotechnology
companies to enhance our internal development capabilities and to offset a
substantial portion of the financial risk of developing our product candidates.
At the same time, we maintain substantial rights to the product candidates
covered by these collaborations, which provide us the opportunity to
participate in a significant portion of the potential economic benefit from
successful development and commercialization. Our most significant
collaboration partners include Eli Lilly and Company, Suntory Limited, Texas
Biotechnology Corporation and Biogen, Inc.

We and our collaboration partners have the following product candidates in
development:

   . Cialis(TM) (tadalafil) has completed registrational Phase 3 clinical
     trials and, on June 28, 2001, Lilly ICOS, a joint venture entity we
     established with Eli Lilly in 1998 for the development of Cialis,
     submitted both a U.S. New Drug Application ("NDA") and a European Market
     Authorization Application seeking marketing approval of Cialis for the
     treatment of erectile dysfunction. To date, we have initiated over 60
     Phase 1, 2 and 3 clinical trials evaluating Cialis for the treatment of
     erectile dysfunction. Efficacy studies demonstrated that, relative to
     placebo, Cialis both improved the patient's ability to attain and maintain
     an erection sufficient for sexual intercourse and significantly increased
     the percentage of successful sexual attempts. The most frequently reported
     side effects in these studies were headache, indigestion, backache and
     muscle ache. Most of these side effects were mild to moderate in
     intensity, and the frequency of reports decreased with continued
     treatment. Additionally, analysis of diary data from the Phase 3 clinical
     trials indicate that, relative to placebo, Cialis increased the number of
     successful sexual intercourse attempts out to 24 hours post-dose. Also, in
     a separate study, relative to placebo, Cialis was shown to significantly
     increase the number of successful sexual intercourse attempts as early as
     16 minutes post-dose in some men. Tadalafil also is in Phase 2 clinical
     trials for the treatment of female sexual dysfunction.

   . Pafase(R) (rPAF-AH) began a pivotal multinational Phase 3 clinical trial
     in the second quarter of 2001, which is designed to enroll up to 2,500
     patients from approximately 150 investigative sites. Pafase is currently
     being developed by Suncos, a joint venture entity we established with
     Suntory in 1997, for the treatment of severe sepsis. In 2000, we announced
     favorable results of a Phase 2 clinical trial evaluating the safety and
     efficacy of Pafase in 240 patients with either severe sepsis or multiple
     traumatic injuries who were at risk of developing acute respiratory
     distress syndrome. These Phase 2 results were used to design our Phase 3
     clinical trial using a primary endpoint of reduction of 28-day all-cause
     mortality in patients with severe sepsis.

   . Sitaxsentan began a Phase 2b/3 clinical trial for the treatment of
     pulmonary arterial hypertension in the second quarter of 2001. Sitaxsentan
     is currently being developed by ICOS-Texas Biotechnology, a limited
     partnership we formed with Texas Biotechnology in 2000 for the development
     of endothelin receptor antagonists, including sitaxsentan and TBC3711.
     Analysis of patient data from an open-label Phase 2a clinical trial
     suggests that sitaxsentan may provide clinical benefit to patients
     diagnosed with certain types of pulmonary arterial hypertension.

   . TBC3711 is in Phase 1 clinical trials and is being evaluated for the
     treatment of a cardiovascular or other disease where an unmet medical need
     exists.

   . IC14 is anticipated to begin a Phase 2 clinical trial in the second
     quarter of 2002 for the treatment of sepsis.

   . IC747 is in Phase 1 clinical trials. We anticipate IC747 will begin Phase
     2 clinical trials in the third quarter of 2002 for the treatment of
     chronic inflammatory diseases, such as psoriasis. IC747 is being developed
     in a worldwide LFA-1 antagonist collaboration with Biogen.

   . IC485 is in Phase 1 clinical trials with potential clinical applications
     for chronic obstructive pulmonary disease or rheumatoid arthritis.

   . RTX(TM) (resiniferatoxin) is anticipated to begin a Phase 2 clinical trial
     in the second quarter of 2002 for the treatment of interstitial cystitis.

                                      3

<PAGE>

Business Strategy

Our objective is to become a leading biopharmaceutical company focused on the
discovery, development and commercialization of innovative drugs. We intend to
accomplish this objective by:

Obtaining regulatory approval for and successfully commercializing Cialis(TM)
and Pafase(R). Both a U.S. New Drug Application and a European Market
Authorization Application seeking approval for Cialis have been submitted. In
addition, a pivotal multinational Phase 3 clinical trial for Pafase has begun.
These product candidates target significant markets. Through sales and
marketing efforts with our collaboration partners, we intend to increase
awareness of the benefits of these product candidates over existing therapies.

Diversifying our portfolio of product candidates. We have developed, and plan
to continue to develop, a broad portfolio of product candidates encompassing a
variety of therapeutic approaches to address both chronic and acute diseases
and medical conditions. For example, we are currently researching and
developing product candidates targeting erectile dysfunction and other urologic
disorders, sepsis, pulmonary arterial hypertension and other cardiovascular
diseases, and inflammatory diseases. To mitigate some of the risks inherent in
clinical development, we plan to continue developing a number of product
candidates in parallel.

Using our internal capabilities to discover and develop novel product
candidates. Using our capabilities in molecular, cellular and structural
biology, high throughput drug screening, medicinal chemistry and gene
expression profiling, we have successfully identified novel product candidates
and obtained patents, or filed patent applications, for protein-based and small
molecule product candidates. We plan to continue our discovery and development
efforts in these areas, emphasizing diseases and medical conditions for which
current therapies are substandard or unavailable, or for which the market
opportunities are large.

Identifying attractive acquisition and in-licensing candidates. We have
acquired and in-licensed product candidates and plan to acquire or in-license
additional product candidates in the future. For example, our sitaxsentan,
TBC3711, IC14 and RTX product candidates are the result of such acquisition and
in-licensing efforts. We believe that we are well positioned to attract
additional product candidates as a result of our demonstrated experience and
success in completing such acquisitions and in-licensing arrangements.

Forming strategic collaborations. We have established, and intend to continue
to establish, corporate collaborations with large pharmaceutical and other
biotechnology companies to enhance the development of product candidates. These
collaborations enable us to retain a significant portion of the potential
economic benefit, while offsetting a substantial portion of the financial risk,
of developing product candidates. For example, we have entered into
collaborations with Eli Lilly, Suntory, Texas Biotechnology and Biogen.
Collaborations such as these generally enable us to develop a greater number of
product candidates than otherwise would be possible and provide us with
domestic and international marketing and sales expertise for our partnered
product candidates if approved.

Expanding our intellectual property portfolio. We intend to continue to
aggressively pursue protection of our proprietary technology and other
intellectual property. We believe that establishing a strong proprietary
position could provide an important competitive advantage in our target
markets. As of December 31, 2001, we owned or exclusively licensed 153 U.S.
patents and had 122 patent applications pending in the United States that we
filed on our own behalf or on behalf of our joint ventures or exclusive
licensors. When appropriate, we also seek foreign patent protection and as of
December 31, 2001, we owned or exclusively licensed 135 foreign patents.

                                      4

<PAGE>

Clinical Development Pipeline

We are developing several product candidates targeting a variety of serious
diseases and medical conditions. We have retained significant marketing rights
to each of the product candidates covered by partnership or joint development
arrangements. We have retained co-promotion rights to Cialis in North America
and most of Europe. We have retained marketing rights to Pafase in the United
States and share marketing rights to Pafase with Suntory outside of Japan and
the United States. We share worldwide marketing rights to sitaxsentan and
TBC3711 with Texas Biotechnology and will co-promote IC747 and other LFA-1
antagonists in our worldwide collaboration with Biogen. The table below
summarizes our product development programs.

                         Clinical Development Pipeline

<TABLE>
<CAPTION>
Product Candidate         Target Indication    Status     Partner                  ICOS Economic Interest
------------------------------------------------------------------------------------------------------------
<C>                       <S>                  <C>        <C>                   <C>

Cialis(TM) (tadalafil)    Erectile dysfunction NDA        Eli Lilly and Company North America and Europe
                          Female sexual        Phase 2                          --co-promotion
                          dysfunction                                           Rest of world--share of
                                                                                royalties to Lilly ICOS

Pafase(R) (rPAF-AH)       Severe sepsis        Phase 3    Suntory Limited       U.S.--commercial rights
                                                                                Japan--share of royalties to
                                                                                Suncos
                                                                                Rest of world--co-promotion

Endothelin Receptor
 Antagonists:
   Sitaxsentan            Pulmonary arterial   Phase 2b/3 Texas Biotechnology   Worldwide--co-promotion
                          hypertension                    Corporation
   TBC3711                Cardiovascular or    Phase 1    Texas Biotechnology   Worldwide--co-promotion
                          other disease                   Corporation

IC14                      Sepsis               Phase 1    N/A                   Worldwide--commercial
                                                                                rights

IC747                     Psoriasis            Phase 1    Biogen, Inc           Worldwide--co-promotion
                          Inflammatory
                          diseases

IC485                     Chronic obstructive  Phase 1    N/A                   Worldwide--commercial
                          pulmonary disease                                     rights
                          or rheumatoid
                          arthritis

RTX(TM) (resiniferatoxin) Interstitial         Phase 1    N/A                   Worldwide--commercial
                          cystitis                                              rights
</TABLE>

In the status column of the table: "Phase 1" indicates clinical trials for
safety and pharmacology; "Phase 2" indicates a clinical trial to determine
dosing and efficacy; "Phase 2a" indicates a small clinical trial to determine
potential therapeutic doses; "Phase 2b" indicates a larger clinical trial to
determine efficacy of chosen therapeutic doses; "Phase 3" indicates a
confirmatory clinical trial to determine efficacy and safety as primary support
for regulatory approval; and "NDA" indicates that new drug applications have
been filed with U.S. and European regulatory authorities for marketing approval.

Cialis (tadalafil)

We are evaluating Cialis (tadalafil), a small molecule compound that inhibits
the phosphodiesterase type 5 enzyme, or PDE5, for the treatment of erectile
dysfunction. We are also evaluating tadalafil for the treatment of female
sexual dysfunction. In 1998, we formed a joint venture entity with Eli Lilly,
called Lilly ICOS, to develop and commercialize PDE5 inhibitors.

   Erectile Dysfunction Clinical Application

Background. Erectile dysfunction is a condition in which a man is unable to
attain or maintain an erection sufficient for sexual intercourse. Erectile
dysfunction affects an estimated 70 million men in North America and Europe and
is increasingly recognized as a serious and treatable medical condition.
Erectile dysfunction is often associated with underlying diseases such as
diabetes, cardiovascular disease and depression, or may be a consequence of
prostate surgery, spinal cord injury or treatment with certain medications.

In the typical erection process, tactile and visual stimuli lead to increased
blood flow into penile tissue, resulting in an erection. As part of this
process, a chemical called cyclic GMP causes penile blood vessels to dilate,
allowing blood flow to

                                      5

<PAGE>

increase. PDE5, an enzyme present in penile blood vessels, removes cyclic GMP
from penile tissue, thereby allowing the penile blood vessels to return to
their undilated state. Inhibition of PDE5 can enhance blood flow to the penis,
contributing to an erection.

Current Treatment. Until 1998, treatments for erectile dysfunction were
primarily limited to the use of injectables, vacuum pumps and prostheses, which
are inconvenient and unpleasant options that have limited the size of the
treated population. With the introduction in 1998 of Viagra, millions of men
were motivated for the first time to acknowledge their affliction and seek
treatment. We believe, however, that many men have ceased therapies for
erectile dysfunction due to ineffectiveness, unpleasant side effects or
inconvenient administration. We believe that as few as 10% of the men who could
benefit from orally administered treatment for erectile dysfunction are
currently undergoing treatment.

Potential Treatment by Cialis(TM). Cialis inhibits PDE5, increasing cyclic GMP
levels and consequently increasing blood flow to the penis. The entry of Cialis
into the marketplace may encourage use among the untreated population of
erectile dysfunction patients in addition to those currently using therapies
for erectile dysfunction.

Development Status. To date, we have initiated over 60 Phase 1, 2 and 3
clinical trials evaluating Cialis for the treatment of erectile dysfunction.
Cialis has been evaluated in several Phase 3 clinical trials conducted in an
outpatient setting. These trials were multicenter, randomized and
placebo-controlled. In these studies, the effect of Cialis was measured using
patient responses to questionnaires and patient diaries. These studies
demonstrated that, relative to placebo, Cialis both improved the patients'
ability to attain and maintain an erection sufficient for sexual intercourse
and significantly increased the percentage of successful sexual attempts. The
most frequently reported side effects in these studies were headache,
indigestion, backache and muscle ache. Most of these side effects were mild to
moderate in intensity, and the frequency of reports decreased with continued
treatment.

We have completed registrational Phase 3 clinical trials for Cialis. Lilly ICOS
submitted a New Drug Application for Cialis to the U.S. Food and Drug
Administration ("FDA") and a European Market Authorization Application to the
European Medicines Evaluation Agency on June 28, 2001. We believe there are
attributes of Cialis that will make it attractive and convenient for patients
and their doctors.

   Female Sexual Dysfunction Clinical Application

Female sexual dysfunction is a general term that describes a variety of
conditions, including lack of sexual desire, lack of sexual arousal, inability
to achieve orgasm and pain during intercourse. Female sexual dysfunction has
been reported to affect greater than 40% of adult women in the United States.
Research in female sexual dysfunction is considerably less advanced than that
of erectile dysfunction. In addition, the factors that underlie female sexual
dysfunction are not well understood. At present, treatment for female sexual
dysfunction is primarily limited to counseling, hormonal treatment and vaginal
lubricants. These products may reduce discomfort, but do not directly address
desire, arousal and orgasmic disorders.

We are evaluating tadalafil for the treatment of some forms of female sexual
dysfunction. Women were included in Phase 1 clinical trials of Cialis, and a
Phase 2 clinical program is being conducted to further explore the safety and
efficacy of tadalafil in women suffering from female sexual dysfunction. In one
Phase 2 clinical trial, there was no significant difference in the incidence of
adverse events between tadalafil and placebo. However, tadalafil demonstrated
no effect relative to placebo on the primary endpoints.

Pafase(R) (rPAF-AH)

We are evaluating Pafase (rPAF-AH), a recombinant truncated human serum
protein, for the treatment of severe sepsis. Pafase breaks down
platelet-activating factor, or PAF, a chemical produced by the body that
generally acts to induce or increase inflammation. In 1997, we formed a joint
venture entity with Suntory called Suncos to develop and commercialize Pafase.
We have funded the development and commercialization of Pafase in part through
contributions from ICOS Clinical Partners, a limited partnership composed of
private investors.

   Severe Sepsis Clinical Application

Background. Severe sepsis is a life-threatening condition that can occur when
the body's immune system mounts a systemic inflammatory response to an
infection. As part of this immune response, immune system cells produce
inflammatory agents, such as PAF, which can induce fever, organ failure and
sometimes shock. When this progression leads to organ failure, the condition is
classified as severe sepsis. It is estimated that there are currently over
750,000 cases of severe sepsis each year in the United States, with
approximately 215,000 deaths annually. The number of deaths of patients with
severe sepsis each year is similar to the number of deaths annually of patients
with acute myocardial infarction and about four times the number of deaths of
patients with breast cancer.

                                      6

<PAGE>

Current Treatment. After over 25 years of clinical and research investigation
of potential therapies for patients with severe sepsis, treatment of the
condition is still primarily limited to antimicrobial therapy directed toward
the underlying infection and supportive measures for patients suffering from,
or at risk of developing, multiple organ dysfunction. Previous clinical trials
of investigational agents in sepsis have targeted various inflammatory
mediators or bacterial components. Until recently, these strategies have met
with only limited success. In 2000, however, Eli Lilly reported favorable
results when Xigris, activated protein C (r-APC), was administered to patients
with severe sepsis. Patients treated with Xigris had a 28-day all-cause
mortality rate of 24.7% compared to a mortality rate of 30.8% in patients
treated with placebo.The FDA recently approved Xigris for the reduction of
mortality in adult patients with severe sepsis who have a high risk of death.
The efficacy of Xigris has not been established in adult patients with severe
sepsis and lower risk of death. Safety and efficacy also have not been
established in pediatric patients with severe sepsis. Despite this approval,
severe sepsis remains a devastating medical condition with a critical need for
additional therapeutic agents. Since Xigris and Pafase(R) have different
mechanisms of action, many investigators believe combination therapy, focusing
on both excessive inflammation, the Pafase mechanism, and accelerated
coagulation, the Xigris mechanism, may ultimately be used to treat severe
sepsis.

Potential Treatment by Pafase. Pafase inactivates PAF, eliminating its
inflammatory effects. PAF is implicated in sepsis as well as acute respiratory
distress syndrome and other debilitating inflammatory conditions. We have
demonstrated the inhibitory activity of Pafase on PAF-induced inflammation in
both in vitro and in vivo studies.

Development Status. In 2000, we announced favorable results of a Phase 2
clinical trial evaluating the safety and efficacy of Pafase in 240 patients
with either severe sepsis or multiple traumatic injuries who were at risk of
developing acute respiratory distress syndrome. These Phase 2 results were used
to design our Phase 3 clinical trial using a primary endpoint of reduction of
28-day all-cause mortality in patients with severe sepsis. Based on safety and
efficacy data obtained from clinical trials completed to date, we initiated a
pivotal multinational Phase 3 clinical trial of Pafase in the second quarter of
2001. The study is designed to enroll up to 2,500 patients from approximately
150 investigative sites. The study will have three equally spaced interim
analyses by an independent monitoring board and could be terminated early if
pre-defined efficacy or futility is noted in interim data.

Endothelin Receptor Antagonist Program

We are evaluating two endothelin receptor antagonists: sitaxsentan, for the
treatment of pulmonary arterial hypertension; and TBC3711, for a cardiovascular
or other disease where an unmet medical need exists. These product candidates
are small molecules that antagonize, or block, the action of endothelin, which
is a potent mediator of blood vessel constriction and of the growth of smooth
muscle in vascular walls. Endothelin receptor antagonists are believed to be
effective in the treatment of a variety of diseases where the regulation of
vascular constriction and muscle tone is important. In June 2000, we formed a
partnership entity with Texas Biotechnology called ICOS-Texas Biotechnology to
develop and commercialize endothelin receptor antagonists, including
sitaxsentan and TBC3711, both currently in clinical development.

Vascular endothelium, which is the innermost lining of the blood vessels, plays
a pivotal role in maintaining normal blood vessel tone, including blood flow,
by producing substances such as endothelin that regulate the delicate balance
between the dilation and constriction of blood vessels. Endothelin binds to two
distinct receptors, ET(A) and ET(B), on cell surfaces. In general, ET(A)
receptors are associated with blood vessel constriction, while ET(B) receptors
are associated with blood vessel dilation and endothelin clearance.

   Pulmonary Arterial Hypertension Clinical Application

Background. Pulmonary arterial hypertension is a condition that involves high
blood pressure and structural changes in the walls of the pulmonary arteries,
which are the blood vessels that connect the right side of the heart to the
lungs. Primary and secondary pulmonary arterial hypertension is estimated to
afflict over 100,000 people worldwide. The life expectancy of patients with
untreated primary pulmonary arterial hypertension is less than three years
after diagnosis.

Current Treatment. Currently, there are two approved pharmaceutical therapies
for pulmonary arterial hypertension. Flolan is an intravenously administered
form of prostacyclin. Tracleer, an oral non-selective endothelin receptor
antagonist, was approved by the FDA on November 20, 2001. Patients currently
using prostacyclin must receive continuous infusion of the drug through an
in-dwelling catheter, necessitating that they carry an infusion pump with them
at all times. We believe that an oral, highly targeted endothelin A receptor
antagonist may be an effective treatment for patients suffering from pulmonary
arterial hypertension and may provide additional benefit to patients who do not
respond to existing therapies.

Development Status. ICOS-Texas Biotechnology has completed an open-label Phase
2a clinical trial evaluating sitaxsentan for the treatment of pulmonary
arterial hypertension. The analysis of patient data from this trial suggests
that sitaxsentan may

                                      7

<PAGE>

provide clinical benefit to patients diagnosed with some types of pulmonary
arterial hypertension. However, in a follow-on extension trial,
treatment-related hepatitis was observed in two patients and one of these
patients died. Following analysis of the open-label Phase 2a clinical trial and
extension studies, and discussions with the FDA, ICOS-Texas Biotechnology
initiated a Phase 2b/3 clinical trial of sitaxsentan, at lower doses, for the
treatment of pulmonary arterial hypertension in the second quarter of 2001. The
trial is expected to complete enrollment in the second quarter of 2002, and
initial results are expected in the third quarter of 2002.

IC14

IC14 is a monoclonal antibody that blocks the function of CD14, a receptor
found on the surface of certain white blood cells, which plays an early role in
the development of sepsis.

   Sepsis Clinical Application

Potential Treatment by IC14. We are developing IC14 for the treatment of
sepsis. While Pafase is intended to treat severe sepsis by destroying PAF and
eliminating its inflammatory effects, IC14 is intended to treat sepsis at both
early and late stages in the inflammatory response by blocking the function of
CD14. CD14 is unique in its ability to recognize components from most types of
microorganisms. Once activated by the recognition of these microbial
components, CD14 typically triggers a localized inflammatory response that
removes microorganisms at the site of infection. However, in some cases, CD14
triggers a systemic inflammatory response that may lead to sepsis and multiple
organ failure. In contrast to other potential targets, CD14 does not appear to
be a redundant component of the immune response that leads to sepsis. Not only
does CD14 recognize a diverse array of microbial components, but it also is
directly involved in activating multiple cell types that promote this immune
response, making it an attractive target for the treatment of sepsis. IC14 has
been shown to block CD14 in both in vitro and in vivo models in preclinical
studies.

Development Status. In 1999, we conducted a bacterial toxin challenge study in
16 healthy volunteers, which demonstrated that IC14 inhibited the inflammatory
response to specific bacterial toxins by blocking the release of greater than
95% of tumor necrosis factor alpha (TNF-alpha) and substantially reducing the
development of flu-like symptoms. We also completed a Phase 1 clinical trial in
30 healthy volunteers in 1999. During the first quarter of 2001, we completed
enrollment in a Phase 1 clinical trial initiated in 2000 that was designed to
determine the molecule's safety and pharmacology in sepsis patients and define
a dosing regimen for evaluation in Phase 2 clinical trials. We intend to begin
enrollment in a Phase 2 clinical trial in sepsis patients in the second quarter
of 2002.

IC747 (LFA-1 antagonist)

In June 2000, we acquired exclusive global rights to an LFA-1 program
previously subject to our 1995 collaborative agreement with Abbott
Laboratories. In July 2001, we entered into a collaboration with Biogen to
jointly develop and co-promote IC747 and other LFA-1 antagonists as oral
therapeutics for autoimmune and inflammatory diseases.

   Psoriasis Clinical Application

Background. Psoriasis is a chronic T lymphocyte-driven skin disorder afflicting
approximately four to five million people in the United States, with 400,000 of
those severely afflicted. The disorder is characterized by frequent episodes of
redness, itching, and thick, dry silver scales or lesions on the skin.

Current Treatment. There is currently no effective, well-tolerated approved
treatment available for advanced psoriasis. Currently approved therapies for
psoriasis are focused on treating the symptoms of this disorder and include
immunosuppressive medications such as corticosteroids or methotrexate,
antifungal medications, antibiotics and vitamin D analogs. We believe that
LFA-1 antagonists, such as IC747, may be particularly desirable for the
treatment of psoriasis. Genentech, Inc. and Xoma Corporation have already
demonstrated the efficacy of an injectable LFA-1 antibody for psoriasis
patients in Phase 3 clinical trials.

Potential Treatment by IC747. IC747 is an orally administered, small molecule
antagonist of the cell adhesion molecule LFA-1, which is expressed by white
blood cells. Many chronic inflammatory diseases are thought to be driven by
abnormal activation of T lymphocytes, a type of white blood cell. In our
preclinical studies, we have demonstrated that IC747 binds to LFA-1 and
inhibits T lymphocyte activation.

Development Status. We initiated a Phase 1 clinical trial for IC747 in the
second quarter of 2001. We anticipate initiation of Phase 2 clinical trials for
psoriasis in the third quarter of 2002.


                                      8

<PAGE>

   Additional Clinical Applications

Other chronic diseases for which LFA-1 antagonists may prove useful are asthma
and rheumatoid arthritis. In the United States, an estimated 17 million people
suffer from asthma and an estimated 2.1 million are afflicted with rheumatoid
arthritis.

IC485 (PDE4 inhibitor)

IC485 is an orally administered, small molecule inhibitor of the Type IV cyclic
adenosine monophosphate (cAMP) phosphodiesterase enzyme, or PDE4. Elevated
levels of cAMP in human myeloid and lymphoid lineage cells are associated with
the suppression of cell activation, including TNF-alpha. PDE4 is a predominant
PDE isotype in these cells and is thus a major route of cAMP degradation.
Inhibition of PDE4 with IC485 elevates cAMP and reduces the production of
TNF-alpha by cells of the immune system.

   Chronic Obstructive Pulmonary Disease and Rheumatoid Arthritis

Background. Chronic obstructive pulmonary disease (COPD) and rheumatoid
arthritis are under consideration as the primary clinical applications for
IC485. According to the American Lung Association, approximately 16 million
people in the United States suffered from COPD in 1996, with approximately 14
million cases manifested as chronic bronchitis and approximately 1.8 million
manifested as emphysema. Rheumatoid arthritis is a chronic and debilitating
disease that affects approximately 2.1 million adults in the United States.

Current Treatment. COPD is currently treated with bronchodilators and
anti-inflammatory drugs. However, these drugs have been of limited benefit in
treating the disease. Rheumatoid arthritis is currently treated with strong
anti-inflammatory medications or biologics that specifically target TNF-alpha.

Potential Treatment by IC485. Clinical benefits in rheumatoid arthritis and
Crohn's disease have been observed with approved therapies that target
TNF-alpha production. Moreover, clinical efficacy has been observed with other
PDE4 inhibitors in patients with asthma and COPD. We have also demonstrated
efficacy in preclinical models of rheumatoid arthritis and a lung injury model
related to the pathology of COPD. Historically, drugs that have targeted PDE4
have induced side effects such as nausea, vomiting and sedation, thereby
limiting their clinical utility. In preclinical studies of IC485, vomiting and
sedation were not observed over a range of doses that inhibited TNF-alpha
production, demonstrating the potential utility of this product candidate.

Development Status. We initiated a Phase 1 clinical trial with IC485 in the
fourth quarter of 2001.

RTX(TM) (resiniferatoxin)

In November 2001, we acquired exclusive worldwide rights to RTX
(resiniferatoxin) for the treatment of bladder disease or dysfunction.

   Interstitial Cystitis Clinical Application

Background. Interstitial cystitis is a chronic condition often associated with
bladder pain and urgency and high frequency of urination, including nocturia.
These symptoms may adversely affect quality of life and cause significant
disability. According to the National Institutes of Health, more than 700,000
Americans have interstitial cystitis, of whom 90% are women.

Current Treatment. Although many treatments have been tried for interstitial
cystitis, none are completely satisfactory. Medicines that are often used to
control symptoms include antihistamines, tricyclic antidepressants and
analgesics. The only oral medication that is approved for interstitial cystitis
is Elmiron (pentosan polysulfate sodium), which has taken up to six months to
provide symptom improvement and is not effective for many patients. Bladder
instillation of various agents is also routinely used, including
dimethylsulfoxide, heparin-like compounds and others. These treatments are
inconvenient due to the number of instillations required and are not
consistently efficacious

Potential Treatment by RTX. RTX is a small molecule that can be delivered to
the bladder to desensitize afferent nerve fibers termed C-fibers. C-fibers are
believed to play a role in many pathological conditions of the bladder,
including interstitial cystitis. RTX is administered topically directly into
the bladder through a catheter. The clinical objectives of RTX treatment for
interstitial cystitis are to reduce bladder pain, nocturia and urinary
frequency and improve the quality of life in patients.

Development Status. We expect to begin enrollment in a Phase 2 clinical trial
of RTX in interstitial cystitis patients in the second quarter of 2002.

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   Additional Clinical Applications

Although we are initially evaluating RTX as a treatment for interstitial
cystitis, it may also be evaluated for the treatment of detrusor hyperreflexia
(overactive bladder) resulting from the following conditions: multiple
sclerosis, spinal cord injury, stroke, Parkinson's disease and benign prostatic
hyperplasia.

Preclinical and Research Pipeline

We continuously evaluate new product candidates as part of our discovery
research program. We use an integrated approach in this program that
incorporates genetics, biochemistry and cell biology. The table below
summarizes our product development programs in which we are engaged in
preclinical development or research.

                       Preclinical and Research Pipeline

 Product Candidate/Program Target Indication                        Status
 ------------------------------------------------------------------------------

 Cell cycle checkpoint/DNA
  repair inhibitors        Cancer                                   Preclinical

 Lipid and protein kinase
  inhibitors               Inflammatory diseases                    Preclinical

 Other phosphodiesterase
  inhibitors               Multiple diseases                        Preclinical

 Chemokine receptor
  antagonists              Allergic inflammatory diseases           Research

 Other cell adhesion
  molecule antagonists     Cardiovascular and inflammatory diseases Research

 Novel antibiotics         Infectious diseases                      Research

In the status column of this table: "Preclinical" indicates evaluation of lead
or preferred compounds for safety, pharmacology and proof of efficacy in
non-human animal models; and "Research" indicates the research phase of the
product identification process for compounds for which activity in target human
biological assay systems has been demonstrated in laboratory tests, but which
have not yet been tested in non-human animal models of specific human diseases.

Preclinical Programs

   Cell Cycle Checkpoint/DNA Repair Inhibitors

Resistance of tumor cells to radiation or chemotherapy is due in part to
cellular enzymes collectively termed cell cycle checkpoint/DNA repair enzymes.
These enzymes are proteins that recognize and repair potentially lethal defects
in cellular DNA introduced by radiation or chemotherapeutic agents. In
preclinical tests, we are currently evaluating and optimizing lead compounds
that inhibit two key enzymes involved in this process. We are assessing these
compounds for their ability to selectively increase the sensitivity of tumors
versus normal tissue to radiation or chemotherapeutic agents, thereby enhancing
the success and minimizing the toxic effects of conventional treatments for
many different types of tumors.

According to the American Cancer Society, cancer is a major cause of death in
the United States, second only to cardiovascular disease. Because our cell
cycle checkpoint/DNA repair inhibitors potentially sensitize human cancer cells
to chemotherapy and radiation therapy, they could potentially treat various
forms of cancer, including the most common and lethal forms, such as prostate,
breast, lung and colon cancer, as well as less common forms that are very
poorly treated, such as pancreatic cancer.

   Lipid and Protein Kinase Inhibitors

Certain lipid and protein kinases are enzymes that regulate activation of white
blood cell types that participate in inflammatory and degenerative diseases
such as autoimmune disorders, chronic obstructive pulmonary disease and
osteoporosis. We are currently evaluating in preclinical studies small molecule
inhibitors of a kinase involved in white blood cell activation. Autoimmune
disorders, a large group of clinically important diseases, occur when the
immune system confuses normal tissue with invading foreign material and attacks
itself, causing tissue destruction. The triggers that cause this process are
many, but the net result is that white blood cells are activated and a robust
immune response ensues against normal tissue. In preclinical studies, we are
testing our kinase inhibitors for their ability to quell an autoimmune response.

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   Other Phosphodiesterase Inhibitors

In addition to PDE4 and PDE5, the targets for IC485 and Cialis(TM) (tadalafil),
respectively, we continue our discovery efforts and are conducting preclinical
evaluations of inhibitors that selectively target other distinct members of the
phosphodiesterase family of enzymes. These enzymes collectively regulate many
bodily functions. Drugs targeted to individual enzymes impact specific bodily
functions associated with the cardiovascular and nervous systems. We are
currently evaluating one set of inhibitor compounds in preclinical models of
Parkinson's disease.

Research Programs

Since our inception, we have placed a strong emphasis on generating novel drug
candidates from our own internal research activities. Over the past eleven
years, we have assembled a highly integrated multidisciplinary research staff
of approximately 150 professionals. Our staff includes:

   . molecular biologists and biochemists who identify new genes or proteins
     that are either product candidates or targets for product candidates; and

   . medicinal chemists, robotics experts and pharmacologists who create,
     evaluate and optimize new product candidates.

To use our expertise most effectively, we have concentrated our product
discovery efforts on specific gene families, including phosphodiesterases, cell
adhesion molecules and cell cycle checkpoint enzymes. In each case, we seek
first to identify all the members of the family, understand the distribution of
each member within the body and, through multiple functional tests, determine
which members are most likely to affect human disease in a manner that can lead
to therapeutic treatment. Once a given target is linked to an important
biological function, such as activation of white blood cells, it is screened by
our robotics group against a complex library of small organic molecules, from
which lead compounds are identified. These lead compounds are tested against
structurally related targets encoded within the same family of genes and then
optimized through repetitive cycles of chemical modification to yield a final
product candidate. During the optimization process our chemists and
pharmacologists work together to build other attractive characteristics into
the product candidate, such as the capacity to be administered orally and be
maintained at appropriate levels in the bloodstream. The advantage of this gene
family approach is that the initial efforts that yield a promising product
candidate targeting one family member also provide valuable information about
how to create product candidates that target other members of the gene family.
For example, novel structural information regarding how IC747 interacts with
its target, LFA-1, has been used to identify lead compounds that selectively
block the function of other protein targets containing a related structural
motif termed IDAS. This approach not only provides additional opportunities in
other therapeutic areas, but also may markedly reduce the effort required to
produce the next product candidate.

Our current discovery research programs are directed toward the discovery of
new product candidates for the treatment of various diseases, including
allergic and other inflammatory diseases, cardiovascular diseases and
infectious diseases. Compounds in the research phase of the product
identification process are those for which activity in the target human
biological assay systems has been demonstrated in laboratory tests. These
compounds have not yet been tested in non-human animal models of specific human
diseases. These compounds include:

   . antagonists of a chemokine receptor that promotes the exit of certain
     white blood cells from the bloodstream to sites of inflammation, which are
     potentially important in allergic inflammatory diseases such as asthma and
     skin inflammation;

   . compounds that block the function of other cell adhesion molecules that
     are potentially important in diseases such as rheumatoid arthritis,
     asthma, and other degenerative diseases of the kidney, liver and lung;

   . lead inhibitors of other members of the PDE family of enzymes, including
     those that may be involved in regulating neurodegenerative diseases such
     as Parkinson's disease; and

   . molecules that represent lead compounds for new classes of antibiotics.

Collaborations and Licensing Agreements

We have entered into arrangements with other parties to access technology and
to facilitate and fund the development and marketing of several of our product
candidates. Our collaborations and licensing agreements include:

   Eli Lilly and Company

In October 1998, ICOS and Eli Lilly formed Lilly ICOS, a 50/50-owned limited
liability company, to develop and commercialize PDE5 inhibitors. Lilly ICOS is
developing Cialis(TM) (tadalafil) as an oral therapeutic agent for the
treatment of

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erectile dysfunction and female sexual dysfunction. Under the terms of this
arrangement, we received a $75.0 million payment upon formation of the joint
venture, a $15.0 million payment in 1999 upon initiation of a Phase 3 clinical
trial program for Cialis and an additional $15.0 million payment in 2001
following the filing of the New Drug Application with the FDA. We could receive
additional payments based on the progression of tadalafil through development.
The joint venture was initially capitalized by Eli Lilly through cash
contributions and our contribution of an exclusive worldwide license to
intellectual property relating to PDE5 inhibitors, including intellectual
property associated with Cialis and its research platform. Subsequent capital
contributions have been made by both Eli Lilly and ICOS in equal amounts. Both
ICOS and Eli Lilly provide Lilly ICOS with research and development services.
The joint venture will market any products resulting from this collaborative
effort in North America and the countries in the European Union or European
Free Trade Area through the services of ICOS and Eli Lilly. For countries
outside North America and these European countries, in exchange for royalty
payments, Lilly ICOS has granted Eli Lilly an exclusive license to develop,
manufacture and commercialize the PDE5 inhibitors developed in the
collaboration.

   Suntory Limited

In February 1997, ICOS and Suntory formed Suncos, a 50/50-owned corporation, to
develop and commercialize Pafase(R) worldwide. Under the terms of this
arrangement, the joint venture was established with a $30.0 million cash
investment by Suntory, to Suncos, and subsequent capital contributions have
been made by both Suntory and ICOS in equal amounts. We granted Suncos an
exclusive license to all rights to Pafase on a worldwide basis. Suncos granted
Suntory exclusive rights to develop and commercialize Pafase in Japan and
granted ICOS exclusive rights to develop and commercialize Pafase in the United
States. Suncos retains the rights to develop and commercialize Pafase in the
rest of the world. Suncos is managed jointly by Suntory and ICOS.Both Suntory
and ICOS provide Suncos with research and development services. Suntory and
ICOS will each pay royalties to Suncos on sales of Pafase in their respective
territories.

   Texas Biotechnology Corporation

In June 2000, ICOS and Texas Biotechnology formed ICOS-Texas Biotechnology, a
50/50-owned limited partnership, to develop and commercialize endothelin
receptor antagonists, such as sitaxsentan and TBC3711. Under the terms of this
arrangement, ICOS and Texas Biotechnology equally fund the development of
endothelin receptor antagonists and equally share in the profits of the
partnership. We made an initial $2.0 million payment to Texas Biotechnology
upon formation of the partnership and made an additional $2.0 million payment
in October 2001. We may make further milestone payments of up to $51.5 million
based on the achievement of certain success-based objectives. Texas
Biotechnology made an initial contribution to ICOS-Texas Biotechnology of an
exclusive worldwide license to the intellectual property associated with
endothelin receptor antagonists, including patent rights and technical
information. ICOS-Texas Biotechnology is managed jointly by Texas Biotechnology
and ICOS. Both parties provide the partnership with research and development
services. ICOS-Texas Biotechnology will manufacture, market and sell any
products resulting from the collaboration worldwide.

   Biogen, Inc.

In July 2001, we entered into an agreement with Biogen to jointly develop and
globally commercialize orally active, small molecule LFA-1 antagonists for the
treatment of inflammatory diseases and conditions, including psoriasis, and
other autoimmune diseases. Under the terms of this agreement, we and Biogen
will cross-license LFA-1 antagonist technology and patents, including IC747 and
other LFA-1 antagonists. We will share costs of ongoing development activities
with Biogen, co-promote any products developed under the agreement, and equally
share in the profits of the collaboration. We received an $8.0 million initial
payment upon executing the agreement and could receive future success-based
milestone payments from Biogen based on the progression of IC747 and other
LFA-1 antagonists through development. In addition, we may receive periodic
loans from Biogen to fund part of our share of the related development costs.
Some or all of the loans may be forgiven upon the achievement of certain
success-based milestones.

   Abbott Laboratories

In April 1995, we formed a collaboration with Abbott Laboratories to discover
small molecule drugs that modulate the intracellular signaling connections of
certain intercellular adhesion molecules and integrins. In September 1997, we
expanded and extended this relationship to include small molecule antagonists
of the extracellular domains of certain integrins and intercellular adhesion
molecules. The research program under the collaboration which provided us with
research funding from Abbott Laboratories was completed at the end of its term
on April 1, 1999. Under the terms of the arrangement, each company received
exclusive development and commercialization rights to drugs relating to
specific molecular targets with royalties and milestone obligations to the
other party. Each party was responsible for the development, registration and
commercialization of its own product candidates. In addition, the collaboration
provided us with a library of

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chemical compounds for use in our own discovery programs. In June 2000, we
amended the arrangement by acquiring Abbott Laboratories' worldwide rights to
all compounds developed in connection with the collaboration, including LFA-1
antagonists such as IC747. Abbott Laboratories will receive royalties and
milestone payments on any products that we market that incorporate these
compounds.

   Other Collaborations and Licensing Arrangements

We have also entered into collaborative arrangements regarding the following
product candidates:

   . IC14. We have entered into a sub-licensing arrangement with Johnson &
     Johnson and The Rockefeller University under which technology relating to
     IC14, developed by Dr. Richard Ulevitch at The Scripps Clinic and Research
     Foundation and Dr. Samuel Wright at The Rockefeller University, was
     sub-licensed to us. Under this arrangement, we received a sub-license to
     the intellectual property relating to IC14 in exchange for royalty and
     future milestone payments based on development of this product candidate.
     We have exclusive rights to a portfolio of patents for the production and
     commercialization of IC14.

   . RTX(TM). We have entered into a licensing agreement with Afferon
     Corporation related to RTX. Under the terms of this agreement, we have
     exclusive worldwide license rights for commercial use of RTX for the
     treatment of bladder disease or dysfunction. We are responsible for the
     costs of developing and commercializing RTX and related analogues. Afferon
     receives certain periodic payments and is entitled to future success-based
     milestone payments and royalties upon sales of marketed products, if any,
     resulting from this arrangement.

   . IC485. We have entered into a research and development arrangement with
     Array BioPharma Inc. relating to IC485. Under this arrangement, we funded
     the medicinal chemistry performed by Array relating to IC485. We received
     either an assignment of, or a license to, any and all intellectual
     property developed by Array relating to IC485 in exchange for future
     milestone payments based on development of this product candidate. We have
     exclusive rights to the worldwide production and commercialization of
     IC485.

   . Cell cycle checkpoint/DNA repair inhibitors. We have entered into a
     research and development arrangement with Array relating to multiple
     research targets, including cell cycle checkpoint/DNA repair inhibitors.
     Under this arrangement, we fund the medicinal chemistry performed by Array
     relating to the targets. We receive either an assignment of, or a license
     to, any and all intellectual property developed by Array in exchange for
     future milestone payments based on the development of any product
     candidates that may arise from this arrangement. We have exclusive rights
     to the worldwide production and commercialization of any product
     candidates developed under this arrangement.

   . IDAS targeted product candidates. We have entered into an additional
     research and development agreement with Array relating to two research
     targets which contain an IDAS structural feature related to, but distinct
     from, that found in the cell adhesion molecule LFA-1, the target of IC747.
     Under the terms of this agreement, we will provide Array with research
     funding over two years. Both parties will collaborate in all aspects of
     lead generation and lead optimization. We will be responsible for clinical
     development and commercialization. We have exclusive rights to market,
     sell and distribute products that may arise from this arrangement. Array
     is entitled to receive success-based payments upon reaching certain
     development milestones and royalties based upon sales of products
     resulting from the collaboration.

In addition, we have entered and continue to enter into licensing agreements
and research collaborations with institutions and scientists to expand our
access to new scientific developments, technologies and discoveries in certain
areas. We have contracted with several academic and institutional collaborators
to conduct research and development activities relating to our product
candidates. We have also entered into licensing agreements with respect to
specific technologies. These arrangements generally provide that we will fund
either the research or development of the technology, or both, and will obtain
an exclusive license or option to the technology developed, subject to certain
royalty and other obligations.

Patents and Proprietary Rights

Because of the length of time and expense associated with bringing new products
through development and the governmental approval process to the marketplace,
pharmaceutical and biotechnology companies have traditionally placed
considerable importance on obtaining and maintaining patent protection for
significant new technologies, products and processes. We have applied, and are
applying, for patents for our product candidates and aspects of our
technologies. As of December 31, 2001, we owned or exclusively licensed 153
U.S. patents and had 122 patent applications pending in the United States that
we filed on our own behalf or on behalf of our joint ventures or exclusive
licensors. When appropriate, we also seek foreign patent protection and, as of
December 31, 2001, we owned or exclusively licensed 135 foreign patents. Our
ability, however,

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to obtain patents in a timely manner, if at all, in foreign countries may be
limited by the laws of some of those countries. For example, many countries,
including several European countries, allow for an opposition period, often
lasting many months, after a patent is granted, providing third parties with
the opportunity to submit arguments that may call for the withdrawal of or
limitations on the affected patents.

Even if we are granted patents by government authorities, the validity and
enforceability of patents issued to pharmaceutical and biotechnology companies
has proven highly uncertain. For example, legal considerations surrounding the
validity of patents in the fields of pharmaceuticals and biotechnology are in
transition, and we cannot assure you that the historical legal standards
surrounding questions of validity will continue to be applied or that current
defenses relating to issued patents in these fields will, in fact, be
considered sufficient in the future. In addition, we cannot assure you as to
the degree and range of protections any of our patents may afford us, whether
patents will be issued or the extent to which we will be successful in avoiding
infringement of patents granted to others. For example, patents which have
already been issued to us may be subjected to further governmental review that
may ultimately result in the reduction of their scope of protection, and
pending patent applications may have their requested breadth of protection
significantly limited before being issued, if issued at all. Furthermore, since
publication of discoveries in scientific or patent literature often lags behind
actual discoveries, we cannot assure you that we were the first creator of
inventions covered by our patents or pending patent applications or that we
were the first to file patent applications for these inventions. In addition,
after seeking advice of counsel, we may undertake research and development with
respect to potential products, even when we are aware of third-party patents
that may be relevant to these potential products, on the basis that such
patents may be challenged or licensed by us. If our subsequent challenges to or
attempts to license such patents were to prove unsuccessful, we may not be able
to commercialize our potential products after having incurred significant
expenditures, and may be subject to patent infringement claims. Under U.S.
federal law, companies are protected against claims of infringement for using
technology patented by others in clinical trials. Accordingly, we cannot assure
you that the absence of litigation with respect to our product candidates in
clinical development is an indication that our commercially marketed products
will not be found to infringe the patent rights of others.

Many pharmaceutical and biotechnology companies and university and research
institutions have filed patent applications or already have received patents in
our areas of product development. Many of these entities' applications and
patents may be competitive with or conflict with ours, and could prevent us
from obtaining patents or could call into question the validity of our existing
patents. For example, if various patents issued to others are upheld in the
courts or if certain patent applications filed by others are issued as patents
and are upheld, we may be unable to market one or more of our product
candidates, or may be required to obtain a license to market those product
candidates. To contend with these possibilities, we have entered into
non-exclusive license agreements and anticipate entering into additional
license agreements in the future with third parties for technologies that may
be useful or necessary for the manufacture or commercialization of some of our
product candidates. In addition, we have initiated discussions with commercial
entities that hold U.S. patents on technology or processes that we may find
necessary in order to engage in some of our activities. However, we cannot
assure you that these licenses, or any others that we may be required to obtain
to market our product candidates, will be available on commercially reasonable
terms, if at all, or that we will be able to develop alternative technologies
if we cannot obtain required licenses.

While we pursue patent protection and enforcement of our product candidates and
aspects of our technologies when appropriate, we also rely on trade secrets,
know-how and continuing technological advancement to develop and maintain our
competitive position. To protect this competitive position, we regularly enter
into confidentiality and proprietary information agreements with third parties,
including employees, suppliers and collaborators. Our company employment policy
requires each new employee to enter into an agreement that contains provisions
generally prohibiting the disclosure of confidential information to anyone
outside of the company and providing that any invention conceived by an
employee within the scope of his employment duties is the exclusive property of
ICOS. Furthermore, our know-how that is accessed by third parties through
collaborations and research and development contracts and through our
relationships with scientific consultants is generally protected through
confidentiality agreements with the appropriate parties. We cannot, however,
assure you that these protective arrangements will be honored by third parties,
including employees, suppliers and collaborators, or that these arrangements
will effectively protect our rights relating to unpatented proprietary
information, trade secrets and know-how. In addition, we cannot assure you that
other parties will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our
proprietary information and technologies.

To protect our rights to our patents and proprietary information, we may need
to litigate against infringing third parties, or avail ourselves of the courts
or participate in hearings to determine the scope and validity of our patent
rights, such as participation in interference proceedings to determine priority
of invention. These types of proceedings are often costly and could be very
time-consuming to us, and we cannot assure you that the deciding authorities
will rule in our favor. An unfavorable decision could allow third parties to
use our technology without being required to pay us licensing fees or may
compel us to license needed technologies to avoid infringing third-party patent
and proprietary rights. In addition, we may be

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required to defend ourselves in patent suits brought by third parties who seek
to enjoin our product development efforts or seek damages for infringement. If
we receive an unfavorable judgment on any of these claims, we could be forced
to, among other things, alter our operations, pay licensing fees or discontinue
developing or marketing one or more of our potential products, as well as incur
significant legal expenses.

Pfizer was granted a patent (EP702555) by the European Patent Office claiming
the use of sildenafil citrate, also known as Viagra, and related compounds in a
medicament for the treatment of erectile dysfunction as well as the use of any
cyclic GMP PDE inhibitor, including any PDE5 inhibitor, as a medicament for the
treatment of erectile dysfunction. We, Eli Lilly, and eleven other companies
opposed this patent in the European Patent Office. A hearing was held July
16-19, 2001, at the end of which the Opposition Division of the European Patent
Office revoked all the claims of the Pfizer patent, including those for
sildenafil-containing medicaments. The decision, however, leaves unaffected
Pfizer's earlier compound patent, which covers sildenafil itself. Pfizer's
European Patent (EP702555) had been nationalized by Pfizer in most European
countries. Lilly ICOS brought suits challenging the patent in the Netherlands,
the United Kingdom and Belgium. The court in the Netherlands issued a judgment
on October 4, 2000 adjourning and staying proceedings pending the decision in
the opposition proceeding before the European Patent Office. The court in the
United Kingdom issued a judgment on November 8, 2000 that the Pfizer patent
claims are invalid for obviousness. Pfizer appealed that decision, and the
Appeals Court in the United Kingdom heard the case in December 2001. A written
decision affirming the lower court's judgment that the Pfizer patent claims are
invalid was issued on January 22, 2002. By agreement of the parties and consent
of the court, the case in Belgium has been adjourned until after the written
opinion, relating to the hearing on July 16-19, 2001, of the Opposition
Division of the European Patent Office has been rendered; upon resumption of
the case, the Belgium court will conduct a full hearing concerning all matters
and issues. It is expected that decisions by the European Patent Office, the
trial courts and the intermediate appellate courts in the three countries will
be appealed, if not already appealed, by the party that does not prevail. These
appeals could take years. If Pfizer's patent is ultimately upheld by the
European Patent Office or the courts in European countries, we may be subject
to litigation by Pfizer in Europe. We may also be prohibited from marketing
Cialis(TM) for the treatment of erectile dysfunction in some or all European
countries, or may be required to enter into licensing agreements to market
Cialis in Europe. We cannot assure you that such agreements would be available
on commercially reasonable terms, if at all. Pfizer has probably filed patent
applications in the United States seeking the same or similar claims as Pfizer
has attempted to obtain in Europe, and if Pfizer were to obtain a comparable
patent in the United States, we may be involved in further litigation to
determine whether our manufacture, use, sale or offer for sale of Cialis in the
United States infringes such a patent, and to determine the validity and scope
of such a patent.

Government Regulation

Regulation by government authorities in the United States, Europe, Japan and
other countries is a significant consideration in the manufacture and marketing
of our potential products and in our ongoing research and product development
activities. Our product candidates, including those of Suncos, Lilly ICOS,
ICOS-Texas Biotechnology and those being jointly developed through our
collaboration with Biogen, will require regulatory approval by government
agencies prior to commercialization. Human therapeutic products are subject to
rigorous preclinical and clinical testing and other approval requirements by
the FDA and comparable agencies in foreign countries. The time required for
completing testing and obtaining approvals of our product candidates is
uncertain but often takes several years. Any delay in testing or in the
evaluation of preclinical or clinical results by governmental health
authorities may hinder product development. In addition, we may encounter
delays in product development or rejections of product applications due to
changes in FDA or foreign regulatory policies during the period of product
development and testing. Various federal, state and foreign statutes and
regulations, including the Federal Food, Drug and Cosmetic Act, also regulate
the manufacturing, safety, labeling, storage, record keeping, and marketing of
our product candidates, and failure to comply with these legal requirements may
subject us to, among other things, civil penalties, criminal prosecution and
restrictions on product development and production. The lengthy process of
obtaining regulatory approvals and ensuring compliance with appropriate
statutes and regulations requires the expenditure of substantial resources. Any
delay or failure by us, our joint ventures or our collaborators to obtain
regulatory approvals could adversely affect our ability to commercialize our
product candidates, receive product, collaborative research or royalty payments
and generate sales revenue.

In general, the steps ordinarily required before a new therapeutic product
candidate may be marketed in the United States include:

   . preclinical laboratory tests, animal tests and formulation studies;

   . the submission to the FDA of an investigational New Drug Application,
     which must become effective before clinical testing may begin;

   . adequate and well-controlled clinical trials to establish the safety and
     efficacy of the product candidate for each indication;

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   . the submission of a New Drug Application or Biologics License Application,
     as the case may be, to the FDA; and

   . FDA review and approval of a New Drug Application or Biologics License
     Application, as the case may be, prior to any commercial sale or shipment
     of the product candidate.

Preclinical studies generally are conducted in the laboratory to evaluate the
potential safety and efficacy of a therapeutic product candidate and are
undertaken in compliance with Good Laboratory Practices regulations. The
results of these studies are submitted to the FDA as part of an investigational
New Drug Application, which must be reviewed by FDA personnel before clinical
testing may begin in the United States. Once the FDA is satisfied with or does
not comment on the submission of the investigational New Drug Application,
clinical trials on humans may begin, although the FDA may put a hold on these
trials at any time.

Clinical trials are conducted in accordance with Good Clinical Practices
regulations at sponsoring institutions under protocols detailing the objectives
of the trial, the parameters to be used in monitoring safety and the efficacy
criteria to be evaluated. Typically, clinical evaluation involves three
sequential phases, which may overlap. During Phase 1, clinical trials are
conducted with a relatively small number of subjects to determine the early
safety profile of a drug, as well as the pattern of drug distribution and drug
metabolism by the subject. In Phase 2, clinical trials are conducted with
groups of patients afflicted by a specific target disease to determine
preliminary efficacy, optimal dosages and dosage tolerance, and to gather
additional safety data. In Phase 3, large-scale, multicenter comparative
clinical trials are conducted with patients afflicted with a specific target
disease to provide data for the statistical proof of efficacy and safety as
required by the FDA and others. The FDA and a clinical trial sponsor may
suspend clinical trials at any time if it is believed that clinical subjects
are being exposed to an unacceptable health risk.

The results of preclinical and clinical testing of a product candidate, as well
as data relating to a product candidate's chemistry, pharmacology and
manufacture, are required to be submitted to the FDA, in the form of a New Drug
Application for small molecule products or a Biologics License Application for
biological products, in order to seek FDA approval. FDA approval of the New
Drug Application or Biologics License Application is required before marketing
of a product may begin in the United States, and the cost of this process may
be substantial. In response to a New Drug Application or Biologics License
Application, the FDA may grant marketing approval, request additional
information or deny the application if the FDA determines that the application
does not satisfy its regulatory approval criteria, including the pre-approval
of relevant product manufacturing facilities. The failure to obtain timely
permission for clinical testing or timely regulatory approval for product
marketing could materially affect us. Furthermore, the FDA may require testing
and surveillance programs to monitor the effect of a new product or may prevent
or limit future marketing of a product based on the results of these
post-marketing programs.

In addition, some of our product candidates, most notably sitaxsentan, which is
targeting pulmonary arterial hypertension, may qualify as orphan drugs under
the Orphan Drug Act of 1983. This act generally provides incentives to
manufacturers to undertake development and marketing of products to treat
relatively rare diseases or those diseases that would likely affect fewer than
200,000 persons annually in the United States. A drug that receives orphan drug
designation by the FDA, and is the first product to receive FDA marketing
approval for its product claim, is entitled to various advantages, including a
seven-year exclusive marketing period in the United States for that product
claim. However, any drug that is considered by the FDA to be different from a
particular orphan drug, including any orphan drug of ours that has been so
designated by the FDA, is not precluded from sale in the United States during
the seven-year exclusive marketing period. We cannot assure you that any of our
product candidates will be designated as an orphan drug by the FDA or, if so
designated, will have a positive effect on our revenues.

In order to manufacture our potential products, a domestic drug manufacturing
facility must be registered with the FDA as a domestic drug manufacturing
establishment, must submit to periodic inspection by the FDA and must comply
with current Good Manufacturing Practices regulations. In addition, to supply
products for use in the United States, foreign manufacturing establishments
must comply with these regulations and are subject to periodic inspection by
the FDA or corresponding regulatory agencies in countries under reciprocal
agreements with the FDA.

Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities may be necessary in foreign countries prior
to the commencement of marketing of a product in those countries. The approval
procedures vary among countries and can involve additional testing. The time
required to obtain approval may differ from that required for FDA approval.
Although there are some procedures for unified filings in some countries,
including some in Europe, in general each country has its own procedures and
requirements, many of which may be expensive and time-consuming. Accordingly,
there may be substantial delays in obtaining required approvals from foreign
regulatory authorities after the relevant applications are filed, if we
ultimately receive any approvals at all.

                                      16

<PAGE>

Our policy is to conduct our research activities in compliance with the
National Institute of Health Guidelines for Research Involving Recombinant DNA
Molecules. We are also subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices, the experimental use of animals, and the use and
disposal of hazardous or potentially hazardous substances, including
radioactive compounds and infectious disease agents, used in connection with
our work. The extent and character of government regulation that might result
from future legislation or administrative action, including additions or
changes to environmental laws, cannot be accurately predicted and may
materially affect our business operations and revenues.

Competition

Competition in the pharmaceutical and biotechnology industries is intense and
characterized by rapid technological development. We expect that our product
candidates will encounter significant competition. A number of pharmaceutical
and biotechnology companies are currently developing products targeting the
same diseases and medical conditions that we target, and some of our
competitors' products have entered clinical trials or are already commercially
available. For example, Pfizer has already successfully commercialized Viagra,
a competitor of our product candidate Cialis(TM). Bayer AG has filed a New Drug
Application with the FDA seeking approval for a PDE5 inhibitor, to be marketed
in partnership with Glaxo SmithKline, for the treatment of erectile
dysfunction. Eli Lilly received FDA approval for Xigris in the U.S. for the
treatment of severe sepsis, which may compete with Pafase(R) and IC14. Actelion
recently received FDA approval for Tracleer, an endothelin receptor antagonist
for the treatment of pulmonary arterial hypertension, with which sixtaxsentan
would compete. In addition, our potential products, if approved and
commercialized, will compete against well-established existing therapeutic
products that are currently reimbursed by government health administration
authorities, private health insurers and health maintenance organizations.

Our competitors include pharmaceutical companies, biotechnology companies and
chemical companies. Furthermore, significant levels of biotechnology research
now occur in universities, government agencies and other nonprofit research
institutions. These entities have become increasingly active in seeking patent
protection and licensing revenues for their research results, thereby providing
us with additional competition and potential costs to our operations. In
addition, many major pharmaceutical companies have made commercial arrangements
with other biotechnology companies or research institutions to further their
development of products that may compete with our potential products.

Many of our competitors have substantially more experience, capital, research
and development, regulatory, manufacturing, sales, marketing, human and other
resources than we do. As a result, they may:

   . develop products that are safer or more effective than our product
     candidates;

   . obtain FDA and other regulatory approvals or reach the market with their
     products more rapidly than we can, reducing the potential sales of our
     product candidates;

   . devote greater resources to market or sell their products;

   . adapt more quickly to new technologies and scientific advances;

   . initiate or withstand substantial price competition more successfully than
     we can;

   . have greater success in recruiting skilled scientific workers from the
     limited pool of available talent;

   . more effectively negotiate third-party collaborative and licensing
     arrangements; and

   . take advantage of acquisition or other opportunities more readily than we
     can.

We anticipate that we will face increased competition in the future as new
companies enter our markets and as scientific developments surrounding biologic
and small molecule therapeutics continue to accelerate. Through research and
discoveries, our competitors may render some or all of our product candidates
obsolete or unmarketable, and may succeed in developing products that are safer
and more effective than our potential products. Furthermore, even if our
product candidates prove superior to the products of our competitors, our
business could suffer as a result of collaboration partners independently
developing competing products through the use of product candidates we licensed
to them or developed through our collaborations.

We believe the principal competitive factors affecting our markets are the
timing and scope of regulatory approvals, safety and efficacy of therapeutic
products, cost and availability of these products, availability of alternative
treatments, third-party reimbursement programs and patent and proprietary
rights protection. Although we believe that we are well positioned to compete
adequately with respect to these factors in the future, our future success is
currently difficult to predict because all of our product candidates are still
in various stages of development and have yet to undergo regulatory approval
and commercialization.

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Manufacturing

Since 1993, we have manufactured recombinant protein-based clinical materials
in our production facilities in Bothell, Washington, a suburb of Seattle, to
support our previous and current clinical trials. Our current facilities are
capable of utilizing both microbial- and mammalian-based production processes
and were designed to meet the FDA requirements for the production of purified
recombinant protein bulk product. We currently produce bulk product for our
product candidates Pafase and IC14 at our production facilities. Vialing and
other finishing steps in the manufacturing processes of Pafase and IC14 are
completed under contracts with Gensia Sicor Pharmaceuticals and several other
companies. We also manufacture purified recombinant protein bulk product for
third parties pursuant to contractual arrangements and may enter into
additional arrangements in the future.

We currently do not have facilities to produce small molecule drugs. Our
product candidate Cialis(TM) is currently manufactured by Eli Lilly. We plan to
use Nordic Synthesis AB to manufacture the active pharmaceutical ingredient of
our product candidate sitaxsentan. We have established relationships with
third-party manufacturers to produce the required materials for our other small
molecule programs in preclinical studies. These manufacturers include Ricerca,
LLC, Salsbury Chemicals, Inc., and IRIX Pharmaceuticals, Inc We cannot assure
you that we will be able to maintain our current relationships with third-party
manufacturers and suppliers or establish future arrangements with third-party
manufacturers and suppliers on commercially reasonable terms, if at all. We
participate in quality control and quality assurance processes related to the
manufacture of potential products for us and our affiliates. However, there is
no assurance that regulatory bodies will not raise issues regarding
manufacturing and quality processes. Recently, the FDA issued Eli Lilly a Form
483 and a warning letter outlining certain observations relative to Eli Lilly's
manufacturing facilities. While these observations do not specifically address
a small molecule manufacturing facility, such as the one where Cialis is
manufactured, we cannot be certain that the FDA's observations will not impact
the Cialis manufacturing program.

Marketing and Sales

We have begun the development of a marketing and sales infrastructure,
recruiting several individuals experienced in these functions from larger
pharmaceutical and biotechnology companies. Currently, we have employees with
significant commercial experience in marketing and sales from major
pharmaceutical companies who will oversee the development of this
infrastructure.

Our marketing professionals are also focused on other product candidates at
earlier stages of development within ICOS. As these products advance in
development, the commitment of marketing resources will increase. In this
regard, the launch of Cialis will provide opportunities for our marketing
professionals to develop further skills and experience prior to assuming
marketing responsibilities for future product launches.

In addition to our own marketing and sales force, we may promote our potential
products with marketing partners. We also may rely on relationships with one or
more companies with established distribution systems and direct sales forces to
distribute and sell our potential products, including our collaboration
partners. For example, the marketing of Cialis in the United States and Europe
will be managed by teams made up of employees of ICOS and Eli Lilly, our joint
venture partner for this product. We are currently building a sales force that,
together with Eli Lilly, will co-promote Cialis. We expect to hire
approximately 165 sales representatives to promote Cialis after it is approved
by the FDA. The majority of the Cialis sales force will be representatives from
Eli Lilly. The Company and Eli Lilly will share all costs of developing,
producing, marketing and selling Cialis.

Human Resources

As of December 31, 2001, we employed 469 individuals. Approximately 349 of our
employees are engaged in research or development activities and the others are
engaged in general, administrative, marketing and sales positions. We consider
our employee relations to be good. We have never had a work stoppage, and none
of our employees are represented under a collective bargaining agreement. We
believe that our future success is dependent in part on our ability to attract,
integrate and retain skilled scientific, sales and marketing, and senior
management personnel. Competition in our industry for these skilled workers is
intense and we cannot assure you that we will be able to attract, integrate and
retain these personnel.

Important Factors Regarding Forward-Looking Statements

This report contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "anticipate,"
"believe," "continue," "could," "estimate," "expect," "intend," "may," "might,"
"plan," "potential," "predict," "should" or "will" or the negative of

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<PAGE>

such terms or other comparable terminology. These statements are only
predictions and involve known and unknown risks, uncertainties and other
factors that may cause our or our industry's actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Although
we believe that the expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee future results, performance or
achievements. You should not place undue reliance on these forward-looking
statements.

Risk Factors

ICOS operates in an environment that involves a number of risks and
uncertainties. The risks and uncertainties described below are not the only
risks and uncertainties we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks actually occur, our
business, results of operations and financial condition would suffer. The risks
discussed below also include forward-looking statements and our actual results
may differ substantially from those discussed in these forward-looking
statements.

   Risks Related to Our Business

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

We have incurred significant operating losses since we began operations in
September 1990. As of December 31, 2001, we had an accumulated deficit of
$302.3 million. We have not yet completed the development, including obtaining
regulatory approvals, of any products and, consequently, have not generated
revenues from the sale of products. Our operating losses have been increasing
during the past several years and will increase in 2002 and, possibly,
thereafter, as we attempt to complete development of our potential products,
obtain necessary regulatory approvals and manufacture and market these product
candidates. In particular, we expect to incur substantial marketing and other
costs related to commercializing Cialis if we are able to complete clinical
trials and obtain regulatory approval for this product candidate. Even if we do
successfully develop products that can be marketed, we will need to generate
significant revenues from those products to achieve and maintain profitability.
We currently do not expect to achieve profitability for at least two years.
Even if we do become profitable, we cannot assure you that we would be able to
sustain or increase profitability on a quarterly or annual basis.

Our operating results are subject to fluctuations that may cause our stock
price to decline.

Our operating results have fluctuated in the past and are likely to continue to
do so in the future. Our revenue is unpredictable and may fluctuate due to the
timing of non-recurring licensing fees, reimbursements earned by us for
manufacturing services, and achievement of milestones under new and existing
licensing and collaborative agreements. Revenue historically recognized under
our prior collaborative agreements may not be an indicator of revenue from any
future collaborations. In addition, our expenses are unpredictable and may
fluctuate from quarter to quarter due to the timing of expenses, which may
include payments owed by us under licensing or collaborative arrangements. We
believe that quarter-to-quarter comparisons of our operating results are not a
good indicator of our future performance and should not be relied upon to
predict the future performance of our stock price.

It is possible that, in the future, our operating results in a particular
quarter or quarters will not meet the expectations of securities analysts or
investors, causing the market price of our common stock to decline. In the
past, companies that have experienced decreases in the market price of their
stock have been subject to securities class action litigation. A securities
class action lawsuit against us could result in substantial damages, costs and
a diversion of our management's attention and resources.

Our clinical trials may fail to demonstrate the safety and efficacy of our
product candidates, which could prevent or significantly delay their regulatory
approval.

Any failure or substantial delay in completing clinical trials for our product
candidates may severely harm our business. Before obtaining regulatory approval
for the sale of any of our potential products, we must subject these product
candidates to extensive preclinical and clinical testing to demonstrate their
safety and efficacy for humans. Clinical trials are expensive, time-consuming
and may take years to complete. We may not complete clinical trials of product
candidates under development, and the results of the trials may fail to
demonstrate the safety or efficacy of such product candidates to the extent
necessary to obtain regulatory approvals or to make commercialization of the
product candidates worthwhile. At any time during these clinical trials,
factors such as ineffectiveness of the product candidate, discovery of
unacceptable toxicities or side effects, development of disease resistance or
other physiological factors, or delays in patient enrollment could cause us to
interrupt, limit, delay or abort the development of these product candidates.

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<PAGE>

In addition, success in preclinical and early clinical trials does not ensure
that late-stage or large-scale trials will be successful. Many companies in the
pharmaceutical and biotechnology industries, including us, have suffered
significant setbacks in clinical trials, even after promising results had been
obtained in earlier trials. Our Phase 3 clinical trial of product candidate
LeukArrest(TM) for the treatment of ischemic stroke was stopped in early 2000
after an interim analysis. Also, our trial data for product candidate ICM3 did
not show sufficiently promising results to warrant further study for the
treatment of psoriasis.

We may at times elect to use aggressive clinical strategies to advance product
candidates through clinical development as rapidly as possible. For example, we
may commence clinical trials without conducting preclinical animal efficacy
testing, or we may conduct late-stage trials based on limited early-stage data.
As a result, we anticipate that only some of our product candidates may show
safety and efficacy in clinical trials and many may encounter difficulties or
delays during clinical development.

Government regulatory authorities may not approve our product candidates.

Any failure to receive the regulatory approvals necessary to commercialize our
product candidates, in particular Cialis(TM), could cause our business to fail.
Our product candidates are subject to extensive and rigorous government
regulation. The United States Food and Drug Administration, or FDA, regulates,
among other things, the development, testing, manufacture, safety, efficacy,
recordkeeping, labeling, storage, approval, advertising, promotion, sale and
distribution of biopharmaceutical products. If our potential products are
marketed abroad, they will also be subject to extensive regulation by foreign
governments. None of our product candidates has been approved for sale in the
United States or any foreign market. In addition, we have only limited
experience in filing and pursuing applications necessary to gain regulatory
approvals, which may impede our ability to obtain such approvals.

The regulatory review and approval process, which includes preclinical studies
and clinical trials of each product candidate, is lengthy, expensive and
uncertain. Securing FDA approval requires the submission of extensive
preclinical and clinical data and supporting information to the FDA for each
indication to establish the product candidate's safety and efficacy. The
approval process may take many years to complete and may involve ongoing
requirements for post-marketing studies. Any FDA or other regulatory approval
of our product candidates, once obtained, may be withdrawn. The effect of
government regulation may be to:

   . delay marketing of potential products for a considerable period of time;

   . limit the indicated uses for which potential products may be marketed;

   . impose costly requirements on our activities; and

   . provide competitive advantage to other pharmaceutical and biotechnology
     companies.

In addition, regulatory compliance may prevent us from introducing new or
improved products or may require us to stop marketing potential products. If we
fail to comply with the laws and regulations pertaining to our business, we may
be subject to sanctions, including the temporary or permanent suspension of
operations, product recalls, marketing restrictions and civil and criminal
penalties.

On June 28, 2001, Lilly ICOS submitted a New Drug Application for Cialis to the
FDA. If the FDA finds that the validation, clinical or other required data in
the New Drug Application are insufficient, the FDA could require corrective
action or additional data, which could delay or prevent approval. For example,
the FDA could require additional studies for Cialis which could require
clinical testing in significantly more patients. These additional studies could
take years and require significant resources.

We may be unable to establish sales and marketing capabilities necessary to
successfully commercialize our potential products.

We currently have limited direct sales and marketing capabilities. We
anticipate relying on others to market and sell some of our primary product
candidates. For example, we have entered into an agreement with Eli Lilly to
co-promote Cialis in North America and Europe. Because we expect to market or
co-market our potential products through a direct sales force, we will need to
either hire a sales force with expertise in pharmaceutical sales or contract
with a third party to provide a sales force to meet our needs. We may be unable
to establish marketing, sales and distribution capabilities necessary to
commercialize and gain market acceptance for our potential products. In
addition, co-promotion or other marketing arrangements with others to
commercialize potential products could significantly limit the revenues we
derive from these potential products, and these parties may fail to
commercialize our potential products successfully.

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<PAGE>

The success of Cialis is dependent on the marketing, promotion, sales and
distribution activities of our partner, Eli Lilly.

Through our joint venture partnership with Eli Lilly, we and Eli Lilly have
joint responsibility for the promotion, sale and distribution of Cialis in
North America and Europe. In addition, Eli Lilly has promotion, sales and
distribution rights to Cialis for the other parts of the world with royalties
to be paid to Lilly ICOS. We have no experience in the sale or marketing of
pharmaceutical products and have only just begun hiring a sales and marketing
staff. We believe that, for Cialis to be widely adopted, the efforts of an
experienced pharmaceutical sales force are needed. If Eli Lilly fails to devote
appropriate resources to promote, sell and distribute Cialis, sales of Cialis
could be reduced. In addition, if Eli Lilly breaches or terminates its
agreement with us or otherwise fails to conduct its Cialis-related activities
in a timely manner, sales of Cialis could be delayed, reduced or become
substantially more costly for us to achieve.

We may be unable to compete successfully in the markets for pharmaceutical and
biotechnological products.

The markets in which we compete are well established and intensely competitive.
We may be unable to compete successfully against our current and future
competitors. Our failure to compete successfully may result in pricing
reductions, reduced gross margins and failure to achieve market acceptance for
our potential products.

Our potential products, if approved and commercialized, will compete against
well-established existing therapeutic products that are currently reimbursed by
government health administration authorities, private health insurers and
health maintenance organizations. In addition, a number of pharmaceutical and
biotechnology companies are currently developing products targeting the same
diseases and medical conditions that we target. For example:

   . Pfizer has already successfully commercialized Viagra, a competitor of our
     product candidate Cialis(TM);

   . Bayer AG is currently seeking regulatory approval for a PDE5 inhibitor for
     the treatment of erectile dysfunction that may also compete with our
     product candidate Cialis and Viagra;

   . Eli Lilly received FDA approval for Xigris in the U.S. for the treatment
     of severe sepsis, which may compete with our product candidates Pafase(R)
     and IC14; and

   . Actelion recently received FDA approval for Tracleer, an endothelin
     receptor antagonist for the treatment of pulmonary arterial hypertension,
     with which sitaxsentan would compete.


Our competitors include pharmaceutical companies, biotechnology companies,
chemical companies, academic and research institutions and government agencies.
Many of these organizations have substantially more experience and more
capital, research and development, regulatory, manufacturing, sales, marketing,
human and other resources than we do. As a result, they may:

   . develop products that are safer or more effective than our product
     candidates;

   . obtain FDA and other regulatory approvals or reach the market with their
     products more rapidly than we can, reducing the potential sales of our
     product candidates;

   . devote greater resources to market or sell their products;

   . adapt more quickly to new technologies and scientific advances;

   . initiate or withstand substantial price competition more successfully than
     we can;

   . have greater success in recruiting skilled scientific workers from the
     limited pool of available talent;

   . more effectively negotiate third-party licensing and collaborative
     arrangements; and

   . take advantage of acquisition or other opportunities more readily than we
     can.

We face and will continue to face intense competition from other companies for
collaborative arrangements with pharmaceutical and biotechnology companies, for
relationships with academic and research institutions, and for licenses to
proprietary technology. In addition, we anticipate that we will face increased
competition in the future as new companies enter our markets and as scientific
developments surrounding protein-based and small molecule therapeutics continue
to accelerate.

                                      21

<PAGE>

We may need additional funds to develop and market our potential products. If
we are unable to obtain the additional funding, we may be required to delay,
scale back or eliminate expenditures for some of our programs or grant rights
to third parties to develop and market our potential products.

Our business does not currently generate the cash needed to finance our
operations. We will require substantial financial resources to conduct the
time-consuming and costly research, preclinical development, clinical trials,
manufacturing and regulatory and marketing activities necessary to
commercialize our potential products. We may need to seek additional financing
through public or private sources, including equity financings, and through
other alternatives, including collaborative arrangements. Poor financial
results, unanticipated expenses or unanticipated opportunities that require
financial commitments could give rise to additional financing requirements.
However, financing may be unavailable when we need it or may not be available
on acceptable terms. If we raise additional funds by issuing equity or
convertible debt securities, the percentage ownership of our existing
stockholders would be diluted, and these securities might have rights superior
to those of our common stock. If we are unable to raise additional funds when
we need them, we may be required to delay, scale back or eliminate expenditures
for some of our development programs or grant rights to third parties to
develop and market product candidates that we would prefer to develop and
market internally. If we are required to grant such rights, the ultimate value
of these product candidates to us would be reduced.

If we fail to negotiate or maintain successful collaborative arrangements with
third parties, our development and marketing activities may be delayed or
reduced.

We have entered into, and we expect to enter into in the future, collaborative
arrangements with third parties who provide us with funding and/or who perform
research, development, regulatory compliance, manufacturing or marketing
activities relating to some or all of our product candidates. If we fail to
secure or maintain successful collaborative arrangements, our development and
marketing activities may be delayed or reduced. Currently, we have
collaborative arrangements with Eli Lilly, Suntory, Texas Biotechnology,
Biogen, other companies and research laboratories. We may be unable to
negotiate additional collaborative arrangements or, if necessary, modify our
existing arrangements on acceptable terms.

Our collaborative agreements can be terminated under certain conditions by our
partners. In addition, our partners may separately pursue competing products,
therapeutic approaches or technologies to develop treatments for the diseases
targeted by us or our collaborative efforts. Even if our partners continue
their contributions to the collaborative arrangements, they may nevertheless
determine not to actively pursue the development or commercialization of any
resulting products. Also, our partners may fail to perform their obligations
under the collaborative arrangements or may be slow in performing their
obligations. In addition, our partners may experience financial difficulties at
any time that could prevent them from having available funds to contribute to
these collaborations. In these circumstances, our ability to develop and market
potential products could be severely limited.

If we are unable to protect our intellectual property rights adequately, the
value of our potential products could be diminished.

Our success is dependent in part on our ability and the ability of our
collaboration partners to obtain, maintain and enforce patents and other
proprietary rights. Patent law relating to the scope of claims in the
biotechnology field in which we operate is still evolving and surrounded by a
great deal of uncertainty. Accordingly, we cannot assure you that our pending
patent applications will result in issued patents. In addition, we cannot
assure you that others have not filed patent applications for technology
covered by our pending applications or that we were the first to invent the
technology. There may be third-party patents or patent applications relevant to
our potential products that may block or compete with the technologies covered
by our patent applications.

In addition, although we own a number of patents, the issuance of a patent is
not conclusive as to its validity or enforceability, and third parties may
challenge the validity or enforceability of our patents. We cannot assure you
how much protection, if any, will be given to our patents if we attempt to
enforce them and they are challenged in court or in other proceedings. It is
possible that a competitor may successfully challenge our patents or that
challenges will result in limitations of their coverage. In addition, the cost
of litigation to uphold the validity of patents can be substantial. If we are
unsuccessful in such litigation, third parties may be able to use our patented
technologies without paying licensing fees or royalties to us.

Moreover, competitors may infringe our patents or successfully avoid them
through design innovation. To prevent infringement or unauthorized use, we may
need to file infringement claims, which are expensive and time-consuming. In
addition, in an infringement proceeding a court may decide that a patent of
ours is not valid or is unenforceable, or may refuse to stop the other party
from using the technology at issue on the ground that its technology is not
covered by our

                                      22

<PAGE>

patents. Policing unauthorized use of our intellectual property is difficult,
and we cannot assure you that we will be able to prevent misappropriation of
our proprietary rights, particularly in countries where the laws may not
protect such rights as fully as in the United States.

In addition to our patented technology, we also rely on unpatented technology,
trade secrets and confidential information. We may not be able to effectively
protect our rights to this technology or information. Other parties may
independently develop substantially equivalent information and techniques or
otherwise gain access to or disclose our technology. We require each of our
employees, consultants and corporate partners to execute a confidentiality
agreement at the commencement of an employment, consulting or collaborative
relationship with us. However, these agreements may not provide effective
protection of our technology or information or, in the event of unauthorized
use or disclosure, they may not provide adequate remedies.

We may be subject to substantial costs and liability or be prohibited from
commercializing our potential products as a result of patent infringement
litigation and other proceedings relating to patent rights.

Patent litigation is very common in the biopharmaceutical industry. We cannot
assure you that third parties will not assert patent or other intellectual
property infringement claims against us or our collaboration partners with
respect to technologies used in potential products. Any claims that might be
brought against us relating to infringement of patents may cause us to incur
significant expenses and, if successfully asserted against us, may cause us to
pay substantial damages. Even if we were to prevail, any litigation could be
costly and time-consuming and could divert the attention of our management and
key personnel from our business operations. Furthermore, as a result of a
patent infringement suit brought against us or our collaboration partners, we
or our collaboration partners may be forced to stop or delay developing,
manufacturing or selling potential products that are claimed to infringe a
third party's intellectual property unless that party grants us or our
collaboration partners rights to use its intellectual property. We or our
collaboration partners may not be able to obtain these rights on acceptable
terms or at all. Even if we or our collaboration partners were able to obtain
rights to the third party's intellectual property, these rights may be
non-exclusive, thereby giving our competitors access to the same intellectual
property. Ultimately we may be unable to commercialize some of our potential
products or may have to cease some of our business operations as a result of
patent infringement claims, which could severely harm our business.

In addition, we may have to resort to costly and time-consuming proceedings and
litigation to determine the validity and scope of the proprietary rights of
others. For example, we, Eli Lilly and eleven other companies were recently
involved in an opposition proceeding in the European Patent Office in which we
opposed a patent previously granted by the European Patent Office to Pfizer
Inc. This patent (EP702555) claimed the use of sildenafil citrate, also known
as Viagra, and related compounds in a medicament for the treatment of erectile
dysfunction as well as the use of any cyclic GMP PDE inhibitor, including any
PDE5 inhibitor, as a medicament for the treatment of erectile dysfunction.
Viagra targets the same medical conditions that our product candidate
Cialis(TM) targets. A hearing was held July 16-19, 2001, at the end of which
the Opposition Division of the European Patent Office revoked all the claims of
the Pfizer patent, including those for sildenafil-containing medicaments. The
decision, however, leaves unaffected Pfizer's earlier compound patent, which
covers sildenafil itself. Pfizer's European Patent (EP702555) had been
nationalized by Pfizer in most European countries. Lilly ICOS brought suits
challenging the patent in the Netherlands, the United Kingdom and Belgium. The
court in the Netherlands issued a judgment on October 4, 2000 adjourning and
staying proceedings pending the decision in the opposition proceeding before
the European Patent Office. The court in the United Kingdom issued a judgment
on November 8, 2000 that the Pfizer patent claims are invalid for obviousness.
Pfizer appealed that decision, and the Appeals Court in the United Kingdom
heard the case in December 2001. A written decision affirming the lower court's
judgment that the Pfizer patent claims are invalid was issued on January 22,
2002. By agreement of the parties and consent of the court, the case in Belgium
has been adjourned until after the written opinion, relating to the hearing on
July 16-19, 2001, of the Opposition Division of the European Patent Office has
been rendered; upon resumption of the case, the Belgium court will conduct a
full hearing concerning all matters and issues. It is expected that decisions
by the European Patent Office, the trial courts and the intermediate appellate
courts in the three countries will be appealed, if not already appealed, by the
party that does not prevail. These appeals could take years. If Pfizer's patent
is ultimately upheld by the European Patent Office or the courts in European
countries, we may be subject to litigation by Pfizer in Europe. We may also be
prohibited from marketing Cialis for the treatment of erectile dysfunction in
some or all European countries, or may be required to enter into licensing
agreements to market Cialis in Europe. We cannot assure you that such
agreements would be available on commercially reasonable terms, if at all.
Pfizer has probably filed patent applications in the United States seeking the
same or similar claims as Pfizer has attempted to obtain in Europe, and if
Pfizer were to obtain a comparable patent in the United States, we may be
involved in further litigation to determine whether our manufacture, use, sale
or offer for sale of Cialis in the United States infringes such a patent, and
to determine the validity and scope of such a patent.

                                      23

<PAGE>

Furthermore, after seeking advice of counsel, we may undertake research and
development with respect to potential products even when we are aware of
third-party patents that may be relevant to these potential products, on the
basis that such third- party patents may be challenged or licensed by us. If
our subsequent challenges to such patents were not to prevail, we may be
subject to patent infringement claims. In addition, if our subsequent attempts
to license such patents were to prove unsuccessful, we may not be able to
commercialize these potential products after having incurred significant
expenditures.

We may be unable to establish the manufacturing capabilities necessary to
develop and commercialize our potential products.

We do not have facilities to manufacture small molecule product candidates,
such as Cialis, and we do not have sufficient manufacturing capacity to
manufacture our biological product candidates in quantities necessary for
commercial sale. In addition, our manufacturing capacity may be inadequate to
complete all clinical trials contemplated by us over time. We intend to rely
significantly on contract manufacturers, including our collaboration partners,
to produce large quantities of drug material needed for clinical trials and
commercialization of our potential products. We will have to depend on these
manufacturers to deliver materials on a timely basis and to comply with
regulatory requirements, including Good Manufacturing Practices regulations
enforced by the FDA through its facilities inspection program. Third-party
manufacturers may not be able to meet our needs with respect to timing,
quantity or quality of materials, and may fail to satisfy applicable regulatory
requirements with respect to the manufacture of these materials. If we are
unable to contract for a sufficient supply of needed materials on acceptable
terms, or if we should encounter delays or difficulties in our relationships
with manufacturers, our clinical trials may be delayed, thereby delaying the
submission of product candidates for regulatory approval and the market
introduction and subsequent commercialization of our potential products. Any
such delays may lower our revenues and potential profitability.

Manufacturing product candidates in compliance with regulatory requirements is
complex, time-consuming and expensive. If we make changes in our manufacturing
processes, the FDA and corresponding foreign authorities may require us to
demonstrate that the changes have not caused the resulting drug material to
differ significantly from the drug material previously produced. Also, we may
want to rely on results of prior preclinical studies and clinical trials
performed using the previously produced drug material. Depending on the type
and degree of differences between the newer and older drug material, we may be
required to conduct additional animal studies or human clinical trials to
demonstrate that the newly produced drug material is sufficiently similar to
the previously produced drug material. We and our collaboration partners have
made manufacturing changes and are likely to make additional manufacturing
changes for the production of our product candidates currently in development,
such as Cialis(TM) and Pafase(R). Manufacturing changes could result in delays
in development or regulatory approval or in reduction or interruption of
commercial sales of our potential products and could impair our competitive
position.

We may develop our manufacturing capacity in part by expanding our current
facilities or building new facilities. Either of these activities would require
substantial additional funds, and we would need to hire and train significant
numbers of employees to staff these facilities. We may not be able to develop
manufacturing facilities that are sufficient to produce drug material for
clinical trials or commercial use. Moreover, we and any third-party
manufacturers that we may use must continually adhere to current Good
Manufacturing Practices regulations. If our facilities or the facilities of
third-party manufacturers cannot pass a pre-approval plant inspection, the FDA
pre-market approval of our product candidates will not be granted. In complying
with these regulations and foreign regulatory requirements, we and any of our
third-party manufacturers will be obligated to expend time, money and effort in
production, recordkeeping and quality control to assure that our potential
products meet applicable specifications and other requirements. If we or any of
our third-party manufacturers fail to comply with these requirements, we may be
subject to regulatory sanctions.

We participate in quality control and quality assurance processes related to
the manufacture of potential products for us and our affiliates. However, there
is no assurance that regulatory bodies will not raise issues regarding
manufacturing and quality processes. Recently, the FDA issued Eli Lilly a Form
483 and a warning letter outlining certain observations relative to Eli Lilly's
manufacturing facilities. While these observations do not specifically address
a small molecule manufacturing facility, such as the one where Cialis is
manufactured, we cannot be certain that the FDA's observations will not impact
the Cialis manufacturing program.

The failure to attract or retain key management and technical personnel could
harm our business.

We are highly dependent on the efforts and abilities of our current management
and key technical personnel. Our success will depend in part on retaining the
services of our existing management and key personnel and attracting and
retaining new highly qualified personnel. Failure to retain our existing key
management and technical personnel or to attract additional highly qualified
personnel could, among other things:

   . compromise our ability to negotiate additional collaborative arrangements;

                                      24

<PAGE>

   . delay our ongoing discovery research efforts;

   . delay preclinical or clinical testing of our product candidates;

   . delay the regulatory approval process; or

   . prevent us from successfully commercializing our product candidates.

In our field, competition for qualified management and technical personnel is
intense. In addition, many of the companies with which we compete for
experienced personnel have greater financial and other resources than we do. As
a result of these factors, we may be unsuccessful in recruiting and retaining
sufficient qualified personnel.

Our business may be harmed if we cannot obtain sufficient quantities of raw
materials.

We depend on outside vendors for the timely supply of raw materials used to
conduct preclinical testing and clinical trials of product candidates. Once a
supplier's materials have been selected for use in our manufacturing process,
the supplier in effect becomes a sole or limited source of that raw material
due to regulatory compliance procedures. Our business could be harmed if our
third-party suppliers were to cease production or otherwise fail to supply us
with quality raw materials in a timely manner and we were unable to contract
for these services with alternative suppliers on acceptable terms.

   Risks Related to Our Industry

Our product candidates, even if approved by the FDA or foreign regulatory
agencies, may not achieve market acceptance among hospitals, insurers or
patients.

Our product candidates, even if approved by the FDA or foreign regulatory
agencies, may fail to achieve market acceptance, which would impair our ability
to become profitable. We believe that market acceptance of our potential
products will depend on our ability to provide acceptable evidence of safety,
efficacy and limited side effects; our ability to provide these potential
products at reasonable prices; and the availability of third-party
reimbursement for these potential products. In addition, market acceptance
depends on the effectiveness of our marketing strategy, and, to date, we have
very limited sales and marketing experience or capabilities.

Rapid changes in technology and industry standards could render our potential
products unmarketable.

We are engaged in a field characterized by extensive research efforts and rapid
technological development. New drug discoveries and developments in our field
and other drug discovery technologies are accelerating. Our competitors may
develop technologies and products that are more effective than any we develop
or that render our technology and potential products obsolete or
noncompetitive. In addition, our potential products could become unmarketable
if new industry standards emerge. To be successful, we will need to enhance our
product candidates and design, develop and market new product candidates that
keep pace with new technological and industry developments.

We may be required to defend lawsuits or pay damages in connection with the
alleged or actual harm caused by our product candidates.

We face an inherent business risk of exposure to product liability claims in
the event that the use of our product candidates is alleged to have resulted in
harm to others. This risk exists in clinical trials as well as in commercial
distribution. In addition, the pharmaceutical and biotechnology industries in
general have been subject to significant medical malpractice litigation. We may
incur significant liability if product liability or malpractice lawsuits
against us are successful. Although we maintain product liability insurance, we
cannot be sure that this coverage is adequate or that it will continue to be
available to us on acceptable terms.

We may incur substantial environmental liability arising from our activities
involving the use of hazardous materials.

Our research and development activities involve the controlled use of
chemicals, viruses, radioactive compounds and other hazardous materials. If an
accident involving these materials occurs, we could be held liable for any
damages that result, and that liability could exceed our resources. We are
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of hazardous materials and certain
waste products. Although we believe that our operations comply with the
standards prescribed by these laws and regulations, we cannot completely
eliminate the risk of accidental contamination or injury from these materials.

                                      25

<PAGE>

Item 2.  Properties

We lease or own approximately 244,000 square feet of space in five buildings
located in Bothell, Washington. Our leases expire between May 2002 and January
2009, with options to renew for additional four- or five-year periods. Our
principal administrative offices, research laboratories and clinical production
facility occupy approximately 229,000 square feet. We sublease the remaining
15,000 square feet of space under a short-term lease expiring in 2002, which
provides yearly extensions through 2004. We have also entered into a five-year
lease for an additional 22,000 square feet, adjacent to our existing
facilities, commencing in June 2002. In addition, in December 1992, we
purchased approximately 300,000 square feet of undeveloped land adjacent to our
main facilities. We believe this purchase gives us the flexibility to expand in
our current geographic location as and if our space needs increase in the
foreseeable future. Over the next several years, we plan to lease, acquire or
build additional facilities to accommodate the activities and personnel
necessary to continue the growth of our business.

Item 3.  Legal Proceedings

From time to time, we may become involved in litigation relating to claims
arising in the ordinary course of our business. We believe that there are no
claims or actions pending or threatened against us that, if adversely
determined, would have a material adverse effect on us.

Item 4.  Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of ICOS' stockholders during the fourth
quarter of 2001.

                                      26

<PAGE>

                                    PART II

Item 5.  Market for the Registrant's Common Equity and Related Stockholder
Matters

Our common stock trades on The Nasdaq National Market under the symbol ICOS.
The following table sets forth, for the periods indicated, the high and low
sale prices per share of our common stock as reported on The Nasdaq National
Market.

<TABLE>
<CAPTION>
                          2001            High   Low
                          ----           ------ ------
                          <S>            <C>    <C>
                          First Quarter  $57.00 $36.44
                          Second Quarter  70.10  40.88
                          Third Quarter   65.40  42.40
                          Fourth Quarter  64.26  48.53

                          2000
                          ----
                          First Quarter  $68.00 $28.00
                          Second Quarter  47.00  26.88
                          Third Quarter   60.00  43.06
                          Fourth Quarter  56.88  37.81
</TABLE>

As of January 31, 2002, there were approximately 2,259 holders of record of our
common stock. Because many of these shares are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of stockholders represented by the record holders.

We have never declared or paid any dividends on our common stock. For the
foreseeable future, we intend to retain earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends.

                                      27

<PAGE>

Item 6.  Selected Consolidated Financial Data

The following selected consolidated financial data should be read in
conjunction with Item 7, Management's Discussion and Analysis of Results of
Operations and Financial Condition, and the consolidated financial statements
and related notes included in this Form 10-K for the year ended December 31,
2001.

<TABLE>
<CAPTION>
                                                                                 (in thousands, except per share data)
                                                                         ----------------------------------------------------
                                                                                        Year ended December 31,
                                                                         ----------------------------------------------------
                                                                           2001       2000       1999       1998      1997
                                                                         ---------  ---------  ---------  --------  ---------
<S>                                                                      <C>        <C>        <C>        <C>       <C>
Statement of Operations Data:
Revenue:
  Collaborative research and development from related parties            $  54,754  $  47,404  $  64,100  $ 33,758  $  21,076
  Licenses of technology, primarily to related parties                      30,846     42,929     15,000    75,000      8,500
  Other                                                                      7,769        400        500     2,010      2,000
                                                                         ---------  ---------  ---------  --------  ---------
   Total revenue                                                            93,369     90,733     79,600   110,768     31,576
                                                                         ---------  ---------  ---------  --------  ---------
Operating expenses:
  Research and development                                                 111,801     87,435    100,541    76,978     42,783
  General and administrative                                                 9,059      6,582      5,259     4,031      2,737
                                                                         ---------  ---------  ---------  --------  ---------
   Total operating expenses                                                120,860     94,017    105,800    81,009     45,520
                                                                         ---------  ---------  ---------  --------  ---------
Operating income (loss)                                                    (27,491)    (3,284)   (26,200)   29,759    (13,944)
                                                                         ---------  ---------  ---------  --------  ---------
Other income (expense):
  Equity in losses of affiliates                                           (64,902)   (37,038)   (12,042)     (191)      (226)
  Interest income                                                           10,451      4,419      4,292     2,369      2,164
  Other, net                                                                 1,769      1,112        755        21         (9)
                                                                         ---------  ---------  ---------  --------  ---------
   Total other income (expense)                                            (52,682)   (31,507)    (6,995)    2,199      1,929
                                                                         ---------  ---------  ---------  --------  ---------
Income (loss) before income taxes and cumulative effect of change in
 accounting principle                                                      (80,173)   (34,791)   (33,195)   31,958    (12,015)
Income taxes                                                                     -          -          -       648          -
                                                                         ---------  ---------  ---------  --------  ---------
Income (loss) before cumulative effect of change in accounting principle   (80,173)   (34,791)   (33,195)   31,310    (12,015)
Cumulative effect of change in accounting principle                              -    (63,075)         -         -          -
                                                                         ---------  ---------  ---------  --------  ---------
Net income (loss)                                                        $ (80,173) $ (97,866) $ (33,195) $ 31,310  $ (12,015)
                                                                         =========  =========  =========  ========  =========
Per common share:
  Income (loss) before cumulative effect of change in accounting
   principle:
   Basic                                                                 $   (1.48) $   (0.75) $   (0.76) $   0.78  $   (0.30)
   Diluted                                                               $   (1.48) $   (0.75) $   (0.76) $   0.67  $   (0.30)
  Cumulative effect of change in accounting principle (basic and
   diluted)                                                              $       -  $   (1.36) $       -  $      -  $       -
  Net income (loss):
   Basic                                                                 $   (1.48) $   (2.11) $   (0.76) $   0.78  $   (0.30)
   Diluted                                                               $   (1.48) $   (2.11) $   (0.76) $   0.67  $   (0.30)

Pro forma amounts assuming the change in accounting principle was
 applied retroactively to prior years:
   Net loss                                                                                    $ (17,309) $(39,667) $ (19,999)
   Net loss per common share - basic and diluted                                               $   (0.40) $  (0.99) $   (0.51)

Weighted-average common shares outstanding - basic                          54,073     46,343     43,449    40,139     39,595
Weighted-average common shares outstanding - diluted                        54,073     46,343     43,449    46,849     39,595

                                                                                            (in thousands)
                                                                         ----------------------------------------------------
                                                                                             December 31,
                                                                         ----------------------------------------------------
                                                                           2001       2000       1999       1998      1997
                                                                         ---------  ---------  ---------  --------  ---------
Balance Sheet Data:
Cash and cash equivalents, investment securities and interest receivable $ 470,707  $ 229,400  $  69,254  $ 78,065  $  25,773
Working capital                                                            381,365    194,276     75,035    71,743     24,536
Total assets                                                               507,587    268,174    112,788   113,347     54,065
Accumulated deficit                                                       (302,349)  (222,176)  (124,310)  (91,115)  (122,425)
Stockholders' equity                                                       453,750    211,095     99,399    98,733     49,872
</TABLE>

                                      28

<PAGE>

Notes to Selected Consolidated Financial Data:

(1) In the fourth quarter of 2000, we changed our accounting for nonrefundable
    upfront technology license fees, for product candidates where we are
    providing continuing services related to product development. These fees
    are deferred and recognized as revenue over the product development
    periods, based on estimated total development costs. Milestone payments are
    recognized as revenue at the time such payments are due, based on the ratio
    of cumulative costs incurred to date, to total estimated development costs.
    Any remaining balance is deferred and recognized as revenue over the
    remaining product development period. Prior to 2000, milestone payments
    were recognized as revenue upon attainment of a specified event and other
    nonrefundable payments for technology or licensing fees were recognized as
    revenue when payment was received. Pro forma amounts give effect to this
    accounting change as if it occurred prior to January 1, 1997.

(2) The following tables summarize our revenue from collaborative research and
    development and licenses of technology, and equity in losses of affiliates.

<TABLE>
<CAPTION>
                                                                             (in thousands)
                                                             ----------------------------------------------
                                                                         Year ended December 31,
                                                             ----------------------------------------------
                                                               2001      2000      1999     1998     1997
                                                             --------  --------  --------  -------  -------
<S>                                                          <C>       <C>       <C>       <C>      <C>
Collaborative research and development from related parties:
 Lilly ICOS                                                  $  9,965  $ 19,944  $ 19,902  $ 3,794  $     -
 Suncos                                                        30,373    15,175    25,053   14,894   11,209
 ICOS-TBC                                                      12,676     2,816         -        -        -
 ICOS Clinical Partners                                         1,740     9,469    19,145   15,070    9,867
                                                             --------  --------  --------  -------  -------
                                                             $ 54,754  $ 47,404  $ 64,100  $33,758  $21,076
                                                             ========  ========  ========  =======  =======
Licenses of technology, primarily to related parties:
 Lilly ICOS                                                  $ 29,416  $ 42,331  $ 15,000  $75,000  $     -
 ICOS Clinical Partners                                           981       598         -        -    8,500
 Biogen                                                           449         -         -        -        -
                                                             --------  --------  --------  -------  -------
                                                             $ 30,846  $ 42,929  $ 15,000  $75,000  $ 8,500
                                                             ========  ========  ========  =======  =======
Equity in losses of affiliates:
 Lilly ICOS                                                  $(38,219) $(23,612) $      -  $     -  $     -
 Suncos                                                       (15,200)   (7,754)  (11,802)       -        -
 ICOS-TBC                                                     (11,461)   (5,476)        -        -        -
 ICOS Clinical Partners                                           (22)     (196)     (240)    (191)    (226)
                                                             --------  --------  --------  -------  -------
                                                             $(64,902) $(37,038) $(12,042) $  (191) $  (226)
                                                             ========  ========  ========  =======  =======
</TABLE>

Item 7.  Management's Discussion and Analysis of Results of Operations and
Financial Condition

The following discussion and analysis should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this
report. This discussion contains forward-looking statements based on current
expectations that are subject to risks and uncertainties, such as statements of
our plans, objectives, expectations and intentions. In some cases, you can
identify forward-looking statements by terminology such as "anticipate,"
"believe," "continue," "could," "estimate," "expect," "intend," "may," "might,"
"plan," "potential," "predict," "should" or "will" or the negative of those
terms or comparable terminology. Our actual results and the timing of events
could differ materially from those anticipated or implied by the
forward-looking statements discussed here as a result of various factors,
including, among others, those set forth under "Important Factors Regarding
Forward-Looking Statements" and "Risk Factors" in Item 1, "Business", and
elsewhere in this Annual Report on Form 10-K. You should not place undue
reliance on these forward-looking statements, which speak only as of the date
of this report. We undertake no obligation to publicly release the results of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events.

Overview

ICOS Corporation and subsidiaries, herein collectively referred to as ICOS, is
a product-driven company that has expertise in both protein-based and small
molecule therapeutics. We combine our capabilities in molecular, cellular and
structural biology, high throughput drug screening, medicinal chemistry and
gene expression profiling, to develop highly innovative products with
significant commercial potential. To enhance our internal development efforts,
we have established collaborations with other pharmaceutical and biotechnology
companies, including Eli Lilly and Company ("Eli Lilly"), Suntory Limited
("Suntory"), Texas Biotechnology Corporation ("Texas Biotechnology") and
Biogen, Inc. ("Biogen"). We and our partners currently have the following
product candidates in late-stage development: Cialis(TM), for which we have
completed registrational Phase 3 clinical trials and have submitted
applications in the United States and Europe seeking marketing approval for the
treatment of erectile dysfunction; Pafase(R), for which patient enrollment in a
Phase 3 clinical trial for severe sepsis was initiated in the second quarter of
2001; and sitaxsentan, for which patient enrollment in a Phase 2b/3 clinical
trial for pulmonary arterial hypertension was initiated in the second quarter
of 2001. Additionally, we continue to develop a broad portfolio of early-stage
clinical product candidates, including IC14, IC747, IC485, TBC3711 and

                                      29

<PAGE>

RTX(TM) (resiniferatoxin), which encompass a variety of therapeutic approaches
to address needs in both chronic and acute diseases.

Cialis

In collaboration with our partner, Eli Lilly, we are evaluating Cialis
(tadalafil) for the treatment of erectile dysfunction and female sexual
dysfunction. Cialis has completed registrational Phase 3 clinical trials and,
on June 28, 2001, Lilly ICOS LLC ("Lilly ICOS"), a joint venture entity we
established with Eli Lilly in 1998 for the development of Cialis, submitted
both a U.S. New Drug Application ("NDA") and a European Market Authorization
Application seeking marketing approval of Cialis for the treatment of erectile
dysfunction. On August 31, 2001, Lilly ICOS announced that the Cialis NDA had
been accepted for review by the U.S Food and Drug Administration ("FDA").

Pafase

In collaboration with Suntory, we are evaluating Pafase (rPAF-AH), a
recombinant human serum protein, for the treatment of severe sepsis. Pafase
began a pivotal multinational Phase 3 clinical trial in the second quarter of
2001, which is designed to enroll up to 2,500 patients from approximately 150
investigative sites.

Endothelin Receptor Antagonists

In collaboration with our partner, Texas Biotechnology, we are evaluating
endothelin receptor antagonists, including sitaxsentan and TBC3711. Sitaxsentan
began a Phase 2b/3 clinical trial for the treatment of pulmonary arterial
hypertension in the second quarter of 2001. TBC3711 completed two Phase 1
studies in 2001.

IC14

IC14 is a monoclonal antibody that we are currently evaluating for the
treatment of sepsis. During the first quarter of 2001, we completed enrollment
in a Phase 1 clinical trial, initiated in 2000, that was designed to determine
the molecule's safety and pharmacology in sepsis patients and define a dosing
regimen for evaluation in Phase 2 clinical trials. We expect to begin
enrollment in a Phase 2 clinical trial in sepsis patients in the second quarter
of 2002.

IC747

In July 2001, we entered into an agreement with Biogen to jointly develop and
co-promote IC747 and other LFA-1 antagonists as oral therapeutics for
autoimmune and inflammatory diseases. IC747 is an orally administered small
molecule antagonist that we are currently evaluating for the treatment of
psoriasis. During the second quarter of 2001, we initiated a Phase 1 clinical
trial for IC747. We anticipate initiation of Phase 2 clinical trials for
psoriasis in the third quarter of 2002.

IC485

IC485 is an orally administered, small molecule PDE4 inhibitor, with potential
clinical applications for chronic obstructive pulmonary disease and rheumatoid
arthritis. We initiated a Phase 1 clinical trial for IC485 in the fourth
quarter of 2001.

RTX(TM)

In November 2001, we acquired exclusive worldwide rights to RTX for the
treatment of bladder disease or dysfunction. RTX is a small molecule that can
be delivered to the bladder to desensitize afferent nerve fibers, which are
believed to play a role in many pathological conditions of the bladder. We are
initially evaluating RTX as a treatment for interstitial cystitis, a chronic
condition often associated with bladder pain and urgency and high frequency of
urination, including nocturia, and expect to begin enrollment in a Phase 2
clinical trial of RTX in interstitial cystitis patients in the second quarter
of 2002.

Results of Operations

Critical Accounting Policies and Estimates

We recognize revenue from our contracts for research and development services,
including those under collaborative agreements ("cost reimbursement revenue"),
as the related expenses are incurred. Payments received that are related to
future

                                      30

<PAGE>

performance are deferred and recognized as revenue over the appropriate future
performance periods. Nonrefundable upfront technology license fees, for product
candidates where we are providing continuing services related to product
development, are deferred. We recognize these fees as revenue over the product
development periods, based on estimated total development costs. Milestone
payments, in the form of additional license fees, are recognized as revenue at
the time such payments are due, based on the ratio of cumulative costs incurred
to date, to total estimated development costs. Any remaining balance is
deferred and recognized as revenue over the remaining product development
period.

The timing and amount of revenue that we recognize as licenses of technology is
dependent upon our estimates of total product development costs as well as the
timing of such costs over the development period. As product candidates move
through the development process, it is necessary to revise these estimates to
consider changes to the products' development cycle, such as changes in the
clinical development plan, regulatory requirements, or various other factors,
many of which may be outside of our control. The impact on revenue of changes
in our estimates of total product development costs, and the timing thereof, is
recognized prospectively over the remaining estimated product development
period.

Substantially all of our cost reimbursement revenue has been for reimbursement
of the cost of research and development services that we provided. In the
future, collaborative revenue is also expected to include reimbursement of the
cost of marketing and sales services we expect to provide.

We recognize our share of the operating results of our unconsolidated
affiliates in proportion to our ownership interest in the collaboration and
report it as equity in losses of affiliates. Losses relating to our affiliates
are recognized only to the extent we have made, or are committed to make,
capital contributions to the affiliate. Operating results of our affiliates
include expenses related to research, development, marketing and sales services
that we provide to them, and that we recognize as cost reimbursement revenue.
The amount of our cost reimbursement revenue, and the associated costs, both
depend on the continued progression of clinical trial and development
activities, the timing and amount of marketing and sales activities, and our
level of participation in those activities. A shift of research, development
and co-promotional activities among collaboration affiliates is not expected to
have a significant impact on our overall operating results. However, a shift of
such activities could have a material impact on our costs and expenses and the
consequent amount of our cost reimbursement revenue. For example, the shift of
development activities from ICOS to our affiliate partner would be expected to
result in our reporting lower revenue and lower operating expenses of
approximately equal magnitude.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.

Research and certain clinical trial activities are conducted by various third
parties, including contract research organizations, which may also provide
contractually defined administration and management services. We recognize
expenses for these contracted activities based on a variety of factors,
including actual and estimated labor hours, clinical site initiation
activities, patient enrollment rates, estimates of external costs, and other
activity-based factors. On a regular basis, our estimates of these costs are
reconciled to actual invoices from the service providers and adjustments are
made accordingly.

General

We have incurred significant operating losses since we began operations in
September 1990. As of December 31, 2001, we had an accumulated deficit of
$302.3 million. We expect that our operating expenses will increase during 2002
and subsequent years as we attempt to complete development of our product
candidates, obtain necessary regulatory approvals, and manufacture and market
these product candidates. Our expenses will also likely increase as our
late-stage products, Cialis(TM), Pafase(R) and sitaxsentan, move closer to
market. In particular, we expect to incur substantial sales, marketing and
other costs related to commercializing Cialis if we obtain regulatory approval
for this product candidate. We also expect to incur costs under our
collaborative agreements with Eli Lilly, Suntory, Texas Biotechnology and
Biogen. While joint venture and collaboration activities are subject to the
oversight of both parties, the clinical, development, marketing and sales
activities of our affiliates are not entirely within our control. In the
future, we may pursue our internal research, development, marketing and sales
activities more aggressively and, when beneficial to do so, establish
additional collaborations. As a result of these factors, we expect to incur
losses for at least two more years.

Our results of operations may vary significantly from period to period.
Operating results will depend on, among other factors, the timing of expenses,
continued funding from our collaborations and collaborative partners, and the
timing and progress of our research, development, marketing and sales efforts.
We may experience significant fluctuations in cost reimbursement revenue and
revenue from licenses of technology. Technology license fee revenue will vary
as a result of the timing of

                                      31

<PAGE>

milestone payments and changes in estimated total development costs, which
depend on the success of our clinical trial and development efforts. In
addition, significant changes in joint venture collaboration activities could
cause the amount of affiliate losses to fluctuate from period to period.

Cost reimbursement revenue includes revenue recognized pursuant to our product
development agreement with ICOS Clinical Partners, L.P. ("ICOS Clinical
Partners"), a limited partnership that participated in funding development of
certain of our product candidates. During the first quarter of 2001, we
received the final funding available under our Product Development Agreement
with ICOS Clinical Partners.

Securities and Exchange Commission Staff Accounting Bulletin No. 101

In the fourth quarter of 2000, we adopted the provisions of the Securities and
Exchange Commission Staff Accounting Bulletin No. 101, as amended ("SAB 101"),
"Revenue Recognition in Financial Statements." Pursuant to SAB 101,
nonrefundable upfront technology license fees, for product candidates where we
are providing continuing services related to product development, are deferred.
We recognize these fees as revenue over the product development periods, based
on estimated total development costs. Milestone payments, in the form of
additional technology license fees, are recognized as revenue at the time such
payments are due, based on the ratio of cumulative costs incurred to date, to
total estimated development costs. Any remaining balance is deferred and
recognized as revenue over the remaining product development period.
Previously, milestone payments were recognized as revenue upon attainment of a
specified event, and other nonrefundable payments for technology or licensing
fees were recognized as revenue when payment was received. Our results for the
year 2000 include a $63.1 million charge ($1.36 per share) representing the
cumulative effect of adopting SAB 101 effective January 1, 2000. This charge
reflects the aggregate amount of license fees and milestone payments that we
reported as revenue in years prior to 2000, that are now being recognized as
revenue in 2000 and future years under SAB 101. For the years ended December
31, 2001 and 2000, we recognized $15.6 million and $42.9 million, respectively,
of the $63.1 million as revenue.

Year Ended December 31, 2001 Compared With Year Ended December 31, 2000

   Revenue

Revenue for the year ended December 31, 2001, increased 3% to $93.4 million
compared to $90.7 million for the year ended December 31, 2000. Cost
reimbursement revenue was $54.8 million for the year ended December 31, 2001,
compared to $47.4 million for the year ended December 31, 2000. The increase in
cost reimbursement revenue primarily relates to the Pafase(R) Phase 3 clinical
trial for severe sepsis and the sitaxsentan Phase 2b/3 clinical trial for
pulmonary arterial hypertension. These increases in revenue were partially
offset by a decline in cost reimbursement revenue related to Cialis(TM), as
certain clinical activities were completed prior to the submission of the NDA
to the FDA in June 2001. Revenue from ICOS Clinical Partners also declined, as
funding under the related services agreement ended in the first quarter of 2001.

Revenue from licenses of technology was $30.8 million in 2001, compared to
$42.9 million in 2000. The decrease was primarily due to the completion of
Cialis development activities required to file the NDA earlier in 2001 and the
substantially greater proportion of estimated total product development costs
incurred in 2000. Revenue for 2001 included $14.8 million of a $15.0 million
license fee received from Lilly ICOS following the submission of the Cialis NDA
to the FDA in June 2001.

During 2001, we recognized $7.4 million in revenue related to the development
and manufacture of third party clinical materials, compared to $0.4 million in
the prior year. We began offering contract manufacturing services in the fourth
quarter of 2000.

   Operating expenses

Research and development. Research and development expense consists primarily
of costs associated with conducting basic research, clinical trials for our
product candidates and other costs incurred in support of those activities.
Research and development expense increased 28% to $111.8 million in 2001
compared to $87.4 million in 2000. This increase was primarily due to the
progression of development activities for Pafase, sitaxsentan, and early-stage
product candidates TBC3711, IC485 and IC747. These increases were partially
offset by lower development costs for Cialis.

General and administrative. General and administrative expense consists
primarily of costs associated with corporate support functions, general
management, and pre-marketing and other activities not directly related to
research and development efforts. General and administrative expense increased
to $9.1 million in 2001 compared to $6.6 million in 2000.

                                      32

<PAGE>

This increase reflects growth of our corporate marketing and sales functions
and other expenditures to support the anticipated commercial launch of Cialis.

   Equity in losses of affiliates

We recognized $64.9 million of affiliate losses in 2001, compared to $37.0
million in 2000. This increase is primarily due to our share of operating
losses of Lilly ICOS, which we began recognizing in the third quarter of 2000.
The increase also reflects higher operating losses from Suncos Corporation
("Suncos") and ICOS-Texas Biotechnology L.P. ("ICOS-TBC") due to the
progression of development activities for Pafase, sitaxsentan and TBC3711.

   Interest income

Interest income totaled $10.5 million in 2001, compared to $4.4 million for
2000. This increase was primarily due to higher average invested balances in
2001, from the net proceeds of our December 2000 and November 2001 equity
financings, offset by the impact of substantially lower interest rates compared
to the prior year.

Year Ended December 31, 2000 Compared With Year Ended December 31, 1999

   Revenue

Revenue for 2000 increased 14% to $90.7 million, compared to $79.6 million in
1999. During 2000, we recognized $42.9 million in revenue related to technology
license fees which had been recognized in previous years but was required to be
deferred under SAB 101. Excluding the effect of adopting SAB 101, revenue for
2000 was $47.8 million compared to $79.6 million in 1999. This decrease was due
to a reduction in cost reimbursement revenue, to $47.4 million in 2000 compared
to $64.1 million in 1999, as well as the recognition of $15.0 million of
license fee revenue, upon receipt in 1999, related to the progression of the
Cialis program, prior to the adoption of SAB 101. The decrease in cost
reimbursement revenue in 2000 was due to a reduction in reimbursable clinical
trial and development expenses primarily associated with completion, in 2000,
of multiple Pafase studies that were ongoing in 1999, and a reduction in
available funding from ICOS Clinical Partners.

   Operating expenses

Research and development. Research and development expense decreased 13% to
$87.4 million in 2000, compared to $100.5 million in 1999. This decrease was
primarily due to the discontinuation of clinical activity associated with
product candidate LeukArrest(TM) in 2000, as well as the completion, in 2000,
of multiple Pafase(R) clinical studies that were ongoing in 1999. The decrease
was partially offset by increased research and development expense associated
with sitaxsentan and our small molecule product candidates IC485 and IC747.
Research and development expense in 2000 also reflects costs related to the
acquisition of certain technology rights and LFA-1 compounds from Abbott
Laboratories.

General and administrative. General and administrative expense increased to
$6.6 million in 2000, compared to $5.3 million in 1999. This increase was
primarily due to certain management transition costs incurred during 2000, an
increase in administrative fees related to ICOS Clinical Partners, and
pre-marketing costs associated with our product candidate Cialis(TM).

   Equity in losses of affiliates

Equity in losses of affiliates was $37.0 million in 2000, compared to $12.0
million in 1999. This increase was primarily due to continued progression of
our clinical trial activity for Cialis as well as our share of losses related
to the start-up activities of ICOS-TBC, partially offset by lower costs
associated with clinical trial activity for Pafase. In the third quarter of
2000, we began to recognize our share of Lilly ICOS' losses because we began to
provide our proportionate share of the funding of Lilly ICOS' operations
pursuant to our collaboration agreement with Eli Lilly. Under the terms of that
agreement, Eli Lilly was obligated to make scheduled cash contributions to fund
the costs of the joint venture's operations. Costs incurred by the joint
venture that exceeded Eli Lilly's scheduled cash contributions were to be
funded from additional capital contributions by each of the joint venture
partners. During 2000, Eli Lilly's scheduled cash contributions were expended.
Consequently, we became responsible for funding our 50% share of the joint
venture's ongoing operating activities.

Liquidity and Capital Resources

At December 31, 2001, we had cash, cash equivalents, investment securities
available-for-sale and interest receivable of $470.7 million, compared to
$229.4 million at December 31, 2000.

                                      33

<PAGE>

We used $5.8 million in cash for operating activities during 2001 compared to
$43.5 million during 2000. The change in operating cash flow primarily reflects
the receipt of a $15.0 million license fee from Lilly ICOS in June 2001,
receipt of an $8.0 million upfront payment from Biogen in July 2001, and timing
of vendor payments and cost reimbursements from our affiliates.

We used $250.3 million in cash for investing activities during 2001 compared to
generating $16.4 million in cash from investing activities during 2000. Cash
used in investing activities in 2001 included a $172.5 million net increase in
our investment portfolio, compared to a $21.4 million net decrease in our
investment portfolio in 2000. The increase in our investment portfolio in 2001
was primarily due to the conversion of cash equivalents held at the end of the
prior year into investments with slightly longer maturities as well as the
investment of proceeds received from our November 2001 equity financing.
Agreements with our affiliates obligate us to fund operating activities and
capital requirements associated with development and commercialization
activities of the affiliate. We generally fund these obligations as capital
contributions to the affiliate. Investing outflows in 2001 included $71.6
million of affiliate capital contributions, compared to $9.2 million of
affiliate capital contributions in 2000. The increase in affiliate capital
contributions primarily reflects funding, in 2001, of certain expenses incurred
by Lilly ICOS in 2000, as well as funding of our proportionate share of 2001
affiliate operations. None of our affiliates have any third-party indebtedness.
Each affiliates' liabilities are principally payable to its owners for
reimbursable research, development and other expenses.

We generated $322.3 million in cash from financing activities in 2001, compared
to $208.9 million in 2000. Cash inflows from financing activities in 2001 were
$297.0 million in net proceeds received from our November 2001 public offering
of 5.5 million shares of common stock at an offering price of $57 per share and
$25.2 million in proceeds from stock options and warrants. Cash inflows from
financing activities in 2000 were $181.1 million in net proceeds received from
our December 2000 public offering of 5.2 million shares of common stock at an
offering price of $37 per share and $27.8 million in proceeds from stock
options and warrants.

Our future cash requirements will depend on various factors, many of which are
beyond our control, including:

   . obtaining regulatory approval for and continued progress in
     commercializing Cialis(TM);

   . continued progress in our research and development programs;

   . the results of clinical trials and preclinical studies;

   . acquisitions of products or technologies, if any;

   . relationships with research and development collaborators;

   . capital contributions to our affiliates;

   . royalty payments to ICOS Clinical Partners in the event of
     commercialization of Pafase(R);

   . competing technological and market development activities;

   . the time and costs involved in filing and prosecuting patents and
     enforcing and defending patent claims;

   . the regulatory process in the United States and other countries; and,

   . the time and costs of manufacturing, scale-up and commercialization
     activities.

We have engaged in collaborations and joint development agreements with other
parties where the capabilities and strategies of the other parties complement
ours. Although corporate collaborations, partnerships and joint ventures have
provided cost reimbursement revenue to us in the past, we cannot assure you
that this type of revenue will be available to us in the future.

We intend to expand our operations and hire the additional personnel necessary
to continue development of our current portfolio of product candidates in
clinical trials, as well as to continue discovery and preclinical research to
identify additional product candidates. We also intend to continue to engage in
pre-marketing activities necessary to bring our product candidates to market
and to establish marketing and selling capabilities for product candidates
ready for commercialization. We anticipate that expansion of these activities
will increase operating expenses in the future. Furthermore, we will need to
make incremental expenditures for additional laboratory, production and office
facilities to accommodate the activities and personnel associated with these
increased development and commercialization efforts.

We anticipate that our existing cash and cash equivalents, investment
securities, interest income from our investments, cash flow from other
operating activities, including anticipated payments from Lilly ICOS, Suncos,
and ICOS-TBC, along with the line of credit available to us under the Biogen
agreement, will be sufficient to fund operations at least until 2005.

                                      34

<PAGE>

However, depending on our product development and marketing and sales efforts,
including those associated with the anticipated commercialization of Cialis, it
is possible that we may need additional financing prior to that time.
Additional financing may not be available when we need it or may be unavailable
on acceptable terms. If we are unable to raise additional funds when we need
them, we may be required to delay, scale back or eliminate expenditures for
some of our development programs or grant rights to third parties to develop
and market product candidates that we would prefer to develop and market
internally.

Our operating cash flows include the effect of certain noncancelable
obligations. We lease certain property and equipment under operating leases
which, in the aggregate, obligate us through 2009. Future minimum payments due
under noncancelable operating leases, as of December 31, 2001, are as follows:

<TABLE>
                               <S>        <C>
                               2002       $ 4,714
                               2003         3,943
                               2004         3,915
                               2005         3,187
                               2006         2,674
                               Thereafter   5,541
                                          -------
                                          $23,974
                                          =======
</TABLE>

Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which is effective for fiscal years
beginning after December 15, 2001. We do not anticipate that adoption of SFAS
No. 144 will have a material impact on our consolidated financial statements.

Item 7A.  Quantitative and Qualitative Disclosure about Market Risk

At December 31, 2001 and 2000, our financial instruments consist of cash, cash
equivalents and marketable investment securities. We do not use derivative
financial instruments in our investment portfolio. Our exposure to market risk
for changes in interest rates relates primarily to our marketable investment
securities. Because of the relatively short maturities of our investments, we
do not expect interest rate fluctuations to materially affect the aggregate
value of our financial instruments.

                                      35

<PAGE>

Item 8.  Consolidated Financial Statements and Supplementary Data

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Consolidated Financial Statements                                              Page in Form 10-K
---------------------------------                                              -----------------
<S>                                                                            <C>

Independent Auditors' Report                                                                  37

Consolidated Balance Sheets at December 31, 2001 and 2000                                     38

Consolidated Statements of Operations for the Years Ended December 31, 2001,
  2000, and 1999                                                                              39

Consolidated Statements of Stockholders' Equity and Comprehensive Loss for the
  Years Ended December 31, 2001, 2000, and 1999                                               40

Consolidated Statements of Cash Flows for the Years Ended December 31, 2001,
  2000, and 1999                                                                              41

Notes to Consolidated Financial Statements                                                 42-54
</TABLE>

Balance sheets of Lilly ICOS LLC as of December 31, 2001 and 2000, and the
related statements of operations, comprehensive operations, members' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 2001, and the period from October 2, 1998 (inception) through
December 31, 2001 are included elsewhere in this report.

Balance sheets of Suncos Corporation as of December 31, 2001 and 2000, and the
related statements of operations, stockholders' equity and comprehensive loss,
and cash flows for each of the years in the three-year period ended December
31, 2001, and the period from February 6, 1997 (inception) through December 31,
2001 are included elsewhere in this report.

All other consolidated financial statement schedules have been omitted as the
information is not required or the information required is included in the
consolidated financial statements or the notes thereto.

                                      36

<PAGE>

                         INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
ICOS Corporation:

We have audited the accompanying consolidated balance sheets of ICOS
Corporation and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for each of the years in the three-year period ended
December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ICOS Corporation
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for nonrefundable technology license fees and
milestone payments in 2000.

/s/  KPMG LLP

Seattle, Washington
January 23, 2002

                                      37

<PAGE>

                               ICOS CORPORATION
                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                     (in thousands, except share data)
                                                                                     --------------------------------
                                                                                               December 31,
                                                                                     --------------------------------
                                                                                          2001              2000
                                                                                        ---------         ---------
<S>                                                                                  <C>               <C>
                                                        ASSETS
Current assets:
 Cash and cash equivalents                                                              $ 260,905         $ 194,708
 Investment securities, at market value                                                   143,435            34,284
 Interest receivable                                                                        3,834               408
 Receivables from affiliates                                                               11,405            17,051
 Other                                                                                      5,326             2,007
                                                                                        ---------         ---------
   Total current assets                                                                   424,905           248,458
Investment securities, at market value                                                     62,533                 -
Property and equipment, net                                                                19,754            19,127
Investments in affiliates, at equity                                                          244               466
Other                                                                                         151               123
                                                                                        ---------         ---------
                                                                                        $ 507,587         $ 268,174
                                                                                        =========         =========
                                         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable                                                                       $   5,701         $   3,273
 Accrued payroll and benefits                                                               2,265             1,640
 Accrued clinical expenses                                                                  5,372             3,897
 Other accrued expenses                                                                     7,741             3,070
 Due to affiliates                                                                         18,132            25,053
 Deferred license fee revenue, primarily from related parties                               4,329            17,249
                                                                                        ---------         ---------
   Total current liabilities                                                               43,540            54,182
Deferred license fee revenue                                                               10,297             2,897
Stockholders' equity:
 Preferred stock, $.01 par value. Authorized 2,000,000 shares; none issued                      -                 -
 Common stock, $.01 par value. Authorized 100,000,000 shares; issued and outstanding
   59,744,194 at December 31, 2001 and 52,382,830 at December 31, 2000                        597               524
 Additional paid-in capital                                                               754,674           432,665
 Accumulated other comprehensive income                                                       828                82
 Accumulated deficit                                                                     (302,349)         (222,176)
                                                                                        ---------         ---------
   Total stockholders' equity                                                             453,750           211,095
                                                                                        ---------         ---------
                                                                                        $ 507,587         $ 268,174
                                                                                        =========         =========
</TABLE>


         See accompanying notes to consolidated financial statements.

                                      38

<PAGE>

                               ICOS CORPORATION
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 (in thousands, except per share data)
                                                                 ------------------------------------
                                                                        Year ended December 31,
                                                                 ------------------------------------
                                                                    2001           2000        1999
                                                                  --------       --------    --------
<S>                                                              <C>            <C>         <C>
Revenue:
 Collaborative research and development from related parties     $ 54,754       $ 47,404    $ 64,100
 Licenses of technology, primarily to related parties              30,846         42,929      15,000
 Other                                                              7,769            400         500
                                                                  --------       --------    --------
   Total revenue                                                   93,369         90,733      79,600
                                                                  --------       --------    --------
Operating expenses:
 Research and development                                         111,801         87,435     100,541
 General and administrative                                         9,059          6,582       5,259
                                                                  --------       --------    --------
   Total operating expenses                                       120,860         94,017     105,800
                                                                  --------       --------    --------
   Operating loss                                                 (27,491)        (3,284)    (26,200)
                                                                  --------       --------    --------
Other income (expense):
 Equity in losses of affiliates                                   (64,902)       (37,038)    (12,042)
 Interest income                                                   10,451          4,419       4,292
 Other, net                                                         1,769          1,112         755
                                                                  --------       --------    --------
   Total other income (expense)                                   (52,682)       (31,507)     (6,995)
                                                                  --------       --------    --------
Loss before cumulative effect of change in accounting principle   (80,173)       (34,791)    (33,195)
 Cumulative effect of change in accounting principle                    -        (63,075)          -
                                                                  --------       --------    --------
Net loss                                                         $(80,173)      $(97,866)   $(33,195)
                                                                  ========       ========    ========
Per common share - basic and diluted:
 Loss before cumulative effect of change in accounting principle $  (1.48)      $  (0.75)   $  (0.76)
 Cumulative effect of change in accounting principle                    -          (1.36)          -
                                                                  --------       --------    --------
 Net loss                                                        $  (1.48)      $  (2.11)   $  (0.76)
                                                                  ========       ========    ========

Weighted-average common shares outstanding - basic and diluted     54,073         46,343      43,449
                                                                  ========       ========    ========
</TABLE>


         See accompanying notes to consolidated financial statements.

                                      39

<PAGE>

                               ICOS CORPORATION
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS

<TABLE>
<CAPTION>
                                                                      (in thousands, except number of shares and per share data)
                                                                      ---------------------------------------------------------
                                                                                           Accumulated
                                                                              Additional      other                     Total
                                                                      Common   paid-in    comprehensive Accumulated stockholders'
                                                                      stock    capital    income (loss)   deficit      equity
                                                                      ------  ----------  ------------- ----------- -------------
<S>                                                                   <C>     <C>         <C>           <C>         <C>
Balances at December 31, 1998                                          $415    $189,436       $  (3)     $ (91,115)   $ 98,733
Comprehensive loss:
    Net loss                                                              -                       -        (33,195)    (33,195)
    Net unrealized losses on investment securities                        -           -        (213)             -        (213)
                                                                       ----    --------       -----      ---------    --------
    Total comprehensive loss                                              -           -        (213)       (33,195)    (33,408)
Issuance of 860,909 shares of common stock from exercise of options       9       6,953           -              -       6,962
Issuance of 2,416,100 shares of common stock from exercise of
 warrants                                                                24      22,839           -              -      22,863
Value of warrants issued to partners of ICOS Clinical Partners, L.P.      -       4,249           -              -       4,249
                                                                       ----    --------       -----      ---------    --------
Balances at December 31, 1999                                           448     223,477        (216)      (124,310)     99,399
Comprehensive income (loss):
    Net loss                                                              -           -           -        (97,866)    (97,866)
    Net unrealized gains on investment securities                         -           -         298              -         298
                                                                       ----    --------       -----      ---------    --------
    Total comprehensive income (loss)                                     -           -         298        (97,866)    (97,568)
Compensation expense related to stock options                             -         555           -              -         555
Issuance of 1,224,928 shares of common stock from exercise of options    12      13,624           -              -      13,636
Issuance of 1,223,850 shares of common stock from exercise of
 warrants                                                                12      11,860           -              -      11,872
Issuance of 5,175,000 shares of common stock at $37.00 per share, net
 of offering costs of $10,377                                            52     181,046           -              -     181,098
Value of warrants issued to partners of ICOS Clinical Partners, L.P.      -       2,103           -              -       2,103
                                                                       ----    --------       -----      ---------    --------
Balances at December 31, 2000                                           524     432,665          82       (222,176)    211,095
Comprehensive income (loss):
    Net loss                                                              -           -           -        (80,173)    (80,173)
    Net unrealized gains on investment securities                         -           -         746              -         746
                                                                       ----    --------       -----      ---------    --------
    Total comprehensive income (loss)                                     -           -         746        (80,173)    (79,427)
Compensation expense related to stock options                             -          25           -              -          25
Issuance of 977,014 shares of common stock from exercise of options       9      11,637           -              -      11,646
Issuance of 884,350 shares of common stock from exercise of warrants      9      12,971           -              -      12,980
Issuance of 5,500,000 shares of common stock at $57.00 per share, net
 of offering costs of $16,455                                            55     296,990           -              -     297,045
Value of warrants issued to partners of ICOS Clinical Partners, L.P.      -         386           -              -         386
                                                                       ----    --------       -----      ---------    --------
Balances at December 31, 2001                                          $597    $754,674       $ 828      $(302,349)   $453,750
                                                                       ====    ========       =====      =========    ========
</TABLE>


         See accompanying notes to consolidated financial statements.

                                      40

<PAGE>

                               ICOS CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                     (in thousands)
                                                                             -----------------------------
                                                                                Year ended December 31,
                                                                             -----------------------------
                                                                               2001       2000      1999
                                                                             ---------  --------  --------
<S>                                                                          <C>        <C>       <C>
Cash flows from operating activities:
 Net loss                                                                    $ (80,173) $(97,866) $(33,195)
 Adjustments to reconcile net loss to net cash used in operating activities:
   Cumulative effect of change in accounting principle                               -    63,075         -
   Recognition of deferred license fee revenue received in prior periods       (15,585)  (42,929)        -
   Depreciation and amortization                                                 7,088     4,977     4,037
   Equity in losses of affiliates                                               64,902    37,038    12,042
   Stock compensation costs                                                         25       555         -
   Change in operating assets and liabilities:
     Receivables                                                                   100    (6,973)   (2,671)
     Other assets                                                               (1,427)      123    (1,160)
     Accounts payable                                                            2,428    (1,581)   (1,226)
     Accrued payroll and benefits                                                  625    (1,925)    2,560
     Accrued clinical expenses                                                   1,475       488    (2,277)
     Other accrued expenses                                                      4,671     1,509      (282)
     Deferred license fee revenue                                               10,065         -         -
                                                                             ---------  --------  --------
       Net cash used in operating activities                                    (5,806)  (43,509)  (22,172)
                                                                             ---------  --------  --------
Cash flows from investing activities:
 Purchases of investment securities                                           (291,499)  (33,772)  (80,844)
 Maturities of investment securities                                           104,152    43,823    24,908
 Sales of investment securities                                                 14,807    11,391     8,966
 Acquisitions of property and equipment                                         (6,113)   (3,142)   (6,011)
 Collection of receivable from affiliate                                             -     7,341         -
 Investments in affiliates                                                     (71,601)   (9,210)  (15,219)
                                                                             ---------  --------  --------
       Net cash provided by (used in) investing activities                    (250,254)   16,431   (68,200)
                                                                             ---------  --------  --------
Cash flows from financing activities:
 Proceeds from stock options and warrants                                       25,212    27,803    33,673
 Proceeds from stock offering, net of related costs                            297,045   181,098         -
                                                                             ---------  --------  --------
       Net cash provided by financing activities                               322,257   208,901    33,673
                                                                             ---------  --------  --------
       Net increase (decrease) in cash and cash equivalents                     66,197   181,823   (56,699)
Cash and cash equivalents at beginning of year                                 194,708    12,885    69,584
                                                                             ---------  --------  --------
Cash and cash equivalents at end of year                                     $ 260,905  $194,708  $ 12,885
                                                                             =========  ========  ========
</TABLE>


         See accompanying notes to consolidated financial statements.

                                      41

<PAGE>

                               ICOS CORPORATION
                  Notes to Consolidated Financial Statements

                          December 31, 2001 and 2000
      (Dollars in thousands, except per share data or as otherwise noted)

(1) Summary of Significant Accounting Policies

   (a) Nature of Operations

       ICOS Corporation is a product-driven company that has expertise in both
       protein-based and small molecule therapeutics. Our product candidates
       target a variety of molecular mechanisms and targets to treat medical
       conditions.

   (b) Principles of Consolidation

       The consolidated financial statements include the accounts of ICOS
       Corporation and its wholly owned subsidiaries, herein collectively
       referred to as "ICOS." All significant intercompany transactions and
       balances have been eliminated in consolidation.

   (c) Use of Estimates in the Preparation of Financial Statements

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

   (d) Cash and Cash Equivalents

       All highly liquid short-term investments with a maturity at purchase of
       three months or less are considered to be cash equivalents and are
       carried at market value. Our cash equivalents consist of money market
       accounts, short-term obligations of U.S. Agencies, commercial paper and
       floating rate debt securities.

   (e) Investment Securities

       Our investment securities are classified as available-for-sale and
       carried at market value, based on quoted market prices, with unrealized
       gains and losses excluded from results of operations and reported as a
       component of total comprehensive income (loss). Realized gains and
       losses on sales of investment securities are determined on the specific
       identification method and included in interest income. We do not have
       any derivative financial instruments in our investment portfolio.

   (f) Property and Equipment

       Property and equipment are stated at cost. Significant additions and
       improvements to property and equipment are capitalized. Maintenance and
       repair costs are expensed as incurred. Depreciation of furniture and
       equipment is provided on the straight-line method over the assets'
       estimated useful lives of three to five years. We own one building which
       is being depreciated over its estimated useful life of ten years.
       Leasehold improvements are amortized over the shorter of their useful
       lives or the term of the lease. Building improvements are amortized over
       the shorter of their useful lives or the remaining economic life of the
       building.

   (g) Investments in Affiliates

       Investments in ICOS Clinical Partners, L.P. ("ICOS Clinical Partners"),
       Suncos Corporation ("Suncos"), Lilly ICOS LLC ("Lilly ICOS") and
       ICOS-Texas Biotechnology L.P. ("ICOS-TBC") are accounted for using the
       equity method. Accordingly, the investments are recorded at cost,
       adjusted for our share of income or losses of the entities. Losses
       relating to our affiliates are recognized to the extent we have made, or
       are committed to make, capital contributions to the affiliate. Operating
       results of our affiliates include expenses related to research,
       development, marketing and sales services that we provide to them, and
       that we recognize as cost reimbursement revenue.

                                      42

<PAGE>

   (h) Revenue Recognition

       Substantially all of our revenue to date has been derived from cost
       reimbursements for collaborative research and development services,
       licenses of technology (technology license fees, including milestone
       payments) and contract manufacturing services. Collaborative revenue
       ("cost reimbursement revenue") is recognized, based on costs incurred,
       as services are provided. We have no obligation to repay other parties
       if our collaborative research and development is unsuccessful.
       Technology license fees are for the transfer of technology rights for
       which we receive nonrefundable cash payments. Milestone payments are for
       the achievement of specified levels of progress related to research and
       development under collaborative agreements. Contract manufacturing
       revenue, including fees earned for process development and manufacturing
       services performed for third parties, is recognized as revenue when
       services are provided and collectibility is reasonably assured.

       Effective January 1, 2000, nonrefundable upfront technology license
       fees, for product candidates where we are providing continuing services
       related to product development, are deferred. We recognize these fees as
       revenue over the product development periods, based on estimated total
       development costs. Milestone payments, in the form of additional
       nonrefundable license fees, are recognized as revenue at the time such
       payments are due, based on the ratio of cumulative costs incurred to
       date, to total estimated development costs. Any remaining balance is
       deferred and recognized as revenue over the remaining product
       development period.

       Prior to 2000, milestone payments were recognized as revenue upon
       attainment of a specified event and other nonrefundable payments for
       technology or licensing fees were recognized as revenue when payment was
       received. These revenues were recognized only after the work had been
       performed, we had no continuing performance obligations with respect to
       that work, and the contracting party was obligated to pay us.

       The timing and amount of revenue that we recognize as licenses of
       technology is dependent upon our estimates of total product development
       costs as well as the timing of such costs over the development period.
       As product candidates move through the development process, it is
       necessary to revise these estimates to consider changes to the products'
       development cycle, such as changes in the clinical development plan,
       regulatory requirements, or various other factors, many of which may be
       outside of our control. The impact on revenue of changes in our
       estimates of total product development costs, and the timing thereof, is
       recognized prospectively over the remaining estimated product
       development period.

   (i) Research and Development Costs

       Research and development costs are expensed as incurred.

       Research and certain clinical trial activities are conducted by various
       third parties, including contract research organizations, which may also
       provide contractually defined administration and management services. We
       recognize expenses for these contracted activities based on a variety of
       factors, including actual and estimated labor hours, clinical site
       initiation activities, patient enrollment rates, estimates of external
       costs, and other activity-based factors. On a regular basis, our
       estimates of these costs are reconciled to actual invoices from the
       service providers and adjustments are made accordingly.

   (j) Income Taxes

       Income taxes are accounted for using the asset and liability method
       whereby deferred tax assets and liabilities are recognized for the
       future tax consequences attributed to differences between the financial
       statement carrying amounts of existing assets and liabilities and their
       respective tax bases, loss carryforwards and tax credits. Deferred tax
       assets and liabilities are measured using enacted tax rates expected to
       apply to taxable income in the years in which those temporary
       differences are expected to be recovered or settled. The effect on
       deferred tax assets and liabilities of a change in tax rates is
       recognized in income in the period that includes the enactment date. A
       valuation allowance is established when necessary to reduce deferred tax
       assets to the amounts expected to be realized.

   (k) Net Loss Per Common Share

       Net loss per common share (basic and diluted) is calculated using the
       weighted-average number of common shares outstanding during the period.

                                      43

<PAGE>

   (l) Stock Based Compensation

       We apply the provisions of Accounting Principles Board ("APB") Opinion
       No. 25, "Accounting for Stock Issued to Employees," and related
       interpretations in accounting for our employee stock option grants.
       Accordingly, we do not recognize compensation expense for fixed options
       granted to employees with an exercise price equal to or in excess of the
       fair value of common shares at the date of grant.

   (m) Operating Segments

       We have one operating segment, the discovery and development of
       proprietary pharmaceuticals for the treatment of serious medical
       conditions.

   (n) New Accounting Standards

       In August 2001, the Financial Accounting Standards Board issued
       Statement of Financial Accounting Standards ("SFAS") No. 144,
       "Accounting for the Impairment or Disposal of Long-Lived Assets," which
       is effective for fiscal years beginning after December 15, 2001. We do
       not anticipate that adoption of SFAS No. 144 will have a material impact
       on our consolidated financial statements.

(2) Scientific Collaboration Agreements

   The following tables summarize our revenue from collaborative research and
   development and licenses of technology, equity in losses of affiliates and
   cash invested in affiliates during the periods presented.

<TABLE>
<CAPTION>
                                                      Year ended December 31,
                                                   ----------------------------
                                                     2001      2000      1999
                                                   --------  --------  --------
<S>                                                <C>       <C>       <C>
Collaborative research and development from
  related parties:
   Lilly ICOS                                      $  9,965  $ 19,944  $ 19,902
   Suncos                                            30,373    15,175    25,053
   ICOS-TBC                                          12,676     2,816         -
   ICOS Clinical Partners                             1,740     9,469    19,145
                                                   --------  --------  --------
                                                   $ 54,754  $ 47,404  $ 64,100
                                                   ========  ========  ========
Licenses of technology, primarily to related
  parties:
   Lilly ICOS                                      $ 29,416  $ 42,331  $ 15,000
   ICOS Clinical Partners                               981       598         -
   Biogen, Inc. ("Biogen")                              449         -         -
                                                   --------  --------  --------
                                                   $ 30,846  $ 42,929  $ 15,000
                                                   ========  ========  ========
Equity in losses of affiliates:
   Lilly ICOS                                      $(38,219) $(23,612) $      -
   Suncos                                           (15,200)   (7,754)  (11,802)
   ICOS-TBC                                         (11,461)   (5,476)        -
   ICOS Clinical Partners                               (22)     (196)     (240)
                                                   --------  --------  --------
                                                   $(64,902) $(37,038) $(12,042)
                                                   ========  ========  ========
Cash invested in affiliates:
   Lilly ICOS                                      $(47,228) $      -  $      -
   Suncos                                           (15,000)   (5,000)  (15,000)
   ICOS-TBC                                          (9,373)   (4,210)        -
   ICOS Clinical Partners                                 -         -      (219)
                                                   --------  --------  --------
                                                   $(71,601) $ (9,210) $(15,219)
                                                   ========  ========  ========
</TABLE>

Lilly ICOS LLC

In October 1998, ICOS and Eli Lilly and Company ("Eli Lilly") formed Lilly
ICOS, a 50/50-owned limited liability company, to develop and commercialize
PDE5 inhibitors. Lilly ICOS is developing Cialis(TM) (tadalafil) as an oral
therapeutic agent for the treatment of erectile dysfunction and, possibly,
other medical conditions. Under the terms of this arrangement, we received a
$75.0 million payment upon formation of the joint venture, a $15.0 million
payment in 1999 upon initiation of a Phase 3 clinical trial program for Cialis
and an additional $15.0 million payment in 2001 following the filing of a New

                                      44

<PAGE>

Drug Application with the U.S. Food and Drug Administration. We could receive
additional payments based on the progression of tadalafil through development.
The joint venture was initially capitalized by Eli Lilly through cash
contributions and our contribution of an exclusive worldwide license to
intellectual property relating to PDE5 inhibitors, including intellectual
property associated with tadalafil and its research platform. Subsequent
capital contributions have been made by both Eli Lilly and ICOS in equal
amounts. Both ICOS and Eli Lilly provide Lilly ICOS with research and
development services. The joint venture will market any products resulting from
this collaborative effort in North America and the countries in the European
Union or European Free Trade Area through the services of ICOS and Eli Lilly.
For countries outside North America and these European countries, in exchange
for royalty payments, Lilly ICOS has granted Eli Lilly an exclusive license to
develop, manufacture and commercialize the PDE5 inhibitors developed in the
collaboration.

The technology we contributed to Lilly ICOS had a zero basis for financial
reporting purposes and, accordingly, our initial investment in Lilly ICOS was
recorded at zero. We did not recognize any portion of Lilly ICOS' operating
losses during the time its activities were funded exclusively by Eli Lilly.
Since the third quarter of 2000, we have recognized our share of Lilly ICOS'
losses because we are funding our proportionate share of Lilly ICOS'
operations. We do not recognize any Lilly ICOS expenses associated with the
valuation of contributed technology, as those expenses are solely applicable to
Eli Lilly.

Summarized unaudited financial information for Lilly ICOS is as follows:

<TABLE>
<CAPTION>
Financial position - December 31:                      2001       2000
---------------------------------                    ---------  ---------
<S>                                                  <C>        <C>        <C>

Total assets - all current                           $       -  $   8,186
                                                     =========  =========
Total liabilities - all current, payable to members  $  29,206  $  55,412
Members' deficit                                       (29,206)   (47,226)
                                                     ---------  ---------
                                                     $       -  $   8,186
                                                     =========  =========

Operating results - For the year ended December 31:    2001       2000       1999
---------------------------------------------------  ---------  ---------  ---------

Research and development expenses, related parties   $ (39,352) $ (87,950) $ (59,073)
Contribution of technology, related party              (30,000)   (40,000)   (70,000)
General and administrative expenses, related parties   (37,280)      (183)      (104)
Interest income                                            196        663        925
                                                     ---------  ---------  ---------
Net loss                                             $(106,436) $(127,470) $(128,252)
                                                     =========  =========  =========
</TABLE>

Suncos Corporation

In February 1997, ICOS and Suntory Limited ("Suntory") formed Suncos, a
50/50-owned corporation, to develop and commercialize Pafase(R) worldwide.
Under the terms of this arrangement, the joint venture was established with a
$30.0 million cash investment by Suntory to Suncos. Subsequent capital
contributions have been made by both Suntory and ICOS in equal amounts. We
granted Suncos an exclusive license to all rights to Pafase on a worldwide
basis. Suncos granted Suntory exclusive rights to develop and commercialize
Pafase in Japan and granted ICOS exclusive rights to develop and commercialize
Pafase in the United States. Suncos retains the rights to develop and
commercialize Pafase in the rest of the world. Suncos is managed jointly by
Suntory and ICOS. Both Suntory and ICOS provide Suncos with research and
development services. Suntory and ICOS will each pay royalties to Suncos on
sales of Pafase in their respective territories.

The technology we contributed to Suncos had a zero basis for financial
reporting purposes and, accordingly, we recorded our initial investment in
Suncos as zero. We did not begin to report our share of Suncos' losses until
Suncos' accumulated losses were equal to Suntory's initial investment.

Our investment in Suncos was $244 and $444 at December 31, 2001 and 2000,
respectively.

                                      45

<PAGE>

Summarized unaudited financial information for Suncos is as follows:

<TABLE>
<CAPTION>
Financial position - December 31:                          2001      2000
---------------------------------                        --------  --------
<S>                                                      <C>       <C>       <C>

Total assets - all current                               $  4,363  $  2,511
                                                         ========  ========
Total liabilities - all current, payable to stockholders $  3,834  $  1,583
Stockholders' equity                                          529       928
                                                         --------  --------
                                                         $  4,363  $  2,511
                                                         ========  ========

Operating results - For the year ended December 31:        2001      2000      1999
---------------------------------------------------      --------  --------  --------

Operating expenses, related parties                      $(30,539) $(15,672) $(26,044)
Interest income                                               140       166       430
                                                         --------  --------  --------
Net loss                                                 $(30,399) $(15,506) $(25,614)
                                                         ========  ========  ========
</TABLE>

ICOS-Texas Biotechnology L.P.

In June 2000, ICOS and Texas Biotechnology Corporation ("Texas Biotechnology")
formed ICOS-TBC, a 50/50-owned limited partnership, to develop and
commercialize endothelin receptor antagonists, such as sitaxsentan and TBC3711.
Under the terms of this arrangement, ICOS and Texas Biotechnology will equally
fund the development of endothelin receptor antagonists and equally share in
the profits of the partnership. We made an initial $2.0 million payment to
Texas Biotechnology upon formation of the partnership and made an additional
$2.0 million payment in October 2001. We may make further milestone payments of
up to $51.5 million based on the achievement of certain success-based
objectives. Texas Biotechnology made an initial contribution to ICOS-TBC of an
exclusive worldwide license to the intellectual property associated with
endothelin receptor antagonists, including patent rights and technical
information. Both parties provide the partnership with research and development
services. ICOS-TBC will manufacture, market and sell any products resulting
from the collaboration worldwide.

Summarized unaudited financial information for ICOS-TBC is as follows:

<TABLE>
<CAPTION>
    Financial position - December 31:                      2001      2000
    ---------------------------------                    --------  --------
    <S>                                                  <C>       <C>

    Total assets - all current                           $      1  $    491
                                                         ========  ========
    Total liabilities - all current, payable to partners $  7,060  $  3,397
    Partners' deficit                                      (7,059)   (2,906)
                                                         --------  --------
                                                         $      1  $    491
                                                         ========  ========

    Operating results - For the year ended December 31:    2001      2000
    ---------------------------------------------------  --------  --------

    Revenue                                              $      -  $    547
    Research and development expenses, related parties    (18,873)   (7,515)
    Contribution of technology, related party              (4,000)   (4,000)
    Administrative expenses                                   (27)       (8)
                                                         --------  --------
    Net loss                                             $(22,900) $(10,976)
                                                         ========  ========
</TABLE>

ICOS Clinical Partners, L.P.

On August 15, 1997, ICOS Clinical Partners completed the sale to private
investors of its limited partnership interests for aggregate net proceeds of
approximately $79.8 million. Approximately $25.9 million, before payment of
offering costs, was paid to ICOS Clinical Partners at closing of the sale of
partnership units. ICOS Clinical Partners received $21.9 million in both 1998
and 1999 with the final balance of $10.1 million received in 2000.

Net proceeds from the sale were used by ICOS Clinical Partners to fund
development of certain product candidates by ICOS pursuant to the terms of the
Product Development Agreement. During the first quarter of 2001, we received
the remainder of the funding available for research and development activities
under our Product Development Agreement with ICOS Clinical Partners. We will
not receive any further funding or revenue under this agreement.

                                      46

<PAGE>

We loaned ICOS Clinical Partners an aggregate of $7.3 million to fund certain
of its initial expenditures, primarily organizational expenses, selling
commissions, financial advisory fees and other fees. The loan bore interest at
the prime rate plus 0.25% and was paid in full during 2000. For the years ended
December 31, 2000 and 1999, interest income on the loan was $0.3 million and
$0.6 million, respectively.

We have a 1% interest in ICOS Clinical Partners and are the sole general
partner. We account for our interest in ICOS Clinical Partners using the equity
method. Under the terms of the partnership agreement, the limited partners have
the ability to replace us as the general partner, to approve the sale or
refinancing of all of the partnership assets and to terminate the partnership.

Our investment in this affiliate, at equity, was $0 and $22 at December 31,
2001 and 2000, respectively.

Summarized unaudited financial information for ICOS Clinical Partners is as
follows:

<TABLE>
<CAPTION>
Financial position - December 31:                    2001      2000
---------------------------------                   -------  --------
<S>                                                 <C>      <C>       <C>
 Total assets - all current                         $     -  $  3,368
                                                    =======  ========
 Payable to ICOS Corporation                        $     -  $  1,156
 Partners' capital                                        -     2,212
                                                    -------  --------
                                                    $     -  $  3,368
                                                    =======  ========

Operating results - For the year ended December 31:  2001      2000      1999
--------------------------------------------------- -------  --------  --------
 Research and development expenses, related party   $(2,126) $(11,571) $(23,292)
 General and administrative expenses                    (90)     (246)     (283)
 Interest income                                          4       167       324
 Interest expense, related party                          -      (277)     (604)
                                                    -------  --------  --------
 Net loss                                           $(2,212) $(11,927) $(23,855)
                                                    =======  ========  ========
</TABLE>

Biogen

On July 11, 2001, we entered into an agreement with Biogen to jointly develop
and globally commercialize orally active, small molecule LFA-1 antagonists for
the treatment of inflammatory diseases and conditions, including psoriasis, and
other autoimmune diseases. Under the terms of the agreement, both companies
will cross-license LFA-1 antagonist technology and patents, including IC747 and
other LFA-1 antagonists. The two companies will equally share costs of ongoing
development activities, co-promote any products developed under the agreement,
and equally share in the profits of the collaboration. We received an $8.0
million initial payment upon executing the agreement and could receive future
milestone payments from Biogen based on the progression of the LFA-1 antagonist
program. In addition, we have received, and may elect to continue to receive,
periodic loans from Biogen to fund part of our share of the development costs.
Loans we have received to date have been forgiven as a result of the
achievement of certain milestones. According to the terms of the collaboration
agreement, future loans, if any, may be similarly forgiven. Loans that are
forgiven are treated as milestone payments and recorded as revenue at the time
such payments are due, based on the ratio of cumulative costs incurred to date,
to total estimated development costs. Any remaining balance is deferred and
recognized as revenue over the remaining product development period.

Abbott Laboratories

In April 1995, we formed a research collaboration with Abbott Laboratories,
which provided us with research funding through the end of its term on April 1,
1999. In June 2000, we acquired Abbott Laboratories' worldwide rights to all
compounds developed in connection with the collaboration, including LFA-1
antagonists such as IC747. Abbott Laboratories will receive royalties and
milestone payments on any products that we market and which incorporate these
compounds.

Other Collaborative Arrangements

We have entered into other collaborative arrangements under which we may be
obligated to pay royalties or milestone payments if product development is
successful. It is not anticipated that the aggregate of any royalty or
milestone obligations under these arrangements will be material to our
operations.

                                      47

<PAGE>

(3) Change in Accounting for Certain Revenues

   In the fourth quarter of 2000, we changed our accounting for nonrefundable
   upfront technology license fees, for product candidates where we are
   providing continuing services related to product development. These fees are
   deferred and recognized as revenue over the product development periods,
   based on estimated total development costs. Milestone payments, in the form
   of additional license fees, are recognized as revenue at the time such
   payments are due, based on the ratio of cumulative costs incurred to date,
   to total estimated development costs. Any remaining balance is deferred and
   recognized as revenue over the remaining product development period. For the
   year ended December 31, 2000, the effect of the accounting change was to
   increase revenue from licenses of technology and decrease the loss before
   the accounting change by $42.9 million ($0.93 per share). For the year ended
   December 31, 2001, we recognized $15.6 million of revenue previously
   deferred as a result of the accounting change.

   The table below presents the pro forma amounts of our revenue, net loss and
   related per share amounts for prior years, had revenue been recognized as
   described in the preceding paragraph.

<TABLE>
<CAPTION>
                                                               December 31,
                                                               ------------
                                                                   1999
                                                                   ----
    <S>                                                        <C>
    Revenue:
       As reported                                               $ 79,600
       Deferral of fees previously reported as revenue            (15,000)
       Revenue recognized over the product development period      30,886
                                                                 --------
       Pro forma                                                 $ 95,486
                                                                 ========
    Net loss:
       As reported                                               $(33,195)
                                                                 ========
       Pro forma                                                 $(17,309)
                                                                 ========
    Net loss per common share - basic and diluted:
       As reported                                               $  (0.76)
                                                                 ========
       Pro forma                                                 $  (0.40)
                                                                 ========
</TABLE>

(4) Investment Securities

   The following table summarizes our current and non-current investment
   securities at December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                  Gross      Gross
                                                                unrealized unrealized
                                                   Market value   gains      losses   Amortized cost
                                                   ------------ ---------- ---------- --------------
<S>                                                <C>          <C>        <C>        <C>
December 31, 2001:
 Certificate of deposit                              $  1,000     $    -      $  -       $  1,000
 Corporate debt securities                            141,687        879       160        140,968
 U.S. government agency mortgage-backed securities     63,281        138        29         63,172
                                                     --------     ------      ----       --------
   Total                                             $205,968     $1,017      $189       $205,140
                                                     ========     ======      ====       ========
December 31, 2000:
 Corporate debt securities                           $ 28,266     $   68      $  9       $ 28,207
 U.S. government agency mortgage-backed securities      6,018         29         6          5,995
                                                     --------     ------      ----       --------
   Total                                             $ 34,284     $   97      $ 15       $ 34,202
                                                     ========     ======      ====       ========
</TABLE>

   Market value and amortized cost of investment securities at December 31,
   2001, by contractual maturity, are shown below.

<TABLE>
<CAPTION>
                                        Market  Amortized
                                        value     cost
                                       -------- ---------
                      <S>              <C>      <C>
                      Maturing within:
                      1 year           $143,435 $143,034
                      2 years          $ 62,533 $ 62,106
</TABLE>

                                      48

<PAGE>

   Actual maturities may be different from the contractual maturities because
   issuers may have the right to call or prepay obligations with or without
   call or prepayment penalties.

(5) Receivables from Affiliates

<TABLE>
<CAPTION>
                                                    December 31,
                                                   ---------------
                                                    2001    2000
                                                   ------- -------
             <S>                                   <C>     <C>
             ICOS Clinical Partners                $     - $ 1,156
             ICOS-TBC                                5,976   1,977
             Lilly ICOS                              1,612  12,273
             Suncos                                  3,814   1,558
             Other                                       3      87
                                                   ------- -------
                                                   $11,405 $17,051
                                                   ======= =======
</TABLE>

   Substantially all of the above balances represent amounts due under
   collaborative research and development arrangements.

(6) Property and Equipment, Net

<TABLE>
<CAPTION>
                                                   December 31,
                                                ------------------
                                                  2001      2000
                                                --------  --------
             <S>                                <C>       <C>
             Land                               $  2,310  $  2,310
             Building and improvements            10,088    10,092
             Leasehold improvements               12,890    10,398
             Furniture and equipment              29,882    26,256
                                                --------  --------
             Total cost                           55,170    49,056
             Less accumulated depreciation and
               amortization                      (35,416)  (29,929)
                                                --------  --------
                                                $ 19,754  $ 19,127
                                                ========  ========
</TABLE>

(7) Accrued Payroll and Benefits

<TABLE>
<CAPTION>
                                                     December 31,
                                                     -------------
                                                      2001   2000
                                                     ------ ------
             <S>                                     <C>    <C>
             Salaries, vacation and other
               compensation                          $1,910 $1,319
             Accrued payroll taxes and other            355    321
                                                     ------ ------
                                                     $2,265 $1,640
                                                     ====== ======
</TABLE>

(8) Other Accrued Expenses

<TABLE>
<CAPTION>
                                                     December 31,
                                                     -------------
                                                      2001   2000
                                                     ------ ------
             <S>                                     <C>    <C>
             Technology license fees                 $1,500 $    -
             Outside manufacturing and process
               development costs                      1,319    492
             Preclinical study costs                  1,033    118
             Patent and legal fees                      951    218
             Building rent                              859    527
             Other                                    2,079  1,715
                                                     ------ ------
                                                     $7,741 $3,070
                                                     ====== ======
</TABLE>

(9) Due to Affiliates

<TABLE>
<CAPTION>
                                                    December 31,
                                                   ---------------
                                                    2001    2000
                                                   ------- -------
             <S>                                   <C>     <C>
             Lilly ICOS                            $14,603 $23,612
             ICOS-TBC                                3,529   1,441
                                                   ------- -------
                                                   $18,132 $25,053
                                                   ======= =======
</TABLE>

   Due to affiliates represents our share of the losses of Lilly ICOS and
   ICOS-TBC in excess of our investment.

                                      49

<PAGE>

(10) Deferred License Fee Revenue

<TABLE>
<CAPTION>
                                                         December 31,
                                                        ---------------
                                                         2001    2000
                                                        ------- -------
         <S>                                            <C>     <C>
         Current:
            Lilly ICOS                                  $ 1,589 $16,004
            ICOS Clinical Partners                        1,543   1,245
            Biogen                                        1,197       -
                                                        ------- -------
                                                        $ 4,329 $17,249
                                                        ======= =======
         Non-current:
            ICOS Clinical Partners                      $ 1,617 $ 2,897
            Biogen                                        8,680       -
                                                        ------- -------
                                                        $10,297 $ 2,897
                                                        ======= =======
</TABLE>

(11) Leases

   We lease certain property and equipment under noncancelable operating leases
   which, in the aggregate, obligate us through 2009. Many of our leases
   contain renewal options and provide for escalations of rent and payment of
   real estate taxes, maintenance, insurance and certain other operating
   expenses of the properties.

   Total rent expense was $4.0 million, $3.5 million and $3.4 million for 2001,
   2000 and 1999, respectively.

   Future minimum payments due under noncancelable operating leases are as
   follows:

<TABLE>
                               <S>        <C>
                               2002       $ 4,714
                               2003         3,943
                               2004         3,915
                               2005         3,187
                               2006         2,674
                               Thereafter   5,541
                                          -------
                                          $23,974
                                          =======
</TABLE>

(12) Federal Income Taxes

   Income tax expense (benefit) differs from the amount computed by applying
   the U.S. federal income tax rate to pre-tax income (loss) as a result of the
   following:

<TABLE>
<CAPTION>
                                                         Year ended December 31,
                                                      ----------------------------
                                                        2001      2000      1999
                                                      --------  --------  --------
<S>                                                   <C>       <C>       <C>
Estimated federal income tax benefit                  $(28,061) $(34,253) $(11,286)
Research and experimentation tax credit carryforwards   (2,905)   (2,233)     (843)
Other                                                      223       862     1,483
Change in valuation allowance                           30,743    35,624    10,646
                                                      --------  --------  --------
                                                      $      -  $      -  $      -
                                                      ========  ========  ========
</TABLE>

   The change in valuation allowance shown above excludes, in each year,
   deductions generated by non-qualified stock option exercises that will be
   credited directly to stockholders' equity upon realization.

                                      50

<PAGE>

   Deferred tax assets arising from temporary differences and carryforwards are
   as follows:

<TABLE>
<CAPTION>
                                                             December 31,
                                                         -------------------
                                                           2001       2000
                                                         ---------  --------
   <S>                                                   <C>        <C>
   Depreciation                                          $   4,432  $  4,310
   Deferred revenue                                          5,119     7,051
   Net operating loss carryforwards                         97,634    71,899
   Research and experimentation tax credit carryforwards    12,165     8,396
   Alternative minimum tax credit carryforward                 612       612
   Investments in affiliates                                19,785     6,202
   Other                                                     2,705     1,484
                                                         ---------  --------
   Gross deferred tax assets                               142,452    99,954
   Valuation allowance                                    (142,452)  (99,954)
                                                         ---------  --------
                                                         $       -  $      -
                                                         =========  ========
</TABLE>

   The increases in the valuation allowance for deferred tax assets of $42.5
   million, $47.4 million and $15.2 million, in 2001, 2000 and 1999,
   respectively, are attributable primarily to net operating loss carryforwards
   and investments in affiliates.

   At December 31, 2001, we have net operating loss carryforwards available to
   offset future taxable income as follows:

<TABLE>
<CAPTION>
                          Year of Expiration
                          ------------------
                          <S>                <C>
                                 2009        $  5,060
                                 2010          21,507
                                 2011          21,039
                                 2012          26,774
                                 2013           7,688
                                 2018             359
                                 2019          36,832
                                 2020          70,989
                                 2021          88,706
                                             --------
                                             $278,954
                                             ========
</TABLE>

   Approximately $79.1 million of the net operating loss carryforwards as of
   December 31, 2001, results from stock option deductions, the realization of
   which would result in a credit to stockholders' equity. At December 31,
   2001, we also had available approximately $12.2 million of research and
   experimentation tax credit carryforwards to offset future tax liabilities.
   These credits expire from 2009 to 2021.

   Under provisions of the Internal Revenue Code of 1986, as amended,
   utilization of our net operating loss carryforwards may be subject to
   limitation if it should be determined that a greater than 50% ownership
   change has occurred or were to occur in the future.

   During 1999, we paid $648 of federal income taxes.

(13) Preferred Stock

   We have the authority to issue up to 2.0 million shares of preferred stock
   in one or more series, but have not issued any to date. Our Board of
   Directors has the authority to fix the powers, designations, preferences,
   and relative participating, optional, or other rights thereof, including
   dividend rights, conversion rights, voting rights, redemption terms,
   liquidation preferences, and the number of shares constituting any series,
   without any further vote or action by our stockholders. The issuance of
   preferred stock in certain circumstances may have the effect of delaying or
   preventing a change in control of ICOS. Such issuance, with voting and
   conversion rights, may adversely affect the voting power of the common stock
   holders. In the future, we may issue preferred stock as part of our overall
   financing strategy.

                                      51

<PAGE>

(14) Common Stock Options and Warrants

   Stock Option Plan

   We adopted the 1999 Stock Option Plan, as amended and restated on March 8,
   2001 (the "Plan"), under which a total of 14.4 million shares of common
   stock are reserved for grant to employees, nonemployee directors and certain
   outside parties. The Plan replaced our 1989 Stock Option Plan and our 1991
   Stock Option Plan for Nonemployee Directors (the "Prior Plans").

   All incentive stock options are granted with an exercise price not less than
   100% of the fair market value of the common stock on the grant date.
   Nonqualified stock options are granted with an exercise price equal to 100%
   of the fair market value of the common stock on the grant date. The options
   generally vest over a four-year period commencing on the grant date and have
   a term of ten years from the grant date.

   A summary of stock options, including the Prior Plans, is presented below
   (shares stated in thousands):

<TABLE>
<CAPTION>
                                          Stock options outstanding
                                          -------------------------
                                                       Weighted-
                                                        average
                                          Number of  exercise price
                                           shares      per share
                                          ---------  --------------
             <S>                          <C>        <C>
             Balance at December 31, 1998   6,450        $ 9.33
             Options granted                2,514         37.60
             Cancellations                    (90)        19.50
             Options exercised               (861)         8.07
                                           ------        ------
             Balance at December 31, 1999   8,013         18.22
             Options granted                1,036         34.27
             Cancellations                   (121)        25.46
             Options exercised             (1,226)        11.12
                                           ------        ------
             Balance at December 31, 2000   7,702         21.39
             Options granted                1,321         53.41
             Cancellations                   (189)        43.87
             Options exercised               (977)        11.94
                                           ------        ------
             Balance at December 31, 2001   7,857        $27.41
                                           ======        ======
</TABLE>

   At December 31, 2001, 6.5 million shares were reserved and available for
   grant under the Plan.

   The following table summarizes information about stock options outstanding
   and exercisable at December 31, 2001 (shares stated in thousands):

<TABLE>
<CAPTION>
                             Stock options outstanding        Stock options exercisable
                       -------------------------------------- -------------------------
                                 Weighted-
                                  average        Weighted-                 Weighted-
                                 remaining        average                   average
              Range of        contractual life exercise price            exercise price
       exercise prices Number    (in years)      per share    Number       per share
       --------------- ------ ---------------- -------------- ------     --------------
       <S>             <C>    <C>              <C>            <C>        <C>
       $ 3.75 - $ 7.38 1,449        2.77           $ 5.86     1,449          $ 5.86
         7.50 -  17.06 1,902        5.03            11.97     1,878           11.92
        17.13 -  30.31 1,322        7.42            27.59       851           27.13
        30.38 -  42.88 1,988        7.39            41.69     1,033           41.25
        43.00 -  66.53 1,196        9.23            54.13       290           52.90
       --------------- -----        ----           ------     -----          ------
       $ 3.75 - $66.53 7,857        6.25           $27.41     5,501          $20.35
       =============== =====        ====           ======     =====          ======
</TABLE>

                                      52

<PAGE>

   We apply APB Opinion No. 25 in accounting for our stock option grants, which
   generally results in no compensation cost being recognized. Had we
   determined compensation cost based on the fair value of our stock options on
   the grant date under SFAS No. 123, "Accounting for Stock Based
   Compensation," our net loss would have been adjusted to the pro forma
   amounts indicated below:

<TABLE>
<CAPTION>
                                                Year ended December 31,
                                            ------------------------------
                                              2001       2000       1999
                                            ---------  ---------  --------
     <S>                                    <C>        <C>        <C>
     Net loss:
        As reported                         $ (80,173) $ (97,866) $(33,195)
        Pro forma                            (110,226)  (121,724)  (47,705)
     Net loss per share--basic and diluted:
        As reported                         $   (1.48) $   (2.11) $  (0.76)
        Pro forma                               (2.04)     (2.63)    (1.10)
</TABLE>

   The per share weighted-average fair value of stock options granted during
   2001, 2000 and 1999, was $37.06, $22.57 and $22.29, respectively, on the
   grant date using the Black-Scholes option pricing model with the following
   assumptions:

<TABLE>
<CAPTION>
                                          Year ended December 31,
                                          ----------------------
                                           2001      2000   1999
                                          ----      ----   ----
                  <S>                     <C>       <C>    <C>
                  Expected dividend yield  0.0%      0.0%   0.0%
                  Risk-free interest rate  5.0%      6.6%   5.8%
                  Expected volatility     73.0%     74.1%  66.0%
                  Expected life in years   6.3       6.8    6.5
</TABLE>

   Warrants To Purchase Common Stock

   In connection with ICOS Clinical Partners' sale of limited partnership
   units, on June 5, 1997, and August 15, 1997, we issued Series A warrants to
   purchase an aggregate of 5.6 million and 2.0 million shares, respectively,
   of our common stock at exercise prices of $9.13 and $10.35 per share,
   respectively. The Series A warrants are exercisable through May 31, 2002. On
   June 30, 1999, we issued Series B warrants to purchase an aggregate of 7.6
   million shares of our common stock at an exercise price of $52.49 per share,
   exercisable through June 30, 2004.

   The warrants were issued in conjunction with a research and development
   agreement between ICOS and ICOS Clinical Partners. Amounts to be received
   from ICOS Clinical Partners were allocated between warrant issuance proceeds
   and the research and development funding to be received.

   During 2001, Series A and B warrants to purchase 0.9 million shares were
   exercised at a weighted-average exercise price of $14.68 per share. During
   2000, Series A and B warrants to purchase 1.2 million shares were exercised
   at a weighted-average exercise price of $9.70 per share. During 1999, Series
   A warrants to purchase 2.4 million shares were exercised at a
   weighted-average exercise price of $9.51 per share. At December 31, 2001,
   warrants to purchase 9.3 million shares were outstanding at a
   weighted-average exercise price of $43.96 per share.

(15) Net Loss per Common Share

<TABLE>
<CAPTION>
                                                       Year ended December 31,
                                                    ----------------------------
                                                      2001      2000      1999
                                                    --------  --------  --------
<S>                                                 <C>       <C>       <C>
Net loss per share computations--basic and diluted:
Numerator:
   Net loss                                         $(80,173) $(97,866) $(33,195)
Denominator:
   Weighted-average common shares                     54,073    46,343    43,449
                                                    --------  --------  --------
Net loss per share--basic and diluted               $  (1.48) $  (2.11) $  (0.76)
                                                    ========  ========  ========
</TABLE>

   Antidilutive securities excluded from the computation of diluted net loss
   per share were as follows:

<TABLE>
<CAPTION>
                                    Year ended December 31,
                                    -----------------------
                                     2001    2000    1999
                                     -----  ------  ------
                     <S>            <C>     <C>     <C>
                     Stock options  7,857    7,702   8,013
                     Stock warrants 9,273   10,157  11,381
</TABLE>

                                      53

<PAGE>

(16) Other Related Party Transactions

   We provide certain administrative, research and support services to Ceptyr,
   Inc. ("Ceptyr"). Ceptyr also subleases space from us. We recognized income
   of approximately $561, $818 and $278 from Ceptyr in 2001, 2000 and 1999,
   respectively. Dr. Wilcox, our Executive Vice President, Operations, is a
   director of Ceptyr.

   During 1999, we chartered an airplane from AMI Jet Charter, Inc. d.b.a. TAG
   Aviation ("TAG") and recognized approximately $282 in expenses for services
   rendered. The aircraft subject to the charter arrangement was under the
   control of Peregrine Aviation, LLC ("Peregrine"), a company wholly owned by
   George B. Rathmann, Ph.D., who concurrently served as the Chairman of our
   Board of Directors. Peregrine subleased the plane to TAG, which used it as
   part of its charter fleet. We believe that the rates charged by TAG were
   below the standard rates for commercial charter services.

(17) Quarterly Financial Data (Unaudited)

   Summary operating data for each quarter of the years ended December 31, 2001
   and 2000 follows.

<TABLE>
<CAPTION>
                                                                        Quarters
                                                         -------------------------------------
                                                          First    Second    Third     Fourth    Total
                                                         --------  -------  --------  --------  --------
<S>                                                      <C>       <C>      <C>       <C>       <C>
2001:
Revenue                                                  $ 18,900  $34,012  $ 18,875  $ 21,582  $ 93,369
Net loss                                                  (15,153)  (5,267)  (24,368)  (35,385)  (80,173)

Net loss per common share                                $  (0.29) $ (0.10) $  (0.45) $  (0.62) $  (1.48)

2000:
Revenue                                                  $ 17,200  $19,642  $ 21,678  $ 32,213  $ 90,733
Loss before cumulative effect of change in accounting
  principle                                                (4,449)  (8,261)  (11,467)  (10,614)  (34,791)
Net loss                                                  (67,524)  (8,261)  (11,467)  (10,614)  (97,866)

Loss per common share before cumulative effect of change
  in accounting principle                                $  (0.10) $ (0.18) $  (0.25) $  (0.22) $  (0.75)
Net loss per common share                                $  (1.49) $ (0.18) $  (0.25) $  (0.22) $  (2.11)
</TABLE>

                                      54

<PAGE>

                                   PART III

Item 10. Directors and Executive Officers of the Registrant

The information requested by this item is incorporated by reference from the
sections entitled "Security Ownership of Certain Beneficial Owners and
Management," "Election of Directors," "Continuing Class 1 Directors (until
2003)," "Continuing Class 2 Directors (until 2004)," "Other Executive
Officers," "Compensation of Directors," "Executive Compensation," "2001 Option
Grants," "2001 Option Exercises and Year-end Option Values," "Compensation
Committee Interlocks and Insider Participation," "Employment Contracts,
Termination of Employment and Change of Control Arrangements," and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 17, 2002.

Item 11. Executive Compensation

The information requested by this item is incorporated by reference from the
sections entitled "Compensation of Directors," "Executive Compensation," "2001
Option Grants," "2001 Option Exercises and Year-end Option Values,"
"Compensation Committee Interlocks and Insider Participation," and "Employment
Contracts, Termination of Employment and Change of Control Arrangements" in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
May 17, 2002.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information requested by this item is incorporated by reference from the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 17, 2002.

                                      55

<PAGE>

                                    PART IV

Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on
Form 8-K

    a) 1. Consolidated Financial Statements
          ---------------------------------

          See Index to Consolidated Financial Statements under Item 8 of this
          Form 10-K.

       2. Consolidated Financial Statement Schedules
          ------------------------------------------

          Balance sheets of Lilly ICOS LLC as of December 31, 2001 and 2000,
          and the related statements of operations, comprehensive operations,
          members' equity (deficit), and cash flows for each of the years in
          the three-year period ended December 31, 2001, and the period from
          October 2, 1998 (inception) through December 31, 2001.

          Balance sheets of Suncos Corporation as of December 31, 2001 and
          2000, and the related statements of operations, stockholders' equity
          and comprehensive loss, and cash flows for each of the years in the
          three-year period ended December 31, 2001, and the period from
          February 6, 1997 (inception) through December 31, 2001.

          Independent Auditors' Reports

          All other consolidated financial statement schedules have been
          omitted as the information is not required or the information
          required is included in the consolidated financial statements or
          notes thereto.

       3. Exhibits
          --------

          See Index to Exhibits filed herewith.

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

       The following reports on Form 8-K were filed during the fourth quarter
       of the fiscal year ended December 31, 2001:

       1. On November 1, 2001, the Company filed a report containing the ICOS
          press release for the quarter ended September 30, 2001.

       2. On November 7, 2001, the Company filed a report including certain
          exhibits pertaining to its registration statement on Form S-3,
          Registration No. 333-63790.

    d) Lilly ICOS LLC Financial Statements
       -----------------------------------

       Suncos Corporation Financial Statements
       ---------------------------------------

                                      56

<PAGE>

                                LILLY ICOS LLC
                         (A DEVELOPMENT STAGE COMPANY)

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                      Page
                                                                      -----
     <S>                                                              <C>
     Independent Auditors' Report                                        58

     Balance Sheets as of December 31, 2001 and 2000                     59

     Statements of Operations for each of the years in the three
       year-period ended December 31, 2001, and the period from
       October 2, 1998 (inception) through December 31, 2001             60

     Statements of Comprehensive Operations for each of the years in
       the three-year period ended December 31, 2001, and the period
       from October 2, 1998 (inception) through December 31, 2001        61

     Statements of Members' Equity (Deficit) for each of the years in
       the three-year period ended December 31, 2001, and the period
       from October 2, 1998 (inception) through December 31, 2001        62

     Statements of Cash Flows for each of the years in the three-year
       period ended December 31, 2001, and the period from October 2,
       1998 (inception) through December 31, 2001                        63

     Notes to Financial Statements                                    64-65
</TABLE>

                                      57

<PAGE>

                         INDEPENDENT AUDITORS' REPORT

The Board of Directors
Lilly ICOS LLC:

We have audited the accompanying balance sheets of Lilly ICOS LLC (a
development stage company) as of December 31, 2001 and 2000, and the related
statements of operations, comprehensive operations, members' equity (deficit),
and cash flows for each of the years in the three-year period ended December
31, 2001, and the period from October 2, 1998 (inception) to December 31, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lilly ICOS LLC as of December
31, 2001 and 2000, and the results of its operations and its cash flows for
each of the years in the three-year period ended December 31, 2001, and the
period from October 2, 1998 (inception) to December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

Seattle, Washington
January 23, 2002

                                      58

<PAGE>

                                LILLY ICOS LLC
                         (A DEVELOPMENT STAGE COMPANY)

                                BALANCE SHEETS

<TABLE>
<CAPTION>
                                                             (in thousands)
                                                           ------------------
                                                              December 31,
                                                           ------------------
                                                             2001      2000
                                                           --------  --------

                          ASSETS
 <S>                                                       <C>       <C>
 Current assets:
    Cash and cash equivalents                              $      -  $  7,143
    Receivable                                                    -     1,043
                                                           --------  --------
                                                           $      -  $  8,186
                                                           ========  ========
             LIABILITIES AND MEMBERS' DEFICIT

 Current liabilities - accrued expenses payable to members $ 29,206  $ 55,412
 Members' deficit:
    Eli Lilly and Company                                   (14,603)  (23,613)
    ICOS Corporation                                        (14,603)  (23,613)
                                                           --------  --------
        Total members' deficit                              (29,206)  (47,226)
                                                           --------  --------
                                                           $      -  $  8,186
                                                           ========  ========
</TABLE>

                See accompanying notes to financial statements.

                                      59

<PAGE>

                                LILLY ICOS LLC
                         (A DEVELOPMENT STAGE COMPANY)

                           STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                          (in thousands)
                                                           --------------------------------------------
                                                                                            Period from
                                                                                             October 2,
                                                                                                1998
                                                                                            (inception)
                                                               Year ended December 31,        through
                                                           -------------------------------  December 31,
                                                             2001       2000       1999         2001
                                                           ---------  ---------  ---------  ------------
<S>                                                        <C>        <C>        <C>        <C>
Operating expenses:
   Development - contributed technology license from ICOS
     Corporation                                           $  30,000  $  40,000  $  70,000   $ 315,000
   Development - Eli Lilly and Company                        30,338     67,864     39,698     140,951
   Development - ICOS Corporation                              9,014     20,086     19,375      51,962
   General and administrative, related parties                37,280        183        104      37,851
                                                           ---------  ---------  ---------   ---------
       Total operating expenses                              106,632    128,133    129,177     545,764
Interest income                                                  196        663        925       2,102
                                                           ---------  ---------  ---------   ---------
       Net loss                                            $(106,436) $(127,470) $(128,252)  $(543,662)
                                                           =========  =========  =========   =========
</TABLE>

                See accompanying notes to financial statements.

                                      60

<PAGE>

                                LILLY ICOS LLC
                         (A DEVELOPMENT STAGE COMPANY)

                    STATEMENTS OF COMPREHENSIVE OPERATIONS

<TABLE>
<CAPTION>
                                                                    (in thousands)
                                                    ---------------------------------------------
                                                                                     Period from
                                                                                      October 2,
                                                                                         1998
                                                                                     (inception)
                                                        Year ended December 31,        through
                                                    -------------------------------  December 31,
                                                      2001       2000       1999         2001
                                                    ---------  ---------  ---------  ------------
<S>                                                 <C>        <C>        <C>        <C>
Net loss                                            $(106,436) $(127,470) $(128,252)    $(543,662)
Other comprehensive loss:
   Unrealized gain (loss) on investment securities          -         11        (10)            -
                                                    ---------  ---------  ---------     ---------
       Comprehensive loss                           $(106,436) $(127,459) $(128,262)    $(543,662)
                                                    =========  =========  =========     =========
</TABLE>

                See accompanying notes to financial statements.

                                      61

<PAGE>

                                LILLY ICOS LLC
                         (A DEVELOPMENT STAGE COMPANY)

                    STATEMENTS OF MEMBERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                     (in thousands)
                                         ---------------------------------------------------------------------
                                               Eli Lilly and Company                    Accumulated    Total
                                         --------------------------------                  other     members'
                                                   Contributions              ICOS     comprehensive  equity
                                          Equity    receivable    Total    Corporation income (loss) (deficit)
                                         --------  ------------- --------  ----------- ------------- ---------
<S>                                      <C>       <C>           <C>       <C>         <C>           <C>
Balances at October 2, 1998 (inception)  $      -    $      -    $      -          -       $         $       -
Member contributions:
 Cash                                     100,000           -     100,000          -          -        100,000
 Technology license                             -           -           -    175,000          -        175,000
 Receivable                                80,000     (80,000)          -          -          -              -
Capital distribution                            -           -           -    (75,000)         -        (75,000)
Unrealized loss on investment securities        -           -           -          -         (1)            (1)
Net loss                                  (90,752)          -     (90,752)   (90,752)         -       (181,504)
---------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998              89,248     (80,000)      9,248      9,248         (1)        18,495
Member contributions:
 Cash                                      15,000      40,000      55,000          -          -         55,000
 Technology license                             -           -           -     70,000          -         70,000
Capital distribution                            -           -           -    (15,000)         -        (15,000)
Unrealized loss on investment securities        -           -           -          -        (10)           (10)
Net loss                                  (64,126)          -     (64,126)   (64,126)         -       (128,252)
---------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999              40,122     (40,000)        122        122        (11)           233
Member contributions:
 Cash                                           -      40,000      40,000          -          -         40,000
 Technology license                             -           -           -     40,000          -         40,000
Unrealized gain on investment securities        -           -           -          -         11             11
Net loss                                  (63,735)          -     (63,735)   (63,735)         -       (127,470)
---------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000             (23,613)          -     (23,613)   (23,613)         -        (47,226)
Member contributions:
 Cash                                      62,228           -      62,228     47,228          -        109,456
 Technology license                             -           -           -     30,000          -         30,000
Capital distribution                            -           -           -    (15,000)         -        (15,000)
Net loss                                  (53,218)          -     (53,218)   (53,218)         -       (106,436)
---------------------------------------------------------------------------------------------------------------
Balances at December 31, 2001            $(14,603)   $      -    $(14,603)  $(14,603)      $  -      $ (29,206)
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
</TABLE>

                See accompanying notes to financial statements

                                      62

<PAGE>

                                LILLY ICOS LLC
                         (A DEVELOPMENT STAGE COMPANY)

                           STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                (in thousands)
                                                                 --------------------------------------------
                                                                                                  Period from
                                                                                                   October 2,
                                                                                                      1998
                                                                                                  (inception)
                                                                     Year ended December 31,        through
                                                                 -------------------------------  December 31,
                                                                   2001       2000       1999         2001
                                                                 ---------  ---------  ---------  ------------
<S>                                                              <C>        <C>        <C>        <C>
Cash flows from operating activities:
 Net loss                                                        $(106,436) $(127,470) $(128,252)  $(543,662)
 Adjustments to reconcile net loss to net cash used in operating
   activities:
   Contributed technology license                                   30,000     40,000     70,000     315,000
   Amortization of investment discounts                                  -       (153)      (398)       (857)
   Change in operating assets and liabilities:
     Receivable                                                      1,043     (1,043)         -           -
     Accrued expenses payable to members                           (26,206)    37,419     11,170      29,206
                                                                 ---------  ---------  ---------   ---------
       Net cash used in operating activities                      (101,599)   (51,247)   (47,480)   (200,313)
                                                                 ---------  ---------  ---------   ---------
Cash flows from investing activities:
 Purchases of investment securities                                      -          -    (37,710)    (62,707)
 Maturities of investment securities                                     -     13,701     49,863      63,564
                                                                 ---------  ---------  ---------   ---------
       Net cash provided by investing activities                         -     13,701     12,153         857
                                                                 ---------  ---------  ---------   ---------
Cash flows from financing activities:
 Member contributions                                              109,456     40,000     55,000     304,456
 Capital distributions                                             (15,000)         -    (15,000)   (105,000)
                                                                 ---------  ---------  ---------   ---------
       Net cash provided by financing activities                    94,456     40,000     40,000     199,456
                                                                 ---------  ---------  ---------   ---------
       Net increase (decrease) in cash and cash equivalents         (7,143)     2,454      4,673           -
Cash and cash equivalents at beginning of period                     7,143      4,689         16           -
                                                                 ---------  ---------  ---------   ---------
Cash and cash equivalents at end of period                       $       -  $   7,143  $   4,689   $       -
                                                                 =========  =========  =========   =========
</TABLE>

                See accompanying notes to financial statements

                                      63

<PAGE>

                                LILLY ICOS LLC
                         (A DEVELOPMENT STAGE COMPANY)
                         Notes to Financial Statements

                          December 31, 2001 and 2000
                (Dollars in thousands, unless otherwise noted)

(1) Organization and Business Operations

   Lilly ICOS LLC (the "Company"), a 50/50-owned limited liability company, is
   a development stage company that was formed in October 1998 by Eli Lilly and
   Company ("Eli Lilly") and ICOS Corporation ("ICOS") to develop and
   commercialize PDE5 inhibitors. Profits, losses and distributions, except for
   distributions for payment of ICOS' exclusive license (see Note 3), are
   allocated based on respective ownership interests. The Company is developing
   Cialis(TM) (tadalafil) as an oral therapeutic agent for the treatment of
   erectile dysfunction and, possibly, other medical conditions. The Company
   will market any products resulting from this collaborative effort in North
   America and the countries in the European Union or European Free Trade Area
   through the services of Eli Lilly and ICOS. For countries outside of North
   America and these European countries, in exchange for royalty payments, the
   Company has granted Eli Lilly an exclusive license to develop, manufacture
   and commercialize the PDE5 inhibitors developed in the collaboration. Lilly
   ICOS is managed jointly by ICOS and Eli Lilly. Both ICOS and Eli Lilly
   provide the Company with research, development, marketing and sales services.

(2) Summary of Significant Accounting Policies

   (a) Use of Estimates in the Preparation of Financial Statements

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

   (b) Cash and Cash Equivalents

       All highly liquid short-term investments with a maturity at purchase of
       three months or less are considered to be cash equivalents and are
       carried at market value.

   (c) Research and Development Costs

       Research and development costs are expensed as incurred.

   (d) Income Taxes

       No provision for federal income taxes is included in the financial
       statements since such taxes, if any, are payable or recoverable by each
       member.

   (e) Operating Segments

       The Company has one operating segment, the development and
       commercialization of PDE5-related products for human therapeutic use.

(3) Equity Transactions

   ICOS contributed to the Company an exclusive license for the PDE5 technology
   in October 1998, and Eli Lilly contributed to the Company $180 million ($100
   million of which was received in October 1998 and $40 million received in
   both October 1999 and October 2000). ICOS and Eli Lilly each acquired a 50%
   ownership interest in the Company upon its formation.

   The technology license contributed by ICOS is valued based on the cash
   contributions from Eli Lilly and the concurrent capital distributions to
   ICOS discussed below. The contributed technology license was initially
   valued at $255 million, of which $175 million was recognized in 1998, and
   $40 million was recognized in both 1999 and 2000. The valuation of the
   contributed technology license increased $30 million in 1999, upon
   initiation of a Phase 3 clinical trial program for

                                      64

<PAGE>

   Cialis, and $30 million in 2001, following the filing of a New Drug
   Application ("NDA") with the U.S. Food and Drug Administration ("FDA"). The
   valuation of the contributed technology license may increase by up to an
   additional $90 million if certain milestones are achieved as provided for in
   the Limited Liability Company Agreement ("LLC Agreement").

   Under the terms of the LLC Agreement, ICOS received a capital distribution
   of $75 million in October 1998, and $15 million each upon the initiation of
   a Phase 3 clinical trial program in September 1999 and following the filing
   of a NDA with the FDA in June 2001. The $15 million capital distributions
   were funded by additional capital contributions from Eli Lilly. ICOS may
   receive up to $45 million in further milestone-related capital distributions
   based on the achievement of certain objectives as specified in the LLC
   Agreement. Any further capital distributions related to potential future
   increases in the valuation of the contributed technology license are also
   required to be funded by additional capital contributions from Eli Lilly.
   Subsequent to depletion of the Eli Lilly contribution of $180 million, in
   the third quarter of 2000, ICOS and Eli Lilly each became responsible for
   funding 50% of the Company's activities.

(4) License Agreements

   In October 1998, the Company entered into a license agreement with ICOS
   under which the Company received an exclusive right and license to certain
   proprietary patent rights, technical information, technology and know-how
   relating to, and useful in, the manufacture, production and worldwide
   commercial sale of PDE5 inhibitors for human therapeutic use. The value of
   the license was charged to development expense, as the underlying technology
   represented incomplete product research and development.

   Also, in October 1998, the Company entered into a license agreement with Eli
   Lilly ("the License Agreement"), under which the Company granted to Eli
   Lilly an exclusive right and license to the PDE5 technology in order to
   develop, manufacture, market and sell PDE5 inhibitor products in Eli Lilly's
   territory, as defined in the License Agreement. Under the License Agreement,
   Eli Lilly will pay to the Company a royalty on net sales of PDE5 inhibitor
   products that are sold by Eli Lilly, or any of its affiliates or
   sublicensees, in the Eli Lilly territory.

(5) Research and Development Service Agreement

   In October 1998, the Company entered into a Research and Development Service
   Agreement ("the R&D Agreement") with Eli Lilly and ICOS. Under the terms of
   the R&D Agreement, to the extent requested by the Company, Eli Lilly and
   ICOS will research and develop PDE5 inhibitor products for treatment of
   human sexual dysfunction. The Company reimburses Eli Lilly and ICOS a
   per-hour amount, calculated on the basis of actual hours incurred by Eli
   Lilly and ICOS, plus certain development and administrative expenses. There
   is no minimum commitment for research and development, and the Company can
   contract with other parties to provide research and development services.

(6) Marketing and Sales Service Agreement

   In October 1998, the Company entered into a Marketing and Sales Service
   Agreement with Eli Lilly and ICOS to jointly promote the Company's future
   products.

(7) Receivable

   The receivable of $1,043 at December 31, 2000, represents an interim award
   related to legal expenses incurred in connection with a revocation hearing
   in the United Kingdom between the Company and Pfizer Corporation. Pursuant
   to a judgement by the court on November 8, 2000, Pfizer was ordered to
   reimburse the Company for legal costs related to the revocation hearing.
   Full payment was received from Pfizer in January 2001.

                                      65

<PAGE>

                              SUNCOS CORPORATION
                       (A DEVELOPMENT STAGE CORPORATION)

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                Page
                                                                                                                -----
<S>                                                                                                             <C>
Independent Auditors' Report                                                                                       67

Balance Sheets as of December 31, 2001 and 2000                                                                    68

Statements of Operations for each of the years in the three-year period ended December 31, 2001, and the period
  from February 6, 1997 (inception) through December 31, 2001                                                      69

Statements of Stockholders' Equity and Comprehensive Loss for each of the years in the three-year period ended
  December 31, 2001, and the period from February 6, 1997 (inception) through December 31, 2001                    70

Statements of Cash Flows for each of the years in the three-year period ended December 31, 2001, and the period
  from February 6, 1997 (inception) through December 31, 2001                                                      71

Notes to Financial Statements                                                                                   72-73
</TABLE>

                                      66

<PAGE>

                         INDEPENDENT AUDITORS' REPORT

The Board of Directors
Suncos Corporation:

We have audited the accompanying balance sheets of Suncos Corporation (a
development stage corporation) as of December 31, 2001 and 2000, and the
related statements of operations, stockholders' equity and comprehensive loss,
and cash flows for each of the years in the three-year period ended December
31, 2001, and the period from February 6, 1997 (inception) through December 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Suncos Corporation as of
December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2001,
and the period from February 6, 1997 (inception) through December 31, 2001, in
conformity with accounting principles generally accepted in the United States
of America.

The accompanying financial statements have been prepared assuming that Suncos
Corporation will continue as a going concern. As discussed in Note 3 to the
financial statements, Suncos Corporation has experienced recurring losses from
operations and has a deficit accumulated during the development stage, which
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

/s/ KPMG LLP

Seattle, Washington
January 23, 2002

                                      67

<PAGE>

                              SUNCOS CORPORATION
                       (A DEVELOPMENT STAGE CORPORATION)

                                BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                 (in thousands,
                                                                                               except share data)
                                                                                               ------------------
                                                                                                  December 31,
                                                                                               ------------------
                                                                                                 2001      2000
                                                                                               --------  --------

                                           ASSETS
<S>                                                                                            <C>       <C>

Current assets - cash and cash equivalents                                                     $  4,363  $  2,511
                                                                                               ========  ========

                            LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities - accrued expenses payable to stockholders                                 $  3,834  $  1,583

Stockholders' equity:
   Common stock, $.0001 par value. 13,000 shares and 10,000 shares, respectively, authorized,
     issued and outstanding at December 31, 2001 and 2000                                             -         -
   Additional paid-in capital                                                                   100,000    70,000
   Deficit accumulated during the development stage                                             (99,471)  (69,072)
                                                                                               --------  --------

       Total stockholders' equity                                                                   529       928
                                                                                               --------  --------

                                                                                               $  4,363  $  2,511
                                                                                               ========  ========
</TABLE>

                See accompanying notes to financial statements.

                                      68

<PAGE>

                              SUNCOS CORPORATION
                       (A DEVELOPMENT STAGE CORPORATION)

                           STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                              (in thousands)
                                                -----------------------------------------
                                                                              Period from
                                                                              February 6,
                                                                                  1997
                                                                              (inception)
                                                   Year ended December 31,      through
                                                ----------------------------  December 31,
                                                  2001      2000      1999        2001
                                                --------  --------  --------  ------------
<S>                                             <C>       <C>       <C>       <C>
Operating expenses:
   Development - Suntory Limited                $    131  $    459  $    942    $  5,240
   Development - ICOS Corporation                 29,363    14,612    24,288      93,849
   General and administrative, related parties     1,045       601       814       3,051
                                                --------  --------  --------    --------
       Total operating expenses                   30,539    15,672    26,044     102,140
Interest income                                      140       166       430       2,669
                                                --------  --------  --------    --------
       Net loss                                 $(30,399) $(15,506) $(25,614)   $(99,471)
                                                ========  ========  ========    ========
</TABLE>

                See accompanying notes to financial statements.

                                      69

<PAGE>

                              SUNCOS CORPORATION
                       (A DEVELOPMENT STAGE CORPORATION)

           STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS

<TABLE>
<CAPTION>
                                                                        (in thousands, except share data)
                                                         ---------------------------------------------------------------
                                                                                                  Deficit
                                                                                   Accumulated  accumulated
                                                         Common stock  Additional     other     during the      Total
                                                         -------------  paid-in   comprehensive development stockholders'
                                                         Shares Amount  capital   income (loss)    stage       equity
                                                         ------ ------ ---------- ------------- ----------- -------------
<S>                                                      <C>    <C>    <C>        <C>           <C>         <C>
Balances at February 6, 1997 (inception)                      -   $-    $      -       $ -       $      -     $      -
Issuance of common stock - 3,000 shares for $30,000 cash
 and 3,000 shares in exchange for technology              6,000    -      30,000         -              -       30,000
Comprehensive loss:
  Net loss                                                    -    -           -         -        (12,057)     (12,057)
  Unrealized loss on investment securities                    -    -           -        (2)             -           (2)
                                                                                                              --------
  Total comprehensive loss                                    -    -           -         -              -      (12,059)
-------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997                             6,000    -      30,000        (2)       (12,057)      17,941
Comprehensive loss:
  Net loss                                                    -    -           -         -        (15,895)     (15,895)
  Unrealized gain on investment securities                    -    -           -         2              -            2
                                                                                                              --------
  Total comprehensive loss                                    -    -           -         -              -      (15,893)
-------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998                             6,000    -      30,000         -        (27,952)       2,048
Issuance of 3,000 shares of common stock for cash         3,000    -      30,000         -              -       30,000
Net loss                                                      -    -           -         -        (25,614)     (25,614)
-------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999                             9,000    -      60,000         -        (53,566)       6,434
Issuance of 1,000 shares of common stock for cash         1,000    -      10,000         -              -       10,000
Net loss                                                      -    -           -         -        (15,506)     (15,506)
-------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000                            10,000    -      70,000         -        (69,072)         928
Issuance of 3,000 shares of common stock for cash         3,000    -      30,000         -              -       30,000
Net loss                                                      -    -           -         -        (30,399)     (30,399)
-------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2001                            13,000   $-    $100,000       $ -       $(99,471)    $    529
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

                See accompanying notes to financial statements.

                                      70

<PAGE>

                              SUNCOS CORPORATION
                       (A DEVELOPMENT STAGE CORPORATION)

                           STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                             (in thousands)
                                                                               -----------------------------------------
                                                                                                             Period from
                                                                                                             February 6,
                                                                                                                 1997
                                                                                                             (inception)
                                                                                  Year ended December 31,      through
                                                                               ----------------------------  December 31,
                                                                                 2001      2000      1999        2001
                                                                               --------  --------  --------  ------------
<S>                                                                            <C>       <C>       <C>       <C>
Cash flows from operating activities:
   Net loss                                                                    $(30,399) $(15,506) $(25,614)   $(99,471)
   Adjustments to reconcile net loss to net cash used in operating
     activities:
       Amortization of investment discounts                                           -         -         -      (1,113)
       Change in operating assets and liabilities:
          Interest receivable                                                         -         -        43           -
          Accrued expenses payable to stockholders                                2,251      (347)   (1,850)      3,834
                                                                               --------  --------  --------    --------
              Net cash used in operating activities                             (28,148)  (15,853)  (27,421)    (96,750)
                                                                               --------  --------  --------    --------
Cash flows from investing activities:
   Purchases of investment securities                                                 -         -   (12,700)    (68,527)
   Maturities of investment securities                                                -         -    17,761      69,640
                                                                               --------  --------  --------    --------
              Net cash provided by investing activities                               -         -     5,061       1,113
                                                                               --------  --------  --------    --------
Cash provided by financing activities - proceeds from issuance of
  common stock                                                                   30,000    10,000    30,000     100,000
                                                                               --------  --------  --------    --------
              Net increase (decrease) in cash and cash equivalents                1,852    (5,853)    7,640       4,363
Cash and cash equivalents at beginning of period                                  2,511     8,364       724           -
                                                                               --------  --------  --------    --------
Cash and cash equivalents at end of period                                     $  4,363  $  2,511  $  8,364    $  4,363
                                                                               ========  ========  ========    ========
</TABLE>

                See accompanying notes to financial statements.

                                      71

<PAGE>

                              SUNCOS CORPORATION
                       (A DEVELOPMENT STAGE CORPORATION)
                         Notes to Financial Statements

                          December 31, 2001 and 2000
        (Dollars in thousands, except share data or as otherwise noted)

(1) Organization and Business Operations

   Suncos Corporation (the "Company") is a development stage corporation that
   was formed in February 1997 by ICOS Corporation ("ICOS") and Suntory Limited
   of Japan ("Suntory") to develop and commercialize Pafase(R) products for
   human therapeutic use. ICOS and Suntory each own 50% of the Company. The
   Company has an exclusive license to all rights to Pafase(R) on a worldwide
   basis. The Company granted Suntory exclusive rights to develop and
   commercialize Pafase(R) in Japan and granted ICOS exclusive rights to
   develop and commercialize Pafase(R) in the United States. The Company
   retains the rights to develop and commercialize Pafase(R) in the rest of the
   world. Suncos is managed jointly by ICOS and Suntory. Both ICOS and Suntory
   provide the Company with research and development services.

   In February 1997, ICOS made an initial capital contribution to the Company
   of an exclusive license for Pafase(R) technology and Suntory made a $30
   million cash capital contribution. Each party received 3,000 shares of
   common stock for their contributions. The technology contributed to the
   Company by ICOS had a zero basis for financial reporting purposes and,
   accordingly, the Company recorded no value for ICOS' initial contribution.
   The initial $30 million cash contribution from Suntory was depleted in 1999.
   Subsequent to depletion of the initial cash contribution, both ICOS and
   Suntory have made additional cash capital contributions to the Company in
   equal dollar amounts in exchange for equal numbers of shares of common
   stock. Any future amounts to be invested in the Company are at the
   discretion of ICOS and Suntory.

(2) Summary of Significant Accounting Policies

   (a) Use of Estimates in the Preparation of Financial Statements

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

   (b) Cash and Cash Equivalents

       All highly liquid short-term investments with a maturity at purchase of
       three months or less are considered to be cash equivalents and are
       carried at market value.

   (c) Research and Development Costs

       Research and development costs are expensed as incurred.

   (d) Income Taxes

       Income taxes are accounted for using the asset and liability method
       whereby deferred tax assets and liabilities are recognized for the
       future tax consequences attributed to differences between the financial
       statement carrying amounts of existing assets and liabilities and their
       respective tax bases and loss carryforwards. Deferred tax assets and
       liabilities are measured using enacted tax rates expected to apply to
       taxable income in the years in which those temporary differences are
       expected to be recovered or settled. The effect on deferred tax assets
       and liabilities of a change in tax rates is recognized in income in the
       period that includes the enactment date. A valuation allowance is
       established when necessary to reduce deferred tax assets to the amounts
       expected to be realized.

   (e) Operating Segments

       The Company has one operating segment, the development and
       commercialization of Pafase(R) products for human therapeutic use.

(3) Financing

   The Company has experienced recurring losses from operations and has a
   deficit accumulated during the development stage of $99,471 at December 31,
   2001.

                                      72

<PAGE>

   The Company's existing cash and cash equivalents were sufficient to fund
   operations into the first quarter of 2002. As of the date of this report,
   ICOS and Suntory are discussing additional funding to the joint venture. To
   continue operations, the Company will need to obtain additional financing
   from the joint venture partners or other sources. There is no assurance that
   such financing will be available. If additional funds are not available, the
   Company will be required to delay, reduce, or eliminate its research and
   development programs.

(4) Development and Supply Agreement

   The Company has a Development and Supply Agreement (the "Agreement") with
   ICOS and Suntory. Under the terms of the Agreement, ICOS and Suntory conduct
   development work with respect to the improvement and commercial development
   of the Pafase(R) technology. The Company reimburses ICOS and Suntory for
   certain actual expenses, plus a 5% profit margin. ICOS has agreed to supply
   the Company and Suntory with sufficient amounts of Pafase(R) to carry out
   the goals and purposes of the development program.

   The Agreement terminates at the earlier of December 2011, the liquidation of
   the Company or completion of the development program.

(5) Services Agreements

   The Company has agreements with ICOS and Suntory, whereby both companies
   have agreed to make general management support available in connection with
   the daily operation of the Company and provide commercial development,
   marketing research and administrative services to the Company.

(6) Federal Income Taxes

   The Company has realized no income tax benefit since its inception due to
   the inability to utilize net operating loss carryforwards.

   Carryforwards which give rise to deferred tax assets at December 31, 2001
   and 2000 consist of the following:

<TABLE>
<CAPTION>
                                                 2001      2000
                                               --------  --------
              <S>                              <C>       <C>
              Net operating loss carryforwards $ 34,815  $ 24,175
              Less valuation allowance          (34,815)  (24,175)
                                               --------  --------
               Net deferred tax assets         $      -  $      -
                                               ========  ========
</TABLE>

   The increase in the valuation allowance was $10,640, $5,962 and $8,709 in
   2001, 2000 and 1999, respectively.

   At December 31, 2001, the Company has net operating loss carryforwards of
   $99,471 available to offset future taxable income, which expire from 2013 to
   2020.

                                      73

<PAGE>

                               Index to Exhibits

<TABLE>
<CAPTION>
                                                                                                            Note
                                                                                                            ----
<C>   <S>                                                                                                   <C>
3.1   Restated Certificate of Incorporation of ICOS Corporation                                              A
3.2   Restated Bylaws of ICOS Corporation                                                                    P
4.1   Restated Certificate of Incorporation of ICOS Corporation (included in Exhibit 3.1)
10.1  ICOS Corporation 1989 Stock Option Plan (Amended and Restated as of January 8, 1997)                   E
10.2  ICOS Corporation 1991 Stock Option Plan for Non-employee Directors (Amended and Restated as of
      January 8, 1997)                                                                                       E
10.3  ICOS Corporation 1999 Stock Option Plan                                                                K
10.4  Employment Agreement dated as of September 16, 1993 between Gary Wilcox and ICOS Corporation           C
10.5  Employment agreement between Paul N. Clark and ICOS Corporation dated June 11, 1999                    L
10.6  Industrial Real Estate Lease dated August 1, 1992 between Trinity at Canyon Park and ICOS Corporation  B
10.7  Real Estate Purchase and Sale Agreement dated October 30, 1992 between Canyon Park Business Center
      Limited Partnership and ICOS Corporation                                                               B
10.8  Industrial Real Estate Lease dated December 20, 1996 between WRC Properties, Inc. and ICOS
      Corporation                                                                                            H
10.9  Industrial Real Estate Lease dated August 6, 1993 between John H. Harland Company and ICOS
      Corporation                                                                                            C
10.10 Industrial Real Estate Lease Agreement dated May 20, 1997 between Benaroya Capital Company, LLC and
      ICOS Corporation                                                                                       H
10.11 Industrial Real Estate Lease Renewal and Amendment Agreement dated August 5, 1997 between WRC
      Properties, Inc. and ICOS Corporation                                                                  H
10.12 Second Amendment dated October 30, 1998 to Industrial Real Estate Lease Agreement between Teachers
      Insurance & Annuity Association of America, Inc., as successors to WRC Properties, Inc., and ICOS
      Corporation                                                                                            J
10.13 Industrial Real Estate Lease Agreement dated January 7, 1999 between CarrAmerica Realty Corporation
      and ICOS Corporation                                                                                   J
10.14 Industrial Real Estate Lease Agreement dated September 6, 2000 between Benaroya Capital Company,
      LLC and ICOS Corporation                                                                               N
10.15 R&D Collaboration/License Agreement dated April 1, 1995 between Abbott Laboratories and ICOS
      Corporation                                                                                            D*
10.16 First Amendment to R & D Collaboration/License Agreement dated April 1, 1995 between Abbott
      Laboratories and ICOS Corporation                                                                      F*
10.17 Shareholders Agreement, entered into December 18, 1996, among ICOS Corporation, Suntory Limited and
      Suncos Corporation.                                                                                    E*
10.18 rPAF-AH License Agreement, dated February 6, 1997, between ICOS Corporation and Suncos Corporation     E*
10.19 Development and Supply Agreement, dated February 6, 1997, among ICOS Corporation, Suntory Limited
      and Suncos Corporation                                                                                 E*
10.20 ICOS Services Agreement, dated February 6, 1997, between Suncos Corporation and ICOS Corporation       E*
10.21 ICOS License Agreement, dated February 6, 1997, between Suncos Corporation and ICOS Corporation        E*
10.22 Agreement of Limited Partnership dated as of June 5, 1997, by and among ICOS Development
      Corporation, as general partner, and each of the limited partners of ICOS Clinical Partners, L.P.      G*
10.23 Purchase Agreement dated as of June 5, 1997 between ICOS Corporation and each of the Limited Partners
      from time to time of ICOS Clinical Partners, L.P.                                                      G*
10.24 Product Development Agreement, dated as of June 5, 1997, by and between ICOS Corporation and ICOS
      Clinical Partners, L.P.                                                                                G*
10.25 Limited Liability Company Agreement of Lilly ICOS LLC (the "LLC Agreement") dated September 30,
      1998 between ICOS Corporation and Eli Lilly and Company, including Exhibit E thereto.                  I*
10.26 Lilly License Agreement, dated September 30, 1998, between Lilly ICOS LLC and Eli Lilly and Company
      (Exhibit A to the LLC Agreement).                                                                      I*
10.27 PDE5 License Agreement, dated September 30, 1998, between ICOS Corporation and Lilly ICOS LLC
      (Exhibit B to the LLC Agreement).                                                                      I*
10.28 Research and Development Agreement, dated September 30, 1998, among ICOS Corporation, Lilly ICOS
      LLC and Eli Lilly and Company (Exhibit C to the LLC Agreement).                                        I*
10.29 Marketing and Sales Service Agreement, dated September 30, 1998, between ICOS Corporation, Lilly
      ICOS LLC, and Eli Lilly and Company (Exhibit F to the LLC Agreement).                                  I*
</TABLE>

                                      74

<PAGE>

<TABLE>
<CAPTION>
<C>   <S>                                                                                                   <C>
10.30 Agreement of Limited Partnership of ICOS-Texas Biotechnology L.P. (the "ICOS-TBC Agreement") dated
      June 6, 2000, among ICOS-ET-LP LLC, Texas Biotechnology Corporation, ICOS-ET-GP LLC and
      TBC-ET, Inc., including Exhibit D thereto.                                                            M*
10.31 Endothelin License Agreement dated June 6, 2000, between Texas Biotechnology Corporation and
      ICOS--Texas Biotechnology L.P. (Exhibit A to the ICOS-TBC Agreement).                                 M*
10.32 Research and Development Service Agreement dated June 6, 2000, among ICOS Corporation, Texas
      Biotechnology Corporation and ICOS-Texas Biotechnology L.P. (Exhibit B to the ICOS-TBC Agreement).    M*
10.33 Formation and Performance Agreement, dated June 6, 2000, by and between ICOS Corporation and Texas
      Biotechnology Corporation.                                                                            M*
10.34 Restated R&D Collaboration/License Agreement dated May 31, 2000, between ICOS Corporation and
      Abbott Laboratories.                                                                                  M*
10.35 Development and Marketing Collaboration Agreement, dated July 11, 2001, between Biogen, Inc. and
      ICOS Corporation                                                                                      O*
10.36 First Amendment dated April 11, 2001, to Industrial Real Estate Lease Agreement dated January 7, 1999
      between CarrAmerica Realty Corporation and ICOS Corporation                                           Q
23.1  Consent of KPMG LLP (ICOS Corporation)                                                                Q
23.2  Consent of KPMG LLP (Lilly ICOS LLC)                                                                  Q
23.3  Consent of KPMG LLP (Suncos Corporation)                                                              Q
</TABLE>

<TABLE>
<CAPTION>
Note
----
<C>  <S>
 A   Filed as an exhibit to the Company's Registration Statement (Registration No. 333-3312) effective May 7, 1996 and
     incorporated herein by reference.
 B   Filed as an exhibit to the Company's Form 10-K Annual Report on March 29, 1993 and incorporated herein by
     reference.
 C   Filed as an exhibit to the Company's Form 10-Q Quarterly Report on November 2, 1993 and incorporated herein by
     reference.
 D   Filed as an exhibit to the Company's Form 10-Q Quarterly Report on May 12, 1995 and incorporated herein by
     reference.
 E   Filed as an exhibit to the Company's Form 10-K Annual Report on March 31, 1997 and incorporated herein by
     reference.
 F   Filed as an exhibit to the Company's Form 10-Q Quarterly Report on August 14, 1997 and incorporated herein by
     reference.
 G   Filed as an exhibit to the Company's Form 8-K Current Report on August 26, 1997 and incorporated herein by
     reference.
 H   Filed as an exhibit to the Company's Form 10-Q Quarterly Report on November 17, 1997 and incorporated herein by
     reference.
 I   Filed as an exhibit to the Company's Form 10-Q Quarterly Report on November 13, 1998 and incorporated herein by
     reference.
 J   Filed as an exhibit to the Company's Form 10-K Annual Report on March 31, 1999 and incorporated herein by
     reference.
 K   Filed as an exhibit to the Company's definitive Proxy Statement dated March 30, 1999 and incorporated herein by
     reference.
 L   Filed as an exhibit to the Company's Form 10-Q Quarterly Report on August 13, 1999 and incorporated herein by
     reference.
 M   Filed as an exhibit to the Company's Form 10-Q Quarterly Report on August 14, 2000 and incorporated herein by
     reference.
 N   Filed as an exhibit to the Company's Form 10-K Annual Report on March 29, 2001 and incorporated herein by
     reference.
 O   Filed as an exhibit to the Company's Form 10-Q Quarterly Report on August 14, 2001 and incorporated herein by
     reference.
 P   Filed as an exhibit to the Company's Form 10-Q Quarterly Report on November 14, 2001 and incorporated herein by
     reference.
 Q   Filed with this document.
 *   Confidential treatment has been granted with respect to portions of this exhibit.
</TABLE>

                                      75

<PAGE>

                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Bothell,
State of Washington, on the 28th day of March, 2002.

                                          ICOS CORPORATION
                                          (Registrant)

                                              /s/ PAUL N. CLARK
                                          By: _______________________________
                                              Paul N. Clark
                                              Chairman of the Board of
                                                Directors,
                                              Chief Executive Officer and
                                                President
                                              (Principal Executive Officer)

                                              /s/ MICHAEL A. STEIN
                                          By: _______________________________
                                              Michael A. Stein
                                              Vice President and Chief
                                                Financial Officer
                                              (Principal Financial and
                                                Accounting Officer)

                                      76

<PAGE>

                               POWER OF ATTORNEY

Each person whose individual signature appears below hereby authorizes and
appoints Paul N. Clark and Michael A. Stein, and each of them, with full power
of substitution and resubstitution and full power to act without the other, as
his true and lawful attorney-in-fact and agent to act in his name, place and
stead and to execute in the name and on behalf of each person, individually and
in each capacity stated below, and to file any and all amendments to this
report, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing, ratifying and confirming all that
said attorneys-in-fact and agents or any of them or their or his substitute or
substitutes may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

          Signature                       Title                  Date
          ---------                       -----                  ----

      /s/ PAUL N. CLARK       Chairman of the Board of      March 28, 2002
----------------------------- Directors, Chief Executive
        Paul N. Clark         Officer and President
                              (Principal Executive Officer)

     /s/ GARY L. WILCOX       Director and Executive Vice   March 28, 2002
----------------------------- President, Operations
       Gary L. Wilcox

      /s/ FRANK T. CARY       Director                      March 28, 2002
-----------------------------
        Frank T. Cary

    /s/ JAMES L. FERGUSON     Director                      March 28, 2002
-----------------------------
      James L. Ferguson

----------------------------- Director
    William H. Gates, III

----------------------------- Director
      David V. Milligan

    /s/ ROBERT W. PANGIA      Director                      March 28, 2002
-----------------------------
      Robert W. Pangia

    /s/ WALTER B. WRISTON     Director                      March 28, 2002
-----------------------------
      Walter B. Wriston

                                      77