##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K

|                                                |  |                                                                                             
|----------------------------------------------- |  | --------------------------------------------------------------------------------------------
|(Mark One)                                      |  |                                                                                             
|þ                                               |  | Annual Report Pursuant to Section 13 or
    15(d) of the Securities Exchange Act of 1934    
|                                               
|For the Fiscal Year Ended December 31,
    2002
|                                               
|or                                             
|                                               
|o                                               |  | 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                 |  | 91-1463450                              
|(State of incorporation) |  | (I.R.S. 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 þ          No o

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.     o

Indicate by check mark whether the registrant is
an accelerated filer (as defined by Rule 12b-2 of the
Act).     Yes þ          No o

State the aggregate market value of voting and
non-voting stock held by non-affiliates of the registrant as of
June 28, 2002.     $954,337,640

Indicate the number of shares outstanding of each
of the registrants classes of Common Stock as of
January 31, 2003.

|                             |  |                 
|---------------------------- |  | ----------------
|Title of Class               |  | Number of Shares
|                             |  |                 
|Common Stock, $.01 par value |  | 62,148,407      

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants definitive
Proxy Statement for the annual meeting of stockholders to be
held on May 2, 2003, relating to Security Ownership
of Principal Stockholders and Management, Election
of Directors, Continuing Class 2 Directors
(until 2004), Continuing Class 3 Directors
(until 2005), Executive Officers,
Compensation of Directors, Executive
Compensation, 2002 Option Grants, 2002
Aggregate Option Exercises and Year-end Option Values,
Compensation Committee Interlocks and Insider
Participation, Report of the Compensation Committee
on Executive Compensation, Stock Price Performance
Graph, Related Party Transactions,
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.



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TABLE OF CONTENTS



|               |                                                                                                         |  |  |  |  |  |  | 
|-------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I        
|               | Item 1. Business                                                                                       
|               | Item 2. Properties                                                                                     
|               | Item 3. Legal Proceedings                                                                              
|               | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II       
|               | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters                      
|               | Item 6. Selected Consolidated Financial Data                                                           
|               | Item 7. Managements Discussion and Analysis of Results of Operations and Financial Condition          
|               | Item 7A. Quantitative and Qualitative Disclosure about Market Risk                                     
|               | Item 8. Consolidated Financial Statements and Supplementary Data                                       
|PART III      
|               | Item 10. Directors and Executive Officers of the Registrant                                            
|               | Item 11. Executive Compensation                                                                        
|               | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|               | Item 13. Certain Relationships and Related Transactions                                                
|               | Item 14. Controls and Procedures                                                                       
|PART IV       
|               | Item 15. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K                 
|SIGNATURES    
|CERTIFICATIONS
|EXHIBIT 10.8  
|EXHIBIT 10.10 
|EXHIBIT 10.13 
|EXHIBIT 10.15 
|EXHIBIT 10.17 
|EXHIBIT 10.18 
|EXHIBIT 10.22 
|EXHIBIT 10.23 
|EXHIBIT 23.1  
|EXHIBIT 23.2  
|EXHIBIT 23.3  
|EXHIBIT 99.1  
|EXHIBIT 99.2  



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##### Table of Contents



ICOS CORPORATION

TABLE OF CONTENTS

|               |          |    |                                                                                                    |  |   
|-------------- | -------- | -- | -------------------------------------------------------------------------------------------------- |  | --
|Part I         |          |    |                                                                                                    | 
|               | Item 1.  |    | Business                                                                                           |  | 1 
|               | Item 2.  |    | Properties                                                                                         |  | 29
|               | Item 3.  |    | Legal Proceedings                                                                                  |  | 29
|               | Item 4.  |    | Submission of Matters to a Vote of Security
    Holders                                            |  | 30
|Part II        |          |    |                                                                                                    | 
|               | Item 5.  |    | Market for the Registrants Common Equity
    and Related Stockholder Matters                      |  | 30
|               | Item 6.  |    | Selected Consolidated Financial Data                                                               |  | 31
|               | Item 7.  |    | Managements Discussion and Analysis of
    Results of Operations and Financial Condition          |  | 33
|               | Item 7A. |    | Quantitative and Qualitative Disclosure about
    Market Risk                                      |  | 41
|               | Item 8.  |    | Consolidated Financial Statements and
    Supplementary Data                                       |  | 42
|               | Item 9.  |    | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |  | * 
|Part III       |          |    |                                                                                                    | 
|               | Item 10. |    | Directors and Executive Officers of the Registrant                                                 |  | 64
|               | Item 11. |    | Executive Compensation                                                                             |  | 64
|               | Item 12. |    | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  | 64
|               | Item 13. |    | Certain Relationships and Related Transactions                                                     |  | 64
|               | Item 14. |    | Controls and Procedures                                                                            |  | 64
|Part IV        |          |    |                                                                                                    | 
|               | Item 15. |    | Exhibits, Consolidated Financial Statement
    Schedules, and Reports on Form 8-K                  |  | 65
|Signatures     |          | 89
|Certifications |          | 91



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|  |               
|- | --------------
|* | Not Applicable

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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 expected to have significant commercial
potential. We apply our integrated approach to erectile
dysfunction and other urologic disorders, sepsis, psoriasis and
other 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, for continuing programs, are Eli Lilly
and Company (Lilly) and Biogen, Inc.
(Biogen).



| |                 
| | ----------------
| | Approved Product

In November 2002, Lilly ICOS LLC (Lilly
ICOS), a joint venture we established with Lilly in 1998,
received approval from the European Commission to market
CialisTM (tadalafil), for the treatment of erectile
dysfunction. Lilly ICOS began shipping Cialis to European
wholesalers in January 2003, and Cialis is now available, by
prescription, in pharmacies across Europe.



| |                                               
| | ----------------------------------------------
| | Product Candidates in Clinical
    Development

In June 2001, Lilly ICOS submitted a New Drug
Application (NDA) to the U.S. Food and Drug
Administration (FDA) seeking marketing approval of
Cialis for the treatment of erectile dysfunction. In April 2002,
Lilly ICOS received an approvable letter from the
FDA. An approvable letter indicates that the FDA is
prepared to approve an application upon the satisfaction of
conditions specified in the letter. The conditions specified by
the FDA are the successful completion of clinical pharmacology
studies, labeling discussions, and successful resolution of
matters related to Lillys manufacturing facilities. A U.S.
regulatory decision for Cialis is projected to occur in the
second half of 2003, with product launch anticipated to occur
shortly after approval.

Lilly is pursuing approval of Cialis for the
treatment of erectile dysfunction in markets outside of the
European Union and North America under an exclusive license from
Lilly ICOS. In those markets, Lilly will sell Cialis and pay a
royalty, equal to 20% of net sales, to Lilly ICOS. In addition,
Lilly ICOS has initiated a Phase 2 clinical program
evaluating tadalafil for the treatment of diabetic gastroparesis.

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



| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | IC747 initiated Phase 2 clinical trials in
    the third quarter of 2002 for the treatment of psoriasis. IC747
    is being developed in a worldwide LFA-1 antagonist collaboration
    with Biogen.
|
| |  | RTXTM (resiniferatoxin) began a
    Phase 2 clinical trial in the first quarter of 2003 for the
    treatment of interstitial cystitis.                                                             
|
| |  | IC14 began a Phase 2 clinical trial in the
    third quarter of 2002 for the treatment of sepsis resulting from
    community acquired pneumonia (CAP).                                             
|
| |  | IC485 completed Phase 1 clinical trials in
    the third quarter of 2002. We expect to initiate a Phase 2
    clinical trial in 2003 for the treatment of chronic obstructive
    pulmonary disease.

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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:

Successfully commercializing Cialis in Europe,
the U.S. and in other countries.With
the European Commissions 2002 approval of Cialis for
erectile dysfunction, and subsequent Cialis product launch in
the European Union, we have succeeded in bringing our first
product to the commercial market. We expect to build on this
success by obtaining regulatory approval for Cialis in the U.S.
and other markets around the world. An NDA seeking approval for
Cialis was submitted to the FDA in June 2001, and Lilly ICOS
received an approvable letter from the FDA in April
2002. A U.S. regulatory decision for Cialis is projected to
occur in the second half of 2003. Product launch is anticipated
shortly after approval. Through sales and marketing efforts with
Lilly, we intend to increase awareness of the unique benefits of
Cialis, as we expand our position in the large and growing
erectile dysfunction market.

Diversifying and commercializing 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, psoriasis and other
inflammatory diseases. To mitigate some of the risks inherent in
clinical development, we plan to continue developing a number of
product candidates in parallel. We believe this diversified
approach yields the greatest opportunity for long-term
commercial success.

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 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 Lilly,
Suntory Ltd., Texas Biotechnology Corporation (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. We have applied,
and are applying, for patents for our product candidates and
unique aspects of our technologies both in the United States
and, when appropriate, in other countries.

2



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Approved Product

In November 2002, Lilly ICOS received approval
from the European Commission to market Cialis, an oral
phosphodiesterase type 5 enzyme (PDE5) inhibitor for the
treatment of erectile dysfunction, in all fifteen member states
of the European Union. Lilly ICOS began shipping Cialis to
wholesalers in January 2003, and Cialis is now available, by
prescription, in pharmacies across Europe.

The European Commission based its decision on the
review and evaluation of a comprehensive data package that
comprised results of more than 60 studies, in more than 4,000
human subjects. In clinical trials evaluating Cialis for the
treatment of erectile dysfunction, efficacy studies demonstrated
that Cialis both improved patients ability to attain and
maintain an erection sufficient for sexual intercourse and
significantly increased the percentage of successful sexual
attempts. Clinical studies have further demonstrated that Cialis
is effective up to twenty-four hours after taking the drug. We
believe that the drugs duration, coupled with a lack of a
food effect, should allow men and their partners more freedom to
pick the right moment for sexual activity.

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 30 million men in Europe
and 40 million men in North America 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 neurological consequence of conditions
such as prostate surgery, spinal cord injury or treatment with
certain medications.

Typically, sexual arousal leads to increased
blood flow into penile tissue, resulting in an erection. As part
of this process, a chemical called cyclic guanosine
monophosphate (cGMP) causes penile blood vessels to dilate,
allowing blood flow to increase. PDE5, an enzyme present in
penile blood vessels, cleaves cGMP, 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®(sildenafil citrate), which also inhibits
PDE5, 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 worlds male population who could benefit from orally
administered treatment for erectile dysfunction are currently
undergoing treatment. We believe the entry of Cialis into the
marketplace may encourage use among the untreated population of
erectile dysfunction patients, in addition to encouraging those
currently using other therapies to switch to Cialis.

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 our collaboration arrangements. We
have retained co-promotion rights to Cialis in North America,
and most of Europe. We expect to co-promote IC747 and other
LFA-1 antagonists in our worldwide collaboration with Biogen.
The table on the following page summarizes our ongoing product
development programs.

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Clinical Development Pipeline

Product Candidate
    
    Target Indication
    
    Status
    
    Partner
    
    ICOS Economic InterestCialis (tadalafil)
    
    Erectile dysfunction
    
    FDA approvable letter; approved in Europe
    
    Lilly
    
    North America and Europe
     co-promotionDiabetic gastroparesis
    
    Phase 2
    
    
    
    Rest of world share of
    royalties to Lilly ICOSIC747
    
    Psoriasis Inflammatory diseases
    
    Phase 2
    
    Biogen
    
    Worldwide co-promotionRTX (resiniferatoxin)
    
    Interstitial cystitis
    
    Phase 2
    
    N/A
    
    Worldwide commercial rightsIC14
    
    Sepsis
    
    Phase 2
    
    N/A
    
    Worldwide commercial rightsIC485
    
    Chronic obstructive pulmonary disease
    
    Phase 1
    
    N/A
    
    Worldwide commercial rights


In the status column of the table:
Phase 1 indicates clinical trials for safety
and pharmacology; Phase 2 indicates clinical
trials to determine dosing and efficacy; and FDA
approvable letter indicates that the FDA is prepared
to approve an NDA upon the satisfaction of conditions specified
in the letter.



| |                   
| | ------------------
| | Cialis (tadalafil)

We are continuing to perform development studies
in our evaluation of Cialis (tadalafil), a small molecule
compound that inhibits PDE5, for the treatment of erectile
dysfunction. We are also evaluating tadalafil for the treatment
of diabetic gastroparesis.



| |                                              
| | ---------------------------------------------
| | Erectile Dysfunction Clinical
    Application

U.S. Development Status.Lilly ICOS submitted an NDA for Cialis
to the FDA in June 2001. In April 2002, Lilly ICOS
received an approvable letter from the FDA. A
U.S. regulatory decision for Cialis is projected to occur
in the second half of 2003, with product launch anticipated to
occur shortly after approval.



| |                                                
| | -----------------------------------------------
| | Diabetic Gastroparesis Clinical
    Application

Gastroparesis is a condition that results in
delayed emptying of stomach contents. Motility studies have
documented the presence of gastroparesis in 30 to 50% of
diabetic patients. Many patients suffer from abdominal symptoms
such as nausea, vomiting, bloating and abdominal pain. Diabetic
gastroparesis can also make glucose control more difficult
because the absorption of food is not well coordinated with the
administration of medication. Only a subset of patients with
diabetic gastroparesis will have symptoms severe enough to seek
prescription medication, but with over 11 million Americans
suffering from diabetes, it is expected that there would be a
substantial market for a drug which proves safe and effective
for gastroparesis.

Inhibition of PDE5 may improve gastric emptying
and symptoms in patients with diabetic gastroparesis. Adequate
levels of cGMP in the smooth muscle cells of the
gastrointestinal tract are necessary for muscle relaxation. The
PDE5 found in these smooth muscle cells degrades cGMP, thereby
opposing this relaxation. In experimental diabetic mouse models,
cGMP levels are low in smooth muscle cells of the pylorus (the
muscular valve that allows the stomach to empty) and the pylorus
does not relax normally. These diabetic mice develop a condition
that mimics diabetic gastroparesis of humans, and treatment with
an inhibitor of the PDE5 enzyme restored gastric emptying rates.

In the United States, agents that improve gastric
emptying (e.g., erythromycin and metoclopromide) can only be
used intermittently and are of limited efficacy. Tadalafil may
improve gastric emptying and provide relief to patients with
diabetic gastroparesis by helping normal relaxation of the
pylorus.

In 2003, we began patient enrollment in a Phase 2
study evaluating tadalafil for patients with diabetic
gastroparesis.

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| |      
| | -----
| | IC747

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
affecting approximately four to five million people in the
United States, with over 400,000 of those severely afflicted.
The disorder is characterized by frequent episodes of scaly skin
plaques which are associated with redness and itching.

Current Treatment.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, cyclosporine, UV light treatment, and
vitamin D analogs. Tumor necrosis factor alpha (TNF-alpha)
sequestrants and efalizumab are in late-stage development or
recently approved for the treatment of psoriasis. In January
2003, Biogen received approval from the FDA for Amevive®
(alefacept) for the treatment of adult patients with moderate to
severe chronic plaque psoriasis. Amevive will be administered by
physicians as an intravenous or intramuscular injection over a
12-week period.

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. An
effective, well tolerated oral agent could appeal to patients
and dermatologists, who currently must contend with toxic and/or
injectable drugs, messy topical applications and in-center UV
light exposures.

Development Status.During 2002, in our collaboration with Biogen, we began a
Phase 2 clinical trial evaluating IC747 for patients with
psoriasis.



| |                                 
| | --------------------------------
| | 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 million are
afflicted with rheumatoid arthritis.



| |                      
| | ---------------------
| | RTX (resiniferatoxin)

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



| |                                               
| | ----------------------------------------------
| | Interstitial Cystitis Clinical
    Application

Background.Interstitial cystitis is a chronic
condition associated with bladder pain, urinary urgency and high
frequency of urination, including at night. These symptoms
adversely affect quality of life and may 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.Medicines that are prescribed in
attempts to control interstitial cystitis symptoms include
antihistamines, tricyclic antidepressants and analgesics. The
only oral medication that is currently approved for interstitial
cystitis is Elmiron® (pentosan polysulfate sodium), which
has taken up to six months to provide symptom improvement.
Bladder instillation of various agents (including
dimethylsulfoxide, heparin-like compounds and others) is also
routinely used. Although numerous treatments have been tried for
interstitial cystitis, many patients continue to suffer.

Potential Treatment by RTX.RTX is a small molecule that can be
delivered directly into the bladder through a catheter 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. The clinical
objectives of RTX

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treatment for interstitial cystitis are to reduce
patients bladder pain, nocturia and urinary frequency and
improve the quality of life.


Development Status.In 2003, we began and plan to complete
a Phase 2 clinical trial evaluating RTX for patients with
interstitial cystitis.



| |                                 
| | --------------------------------
| | Additional Clinical Applications

RTX may also be evaluated for the treatment of
detrusor hyperreflexia (overactive bladder) resulting from
multiple sclerosis, spinal cord injury, stroke, Parkinsons
disease or benign prostatic hyperplasia.

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. IC14 is currently in development as a treatment for
sepsis resulting from CAP.



| |                            
| | ---------------------------
| | Sepsis Clinical Application

Background.Sepsis
is a serious, potentially life-threatening condition that occurs
in some patients with serious infections. The inflammation
caused by these infections can, in some cases, systemically
spread throughout the body. This process begins when bacteria
release toxins into the bloodstream. CD14, present on the
surface of myeloid cells and in plasma, recognizes these toxins
and triggers a release of inflammatory mediators that drives the
systemic inflammatory response.

In the U.S., approximately 1.1 million
patients are hospitalized each year with CAP. Patients with CAP
represent the largest subset of patients that develop sepsis. If
unattended, sepsis resulting from CAP may progress to severe
sepsis and organ failure, which is typically treated using
costly and/or invasive medical interventions including intensive
care unit admission, dialysis, mechanical ventilation,
vasopressor and Xigris® (drotrecogin alfa).

Current Treatment.We are currently not aware of other
therapies in development for the prevention of progression of
sepsis as a result of CAP.

Potential Treatment by IC14.IC14 is unique among sepsis therapies
because its early mechanism of action suggests that it may have
potential as a broad-based, first line therapy. IC14 inhibits
the inflammatory response of sepsis at an early stage 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
triggers a localized inflammatory response that removes
microorganisms at the site of infection. However, in some cases
CD14 triggers an over-exuberant systemic inflammatory response
that may lead to severe 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 vitroand in vivomodels in preclinical studies.

Development Status.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
the cytokine TNF-alpha which is grossly elevated during sepsis,
and substantially reduced the development of flu-like symptoms.
In 2002, we began enrollment in a Phase 2 clinical trial
evaluating IC14 for patients with sepsis resulting from CAP.



| |      
| | -----
| | IC485

IC485 is an orally administered, small molecule
inhibitor of the type 4 cyclic adenosine monophosphate
(cAMP) phosphodiesterase enzyme, or PDE4. Inhibition of PDE4
leads to an increase in the second

6



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##### Table of Contents



messenger, cAMP, within cells. This inhibition
may in turn reduce the cells production of TNF-alpha and a
variety of other inflammatory mediators.




| |                                                               
| | --------------------------------------------------------------
| | Chronic Obstructive Pulmonary Disease Clinical
    Application

Background.Chronic
obstructive pulmonary disease (COPD) is under consideration
as the primary clinical application for IC485. According to the
U.S. Centers for Disease Control and Prevention, approximately
24 million U.S. adults have evidence of impaired lung
function, indicating that COPD is under diagnosed.

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 efficacy has been observed
with other PDE4 inhibitors in patients with asthma and COPD.
Clinical benefits in rheumatoid arthritis and Crohns
disease have also been observed with approved therapies that
target TNF-alpha production. We have 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 completed a Phase 1 clinical trial
in 2002 and plan to begin a Phase 2 study evaluating IC485 for
patients with COPD in 2003.



| |                                
| | -------------------------------
| | Additional Clinical Application

IC485 may also be evaluated for the treatment of
rheumatoid arthritis.

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 our capabilities in
molecular, cellular and structural biology, high throughput drug
screening, medicinal chemistry and gene expression profiling.
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
    
    StatusCell cycle checkpoint/ DNA repair inhibitors
    
    Cancer
    
    PreclinicalLipid and protein kinase inhibitors
    
    Inflammatory diseases
    
    PreclinicalOther phosphodiesterase inhibitors
    
    Multiple diseases
    
    PreclinicalChemokine receptor antagonists
    
    Allergic inflammatory diseases
    
    ResearchOther cell adhesion molecule antagonists
    
    Cardiovascular and inflammatory diseases
    
    ResearchNovel 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.

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| |                     
| | --------------------
| | 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 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 U.S., 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.



| |                                   
| | ----------------------------------
| | Other Phosphodiesterase Inhibitors

In addition to PDE4 and PDE5, the targets for
IC485 and Cialis (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, urinary and nervous systems. We are currently
evaluating inhibitor compounds in preclinical models of
Parkinsons disease and urinary incontinence.



| |                  
| | -----------------
| | 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 twelve years, we
have assembled a highly integrated multidisciplinary research
staff which includes:



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | molecular biologists and biochemists who identify
    new genes or proteins that are either product candidates or
    targets for product candidates; and
|
| |  | medicinal and process chemists, robotics experts,
    and pharmacologists and toxicologists 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

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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, oncologic
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 urological disorders, such as incontinence; 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 Lilly formed Lilly
ICOS, which is 50/50-owned, to develop and commercialize PDE5
inhibitors. In November 2002, Lilly ICOS received approval from
the European Commission to market Cialis, for the treatment of
erectile dysfunction, in all 15 member states of the European
Union. Lilly ICOS began shipping Cialis to European wholesalers
in January 2003. Both Lilly and ICOS will market any products
resulting from the collaboration.

Lilly ICOS continues to develop Cialis as an oral
therapeutic agent for the treatment of erectile dysfunction in
North America and other countries, and is also evaluating
tadalafil in diabetic gastroparesis. Lilly ICOS intends to
commercialize products approved in North America and Europe
through the services of both ICOS and Lilly. For countries
outside the European Union and North America, in exchange for
royalty payments, Lilly ICOS has granted Lilly an exclusive
license to develop, manufacture and commercialize the PDE5
inhibitors developed in the collaboration.

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
NDA with the FDA. We could receive

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additional payments based on the achievement of
further development and commercialization objectives. Lilly ICOS
was initially capitalized by 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 Lilly and ICOS in equal amounts. ICOS and Lilly jointly
manage Lilly ICOS and, together, provide it with a broad range
of research, development and commercial services.


ICOS acquired the rights to the intellectual
property license under an agreement with a third party in
association with a previous collaboration. Pursuant to the terms
of the third party agreement, ICOS committed to pay the party a
royalty equal to 5% of the net sales of products developed
utilizing the acquired technology. Lilly ICOS and Lilly have
accepted primary responsibility for any royalty obligations
resulting from ICOS previous arrangement.



| |             
| | ------------
| | 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 upfront fee upon executing the agreement,
and received an additional $3.0 million in milestones in
2002, upon the successful completion of Phase 1 clinical trials
and the subsequent initiation of a Phase 2 clinical program. We
could receive future success-based milestones from Biogen based
on the progression of IC747 and other LFA-1 antagonists through
development. As of December 31, 2002, we have also received
$10.0 million in loans from Biogen to fund part of our
share of the related development costs, of which
$9.0 million has been forgiven upon the achievement of
certain objectives. Some or all future loans, of up to an
additional $10.0 million as of December 31, 2002, may
also be forgiven upon the achievement of further development
milestones.



| |                                    
| | -----------------------------------
| | Texas Biotechnology
    Corporation

In June 2000, ICOS and Texas Biotechnology formed
ICOS-Texas Biotechnology L.P. (ICOS-TBC), a
50/50-owned limited partnership, to develop and commercialize
endothelin receptor antagonists, such as sitaxsentan. Under the
terms of this arrangement, ICOS and Texas Biotechnology equally
funded the development of endothelin receptor antagonists and
are entitled to 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. 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. ICOS-TBC is managed
jointly by Texas Biotechnology and ICOS. Both parties provided
the partnership with research and development services. In
January 2003, we announced our conclusion that joint development
of the endothelin receptor antagonist program, through ICOS-TBC,
should not continue. We and Texas Biotechnology are currently
negotiating the terms pursuant to which Texas Biotechnology
might independently continue the endothelin receptor antagonist
program.



| |                                     
| | ------------------------------------
| | Daiichi Suntory Pharma Co.,
    Ltd.

In February 1997, ICOS and Suntory Ltd. (the
predecessor to Daiichi Suntory Pharma Co., Ltd.) formed Suncos,
a 50/50-owned corporation, to develop and commercialize
Pafase® (recombinant human platelet-activating factor
acetylhydrolase). The joint venture was established with a
$30.0 million cash investment, in Suncos, by Suntory Ltd.,
and ICOS contribution of an exclusive license for Pafase
technology. Subsequent capital contributions were made by
Suntory Ltd. and ICOS in equal amounts. Both Suntory Ltd. and
ICOS provided Suncos with research and development services in
support of the Pafase program. In December 2002, the Pafase
development program was terminated, after an interim analysis
did not demonstrate clinical benefit in a Phase 3 study for
severe sepsis. There are no current plans for further
development activities by Suncos.

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| |                    
| | -------------------
| | 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 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 sublicensing 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 sublicensed to us.
    Under this arrangement, we received a sublicense 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.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 function. 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. In addition, 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 and both
    parties will collaborate in all aspects of lead generation and
    lead optimization. We will be responsible for clinical
    development                                                                                                                                                                                                       

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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.                                                                                                                                                  
|
| |  | Chemokine receptor 5 (CCR5).We have entered into a licensing
    agreement with Euroscreen S.A. related to CCR5. Under the terms
    of this agreement, we granted Euroscreen an exclusive license
    for key patents relating to the human CCR5 receptor and its role
    in HIV infection. We received an upfront payment in January 2003
    and are entitled to future milestone and potential royalty
    payments upon commercialization of the licensed technology.

In addition, we have entered, and may 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 both in
the U.S. and, when appropriate, in other countries. Our ability,
however, 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

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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.


In connection with the treatment of erectile
dysfunction, our principal competitor, Pfizer Inc., has been
granted a number of U.S. and foreign patents. On
October 22, 2002, the U.S. Patent and Trademark Office
issued to Pfizer a method of use patent (US6469012).
Later that day, Pfizer filed a lawsuit in the United States
District Court for the District of Delaware against ICOS, Lilly,
and Lilly ICOS alleging that the proposed marketing of product
candidate Cialis would infringe this patent. We believe that
Pfizers suit lacks merit and intend to vigorously pursue
our defenses. If Pfizer were to prevail, however, we might be
subject to substantial damages, prohibited from marketing Cialis
for the treatment of erectile dysfunction in the United States,
or required to enter into a licensing agreement to market Cialis
in the United States. We cannot assure you that any required
agreement would be available on commercially reasonable terms,
if at all.

On March 11, 1998, the European Patent
Office granted Pfizer a similar patent (EP702555). We, Lilly,
and eleven other companies successfully opposed this patent
before the Opposition Division of the European Patent Office
which, on July 18, 2001, revoked all the claims. Pfizer has
appealed this decision. Pfizers European Patent had been
nationalized by Pfizer in most European countries. Lilly ICOS
brought suits challenging the patent in a number of these
countries. On November 8, 2000, in the United Kingdom, the
High Court of Justice, Chancery Division, Patents Court issued a
judgment that the Pfizer patent claims are invalid for
obviousness. Pfizer appealed and on January 23, 2002, the
Supreme Court of Judicature, Court of Appeals affirmed. No
further appeal is available to Pfizer in the United Kingdom. In
other European Countries, Lilly ICOS suits have been
stayed pending the appellate decision in the opposition
proceeding before the European Patent Office. The resolution of
the European Patent Office appeal and pending or subsequent
litigation in the various European countries could take years.
If Pfizers patent were ultimately reinstated by the
European Patent Office or the courts in European countries, we
might be subject to litigation by Pfizer in Europe, prohibited
from marketing Cialis for the treatment of erectile dysfunction
in some European countries, or 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.

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.

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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 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.

Government Regulation

Regulation by government authorities in the
United States, Europe, and other countries is a significant
consideration in the manufacture and marketing of our products
and potential product candidates and in our ongoing research and
product development activities. Our product candidates 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 the approval of testing
or in the evaluation of preclinical or clinical results by
governmental 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, as amended, and the regulations promulgated
thereunder, also regulate the manufacturing, safety, labeling,
storage, record keeping, advertising, promotion 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 in humans;                            
|
| |  | adequate and well-controlled clinical trials to
    establish the safety and efficacy of the product candidate for
    each indication;                                           
|
| |  | 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 the FDA 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.

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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. No action can be
taken to market any new drug or biologic product in the United
States until an appropriate marketing application has been
approved by the FDA. The failure to obtain timely permission for
clinical testing or timely regulatory approval for product
marketing could materially affect us. Furthermore, following
approval, the FDA may require additional testing and
surveillance programs to monitor the side effects or adverse
events associated with use of a new product. The FDA may prevent
or limit future marketing of a product based on the results of
these post-marketing programs. Additional testing is also
required to gain approval for the use of a product as a
treatment for indications other than those already approved.

In addition, some of our product candidates 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.

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In the event that one of our product candidates
is approved for sale in the United States, we will also be
subject to various federal and state laws pertaining to health
care fraud and abuse, including anti-kickback laws
and false claims laws. Anti-kickback laws make it illegal for a
prescription drug manufacturer to solicit, offer, receive, or
pay any remuneration in exchange for, or to induce, the referral
of business, including the purchase or prescription of a
particular drug. The federal government has published
regulations that identify exemptions or safe harbors
for certain payment arrangements that do not violate the
anti-kickback statutes. Due to the breadth of the statutory
provisions and the absence of guidance in the form of
regulations or court decisions addressing certain practices, it
is possible that our future practices might be challenged under
anti-kickback or similar laws. False claims laws prohibit anyone
from knowingly and willingly presenting, or causing to be
presented for payment to third party payors (including Medicare
and Medicaid) claims for reimbursed drugs or services that are
false or fraudulent, claims for items or services not provided
as claimed, or claims for medically unnecessary items or
services. In the event that one of our product candidates is
approved for sale in the United States and is subject to
reimbursement by third party payors, our future activities
relating to the sale and marketing of our products may be
subject to scrutiny under these laws. Violations of fraud and
abuse laws may be punishable by criminal and/or civil sanctions,
including fines and civil monetary penalties, as well as the
possibility of exclusion from federal health care programs
(including Medicare and Medicaid). If the government were to
allege against or convict ICOS of violating these laws, there
could be a material adverse effect on us, including our stock
price. Our future activities could be subject to challenge for
the reasons discussed above and due to the broad scope of these
laws and the increasing attention being given to them by law
enforcement authorities.

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. Additionally, our present and future business is and
will continue to be subject to various other forms of
governmental regulation.

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. Bayer AG has filed a New Drug Application with
the FDA seeking approval for a PDE5 inhibitor, to be marketed in
partnership with GlaxoSmithKline, for the treatment of erectile
dysfunction. Additionally, Bayer AG recently received marketing
approval from the European Commission for that PDE5 inhibitor
for the treatment of erectile dysfunction. Genentech, Inc. and
XOMA Ltd. have demonstrated the efficacy of an injectable LFA-1
antibody, efalizumab, in Phase 3 clinical trials for
psoriasis, with which IC747 would compete. Similarly, Amgen Inc.
recently announced positive results in a Phase 3 clinical study
for psoriasis with Enbrel® (etanercept), a TNF-alpha
inhibitor, for the treatment of moderate to severe plaque
psoriasis. RTX, if approved, would compete with both Elmiron, an
oral therapy approved for the treatment of interstitial
cystitis, and BCG, an intravesical therapy currently in
development. Major competitors for IC485 could include
cilomilast, roflumilast and other compounds currently under
development. 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

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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, more effective
    or less costly than our products or product candidates, or that
    render our products or product candidates obsolete;                                                      
|
| |  | obtain FDA and other regulatory approvals or
    reach the market with their products more rapidly than we can,
    or with labeling claims more favorable than ours, reducing the
    potential sales of our product candidates;
|
| |  | obtain intellectual property rights that could
    increase our costs or prevent development or commercialization
    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 Cialis was only recently made available in
Europe and all of our product candidates are still in various
stages of development and are subject to substantial regulatory
approval and commercialization risks.

Manufacturing

We have been manufacturing recombinant
protein-based clinical materials in our production facilities in
Bothell, Washington, a suburb of Seattle, to support our
clinical trials since 1993. 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 candidate IC14 at
our production facilities. Vialing and other finishing steps in
the manufacturing processes of IC14 are completed under
contracts with third parties. 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. Cialis is currently manufactured under
contract by Lilly in the United Kingdom. We have established
relationships with third party

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manufacturers to produce the required materials
for our other small molecule programs. 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. In
2001, the FDA issued Lilly a Form 483 and a warning letter
outlining certain observations relative to Lillys U.S.
manufacturing facilities. We cannot be certain that the
FDAs observations will not impact the Cialis U.S.
manufacturing program and the potential U.S. launch of Cialis.


Marketing and Sales

We have begun the development of a marketing and
sales infrastructure by 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 Lilly, our joint venture partner for this
product. We plan to build a sales force that, together with
Lilly, will co-promote Cialis. Costs of marketing and selling
Cialis in Europe and North America will be charged to Lilly ICOS.

Human Resources

As of December 31, 2002, we employed
approximately 525 individuals. Approximately 400 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 other professional 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,
possible, potential,
predict, should or will or
the negative of such terms or other comparable terminology.
Forward-looking statements are only predictions that provide our
current expectations or forecasts of future events. In
particular, forward-looking statements include:



| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | information concerning possible or assumed future
    results of operations, trends in financial results and business
    plans;
|
| |  | statements about our product development schedule;                                                                              
|
| |  | statements about our expectations for regulatory
    approvals for any of our product candidates;                               

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| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | statements about our potential or prospects for
    future product sales;                                                                                                       
|
| |  | statements about the level of our costs and
    operating expenses relative to our revenues, and about the
    expected composition of our revenues;                            
|
| |  | statements about our future capital requirements
    and the sufficiency of our cash, cash equivalents, investments
    and other financing proceeds to meet these requirements;
|
| |  | statements about the outcome of contingencies
    such as legal proceedings;                                                                                                    
|
| |  | other statements about our plans, objectives,
    expectations and intentions; and                                                                                              
|
| |  | other statements that are not historical fact.                                                                                                                                  

From time to time, we also may provide oral or
written forward-looking statements in other materials we release
to the public. Any or all of our forward-looking statements in
this report and in any other public statements that we make may
turn out to be wrong. Inaccurate assumptions we might make and
known and unknown risks, uncertainties and other factors may
cause our 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.

We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new
information, future events or otherwise. You are advised,
however, to consult any further disclosures we make on related
subjects in our Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K. Also note that we provide a cautionary
discussion of risks, uncertainties and possibly inaccurate
assumptions relevant to our business under the caption Risk
Factors in this report. These are risks that we think could
cause our actual results to differ materially from expected or
historical results.

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, 2002, we had an accumulated deficit of
$464.0 million. Development work for Lilly ICOS
anticipated U.S. approval of Cialis continues. Sales of Cialis
in Europe, which will be reported by Lilly ICOS, did not begin
until late January 2003. ICOS has never reported revenues from
the sale of approved pharmaceutical products. Our operating
losses have been increasing during the past several years and
are expected to increase in 2003 and, possibly, thereafter, as
we attempt to complete development of our potential products,
obtain necessary regulatory approvals and manufacture and market
these product candidates. We expect to incur substantial
marketing and other costs related to commercializing Cialis in
Europe and if we are able to complete development and obtain
regulatory approval for this product candidate in the United
States. Even if we do successfully develop products that can be
marketed, we or our collaboration entities 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-to-three 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.

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| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | 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 many factors, some of
which we cannot control. For example, factors affecting our
revenue presently or in the future could include:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | the timing of non-recurring licensing fees;                                                 
|
| |  | reimbursements earned by us for manufacturing
    services;                                 
|
| |  | achievement of milestones under new and existing
    licensing and collaborative agreements;
|
| |  | timing and success of product launches;                                                     
|
| |  | lower than expected demand for our products;                                                
|
| |  | changes in wholesaler buying patterns;                                                      
|
| |  | changes in reimbursement rates;                                                             
|
| |  | government regulation;                                                                      
|
| |  | changes in physician prescribing habits;                                                    
|
| |  | increased competition for new or existing
    products;                                     
|
| |  | fluctuations in foreign currency exchange rates;
    and                                    
|
| |  | changes in our product pricing strategies.                                                  

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, some
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.

Successful development of pharmaceutical and
biotechnology products is highly uncertain, and very few
research and development projects produce a commercial product.
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.

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,

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have suffered significant setbacks in clinical
trials, even after promising results had been obtained in
earlier trials. We have stopped two of our late-stage Phase 3
clinical trials of product candidates following interim
analyses: a trial of Pafase for the treatment of severe sepsis
was stopped in late 2002, and a study of LeukArrest for
the treatment of ischemic stroke was stopped in early 2000.
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, could cause our business to fail. Our product candidates
are subject to extensive and rigorous government regulation. For
example, 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
pharmaceutical products. Our products marketed abroad are also
subject to extensive regulation by foreign governments. None of
our product candidates has been approved for sale in the United
States, and only Cialis has been approved outside of the U.S. 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.

In June 2001, Lilly ICOS submitted a New Drug
Application for Cialis for the treatment of erectile dysfunction
to the FDA and, in April 2002, received an
approvable letter from the FDA. The letter indicated
that FDA approval for Cialis is conditional upon completion of
additional pharmacology studies, labeling discussions and
manufacturing inspections. If the FDA finds that the additional
required data are insufficient or is unsatisfied with the
manufacturing inspections, the FDA could require corrective
action or additional data, which could further 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.

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| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | 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 Lilly to
co-promote Cialis in North America and Europe. Lilly ICOS began
European promotion of Cialis in late 2002, following receipt of
marketing authorization from the European Commission. Lilly is
expected to provide the majority of the sales and marketing
resources to Lilly ICOS. 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.



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

Through Lilly ICOS, we and Lilly have joint
responsibility for the promotion, sale and distribution of
Cialis in North America and Europe. In addition, Lilly has
promotion, sales and distribution rights to Cialis for the other
parts of the world with royalties to be paid to Lilly ICOS. As a
company, ICOS has no experience in the sale or marketing of
pharmaceutical products and has only recently hired an
experienced sales and marketing staff. We believe that, for
Cialis to be widely adopted, the efforts of a sizeable,
experienced pharmaceutical sales force are needed. If Lilly
fails to devote appropriate resources to promote, sell and
distribute Cialis, sales of Cialis could be reduced. In
addition, if 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 establish or maintain 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. Contract 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 revenues and potential profitability may be
lower. For example, our ability to satisfy demand for our
products could be reduced, which could adversely affect our
operating results. Further, 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.

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

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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.
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 contract manufacturers that we may use must
continually adhere to current Good Manufacturing Practices
regulations. If our facilities or the facilities of contract
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 contract
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 contract manufacturers fail to
comply with these requirements, we may be subject to regulatory
sanctions.

It is expected that Cialis will be manufactured
by Lilly for sale in all markets where regulatory approval has
been granted. Recently, Lilly has had a number of regulatory
issues with its manufacturing facilities. In early 2001, as a
result of preapproval plant inspections for certain of its
products, the FDA issued a warning letter to Lilly regarding
their U.S. manufacturing practices. In November 2001,
following a reinspection of their manufacturing facilities, the
FDA noted additional observations. In the spring of 2002, the
FDA conducted a comprehensive review of eight of Lillys
global manufacturing sites and a number of observations were
noted. Lilly has stated that it has provided the FDA with
responses to the observations, and has been meeting with senior
FDA officials to discuss the Agencys priority issues and
expectations as well as Lillys comprehensive action plan.
The FDA has not yet issued its final conclusions and
recommendations. Lilly has stated that it continues to work to
resolve issues related to their manufacturing operations and
expects to be prepared for a reinspection by the FDA during the
first half of 2003. Lilly has informed us that the FDA approval
of Cialis and availability of Cialis for the U.S. market is not
expected to be affected by Lillys manufacturing issues.
However, we can give no assurances as to what future actions the
FDA may take with regard to the manufacturing of Cialis, and we
cannot be certain that Lillys outstanding manufacturing
issues will not impact the anticipated approval or sale of
Cialis in the U.S.



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | 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.
Presently, Lilly is the sole, authorized provider of the active
pharmaceutical ingredient (API) utilized in the
manufacture of Cialis, and all API production for Cialis is
conducted at a single Lilly facility. Lilly relies on a
third-party vendor who has the exclusive rights to mill the API
to conform the drug substance to specifications used in the
manufacturing process. Once milled, the refined API is shipped
to a different Lilly location, where the drug substance is
manufactured into tablets, packaged, and made ready for sale. At
each of these stages in the manufacturing process, Lilly ICOS
depends on an exclusive provider (i.e. Lilly or another vendor)
for the timely supply and production of raw materials. If any of
these suppliers, or production facilities, were to cease
production or otherwise fail to supply Lilly ICOS with quality
raw materials or manufacturing services in a timely manner,
Lilly ICOS and ICOS could be materially impacted. Similar risks
exist with respect to raw materials used in the testing and
development of our other product candidates.

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| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | 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, failure to achieve market
acceptance for our potential products and inability to achieve
profitability.

Our potential products, if approved and
commercialized, will compete against well-established existing
therapeutic products or treatments, many of which 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. Also, Bayer AG recently received
marketing approval from the European Commission, and has
received an approvable letter from the FDA, for a
PDE5 inhibitor for the treatment of erectile dysfunction.

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.
Furthermore, large pharmaceutical companies recently have been
consolidating, which has increased their resources and
concentrated valuable intellectual property assets. As a result,
they may:



| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | develop products that are safer, more effective
    or less costly than any of our current or future products or
    that render our products obsolete;                                                                         
|
| |  | obtain FDA and other regulatory approvals or
    reach the market with their products more rapidly than we can or
    with labeling claims more favorable than ours, reducing the
    potential sales of our product candidates;
|
| |  | obtain intellectual property rights that could
    increase our costs or prevent development or commercialization
    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
    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.



| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | 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

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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 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 commercially
reasonable terms, if 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. For example, on
October 22, 2002, the U.S. Patent and Trademark Office
issued to Pfizer a method of use
patent (US6469012). Later that day, Pfizer filed a lawsuit
in the United States District Court for the District of Delaware
against ICOS, Lilly, and Lilly ICOS alleging that the proposed
marketing of product candidate Cialis would infringe this
patent. We believe that Pfizers suit lacks merit and
intend to vigorously pursue our defenses. If Pfizer were to
prevail, however, we might be subject to substantial damages,
prohibited from marketing Cialis for the treatment of erectile
dysfunction in the United States, or required to enter into a
licensing agreement to market Cialis in the United States. We
cannot assure you that any required agreement would be available
on commercially reasonable terms, if at all. In the event that
we were unable to profitably market Cialis in the U.S., our
future

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financial condition, and our ability to obtain
additional funding, would be adversely affected, including our
ability to pursue our development programs.


Additionally, we may have to resort to costly and
time-consuming proceedings and litigation to determine the
invalidity or scope of the proprietary rights of others. For
example, we, Lilly and eleven other companies were 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. This patent (EP702555) is a method of
use patent similar to the patent (US6469012) subsequently
granted to Pfizer in the United States. Although the opposition
proceeding was successful before the Opposition Division of the
European Patent Office, which on July 18, 2001, revoked all
the claims, Pfizer has appealed. Pfizers European Patent
had been nationalized by Pfizer in most European countries.
Lilly ICOS brought suits challenging the patent in a number of
these countries. Generally, these cases have been stayed pending
the appellate decision in the opposition proceeding before the
European Patent Office. The resolution of the European Patent
Office appeal and pending or subsequent litigation in the
various European countries could take years. If Pfizers
patent were ultimately reinstated by the European Patent Office
or the courts in European countries, we might be subject to
litigation by Pfizer in Europe, prohibited from marketing Cialis
for the treatment of erectile dysfunction in some European
countries, or 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.

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 will need additional funds to develop and
    market our potential products. If we are unable to obtain the
    additional funding, we could 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, regulatory and marketing activities necessary to
commercialize our potential products. We expect to seek
additional financing through public or private sources,
including equity or debt 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 reduced, 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 could
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 may 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 Lilly, Biogen and other companies and research
laboratories. We may be unable to negotiate additional
collaborative arrangements or, if necessary, modify our existing
arrangements on acceptable terms.

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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. Disputes may arise between us and our partners as to a
variety of matters, including financing obligations under our
agreements and ownership of intellectual property rights. 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.



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | Acquisitions, mergers or investments in
    businesses, products or technologies could harm our business,
    operating results and stock price.

We may acquire, merge with or invest in other
businesses, products or technologies that are intended to
complement our existing business. From time to time, we have had
discussions and negotiations with companies regarding business
combinations or investing in these companies businesses,
products or technologies, and we regularly engage in these
discussions and negotiations in the ordinary course of our
business. Some of our management have limited or no prior
experience in assimilating acquired or merged companies. Any
acquisitions or investments we complete will likely involve some
or all of the following risks:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | difficulty of assimilating the new operations and
    personnel, products or technologies;   
|
| |  | commercial failure of the new products;                                                      
|
| |  | disruption of our ongoing business;                                                          
|
| |  | diversion of resources;                                                                      
|
| |  | inability of management to maintain uniform
    standards, controls, procedures and policies;
|
| |  | difficulty of managing our growth and information
    systems;                               
|
| |  | reduction in the overall growth rate of the
    combined organization;                       
|
| |  | risks of entering markets in which we have little
    or no prior experience; and            
|
| |  | impairment of relationships with employees or
    customers.                                 

In addition, future acquisitions, mergers or
investments could result in potentially dilutive issuances of
equity securities, use of cash or incurrence of debt and
assumption of direct and contingent liabilities, any of which
could have an adverse effect on our business and operating
results or the price of our common stock.



| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Anti-takeover provisions in our charter
    documents and under Delaware law and our stockholders
    rights plan could make an acquisition of us, which may be
    beneficial to our stockholders, more difficult to
    complete.

Provisions of our certificate of incorporation
and bylaws will make it more difficult for a third party to
acquire us on terms not approved by our board of directors, even
if such acquisitions were beneficial to our stockholders, and
may have the effect of deterring hostile takeover attempts. For
example, our certificate of incorporation currently authorizes
our board of directors to issue up to 2,000,000 shares of
preferred stock and to fix the price, rights, preferences,
privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders.
The rights of the holders of our common stock will be subject
to, and may be harmed by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance
of preferred stock could reduce the voting power of the holders
of our common stock and the likelihood that common stockholders
will receive payments upon liquidation. In addition, our
certificate of incorporation divides our board of directors into
three classes having staggered terms, which would make it more
difficult for a potential acquirer to replace our board of
directors. We are also subject to provisions of Delaware law
that could have the effect of delaying, deferring or preventing
a change in control of ICOS. One

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of these provisions prevents us from engaging in
a business combination with any interested stockholder for a
period of three years from the date the person becomes an
interested stockholder, unless specified conditions are
satisfied. We have also implemented a stockholders rights
plan, also called a poison pill, which would substantially
reduce or eliminate the expected economic benefit to an acquirer
from acquiring us in a manner or on terms not approved by our
board of directors. These and other impediments to a third party
acquisition or change of control could limit the price investors
are willing to pay in the future for shares of our common stock.




| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | The failure to attract or retain key
    management and technical employees and consultants 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:



| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | delay our ongoing discovery research efforts;                                    
|
| |  | delay preclinical or clinical testing of our
    product candidates;             
|
| |  | delay the regulatory approval process;                                           
|
| |  | compromise our ability to negotiate additional
    collaborative arrangements; 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.



| |                              
| | -----------------------------
| | 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.

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

We face an inherent business risk of exposure to
product liability claims in the event that the use of our
products 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. Furthermore, product liability claims, regardless of
their merits, could be costly and divert managements
attention from other business concerns, or adversely affect our
reputation and the demand for our products. 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.

Available Information

Our internet address is www.icos.com. We make our
Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments
to these reports available free of charge through our internet
website. In addition, we will voluntarily provide paper copies
of such filings, free of charge, upon request.




Item 2.      Properties

We lease or own approximately 300,000 square feet
of space in seven buildings located in Bothell and Bellevue,
Washington. Our leases expire between March 2006 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 285,000 square feet. We sublease the remaining
15,000 square feet of space under a lease expiring in 2003. In
addition, in December 1992, we purchased approximately 300,000
square feet of undeveloped land adjacent to our main facilities.
We believe this property gives us additional flexibility to
expand in our current geographic location 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 anticipated growth of our business.




Item 3.      Legal
Proceedings

On October 22, 2002, Pfizer Inc., Pfizer
Limited, and Pfizer Ireland Pharmaceuticals filed a patent
infringement lawsuit against ICOS, Lilly ICOS and Lilly in the
United States District Court for the District of Delaware. The
complaint alleges that the intended and imminent use, offering
for sale, selling, manufacture, or importing into the United
States upon FDA approval of Cialis for the treatment of erectile
dysfunction by ICOS, Lilly ICOS and Lilly will constitute
infringement of plaintiffs U.S. Patent
No. 6,469,012, which issued on October 22, 2002. The
plaintiffs seek a judgment declaring that the defendants
using, selling, offering for sale, making or importing of Cialis
for the treatment of erectile dysfunction will infringe this
patent. The plaintiffs also seek a permanent injunction,
attorneys fees, costs and expenses. On January 6,
2003, we filed an answer denying the central allegations of
plaintiffs complaint and setting forth various affirmative
defenses. Litigation is inherently unpredictable and the
eventual outcome in a particular case is impossible to determine
in advance. We believe that Pfizers suit lacks merit and
intend to vigorously pursue

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our various defenses. If Pfizer were to prevail,
however, we might be subject to substantial damages, prohibited
from marketing Cialis for the treatment of erectile dysfunction
in the United States, or required to enter into a licensing
agreement to market Cialis in the United States. Any such
adverse result could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.





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 2002.




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.

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  | High |       | Low
|               |  |      |       |    
|2002           |  |      |       |     |  |   |       | 
|First Quarter  |  | $    | 57.66 |     |  | $ | 40.24 | 
|Second Quarter |  |      | 47.72 |     |  |   | 16.40 | 
|Third Quarter  |  |      | 29.47 |     |  |   | 13.35 | 
|Fourth Quarter |  |      | 32.72 |     |  |   | 19.74 | 
|2001           |  |      |       |     |  |   |       | 
|First Quarter  |  | $    | 57.00 |     |  | $ | 36.44 | 
|Second Quarter |  |      | 70.10 |     |  |   | 40.88 | 
|Third Quarter  |  |      | 65.40 |     |  |   | 42.40 | 
|Fourth Quarter |  |      | 64.26 |     |  |   | 48.53 | 

As of January 31, 2003, there were
approximately 2,183 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.

30



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|        |                                     
|------- | ------------------------------------
|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, 2002.

|                                                                                              |                                                                               |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |        |         | 
|--------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------- | -------- | -------- | ------- | ---- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------ | ------ | ------- | 
|                                                                                              |                                                                               |                                      
|                                                                                              |                                                                               | Year Ended December 31,              
|                                                                                              |                                                                               |                                      
|                                                                                              |                                                                               | 2002                                  |          | 2001     |         | 2000 |         | 1999    |         | 1998
|                                                                                              |                                                                               |                                       |          |          |         |      |         |         |         |     
|                                                                                              |                                                                               |                                      
|                                                                                              |                                                                               | (In thousands, except per share data)
|Statement of Operations Data:                                                                 |                                                                               |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|Revenue:                                                                                      |                                                                               |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|                                                                                              | Collaboration revenue from related
    parties                                |                                       | $        | 77,728   |         |      | $       | 54,754  |         |      | $       | 47,404  |         |   | $       | 64,100  |         |   | $      | 33,758 |        
|                                                                                              | Licenses of technology, primarily to related
    parties                      |                                       |          | 6,617    |         |      |         | 30,846  |         |      |         | 42,929  |         |   |         | 15,000  |         |   |        | 75,000 |        
|                                                                                              | Contract manufacturing and other                                              |                                       |          | 8,532    |         |      |         | 7,402   |         |      |         | 400     |         |   |         | 500     |         |   |        | 2,010  |        
|                                                                                              |                                                                               |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|                                                                                              |                                                                               | Total revenue                         |          |          | 92,877  |      |         |         | 93,002  |      |         |         | 90,733  |   |         |         | 79,600  |   |        |        | 110,768 | 
|                                                                                              |                                                                               |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|Operating expenses:                                                                           |                                                                               |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|                                                                                              | Research and development                                                      |                                       |          | 145,013  |         |      |         | 111,684 |         |      |         | 87,435  |         |   |         | 100,541 |         |   |        | 76,978 |        
|                                                                                              | General and administrative                                                    |                                       |          | 17,613   |         |      |         | 9,059   |         |      |         | 6,582   |         |   |         | 5,259   |         |   |        | 4,031  |        
|                                                                                              |                                                                               |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|                                                                                              |                                                                               | Total operating expenses              |          |          | 162,626 |      |         |         | 120,743 |      |         |         | 94,017  |   |         |         | 105,800 |   |        |        | 81,009  | 
|                                                                                              |                                                                               |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|Operating income (loss)                                                                       |                                                                               |                                       | (69,749  | )        |         |      | (27,741 | )       |         |      | (3,284  | )       |         |   | (26,200 | )       |         |   | 29,759 |       
|                                                                                              |                                                                               |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|Other income (expense):                                                                       |                                                                               |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|                                                                                              | Equity in losses of affiliates                                                |                                       |          | (104,160 | )       |      |         | (64,902 | )       |      |         | (37,038 | )       |   |         | (12,042 | )       |   |        | (191   | )      
|                                                                                              | Interest and other income                                                     |                                       |          | 12,292   |         |      |         | 12,470  |         |      |         | 5,531   |         |   |         | 5,047   |         |   |        | 2,390  |        
|                                                                                              |                                                                               |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|                                                                                              |                                                                               | Total other income (expense)          |          |          | (91,868 | )    |         |         | (52,432 | )    |         |         | (31,507 | ) |         |         | (6,995  | ) |        |        | 2,199   | 
|                                                                                              |                                                                               |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|Income (loss) before income taxes and cumulative
    effect of change in accounting principle |                                                                               |                                       | (161,617 | )        |         |      | (80,173 | )       |         |      | (34,791 | )       |         |   | (33,195 | )       |         |   | 31,958 |       
|Income taxes                                                                                  |                                                                               |                                       |         |          |         |      |        |         |         |      |        |         |         |   |        |         |         |   | 648    |       
|                                                                                              |                                                                               |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|Income (loss) before cumulative effect of change
    in accounting principle                  |                                                                               |                                       | (161,617 | )        |         |      | (80,173 | )       |         |      | (34,791 | )       |         |   | (33,195 | )       |         |   | 31,310 |       
|Cumulative effect of change in accounting
    principle                                       |                                                                               |                                       |         |          |         |      |        |         |         |      | (63,075 | )       |         |   |        |         |         |   |       |       
|                                                                                              |                                                                               |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|Net income (loss)                                                                             |                                                                               | $                                     | (161,617 | )        |         | $    | (80,173 | )       |         | $    | (97,866 | )       |         | $ | (33,195 | )       |         | $ | 31,310 |       
|                                                                                              |                                                                               |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|Per common share:                                                                             |                                                                               |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|                                                                                              | Income (loss) before cumulative effect of change
    in accounting principle: |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |        |        
|                                                                                              |                                                                               | Basic                                 |          | $        | (2.64   | )    |         | $       | (1.48   | )    |         | $       | (0.75   | ) |         | $       | (0.76   | ) |        | $      | 0.78    | 
|                                                                                              |                                                                               | Diluted                               |          | $        | (2.64   | )    |         | $       | (1.48   | )    |         | $       | (0.75   | ) |         | $       | (0.76   | ) |        | $      | 0.67    | 
|                                                                                              | Cumulative effect of change in accounting
    principle (basic and diluted)   |                                       | $        |         |         |      | $       |        |         |      | $       | (1.36   | )       |   | $       |        |         |   | $      |       |        
|                                                                                              | Net income (loss):                                                            |                                       |          |          |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |        |        
|                                                                                              |                                                                               | Basic                                 |          | $        | (2.64   | )    |         | $       | (1.48   | )    |         | $       | (2.11   | ) |         | $       | (0.76   | ) |        | $      | 0.78    | 
|                                                                                              |                                                                               | Diluted                               |          | $        | (2.64   | )    |         | $       | (1.48   | )    |         | $       | (2.11   | ) |         | $       | (0.76   | ) |        | $      | 0.67    | 

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|                                                                                                            |                                                   |                                       |        |      |  |      |        |      |  |      |        |  |  |  |        |         |   |  |        |         |  
|----------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------ | ------- | - |  | ------ | ------- | -
|                                                                                                            |                                                   |                                      
|                                                                                                            |                                                   | Year Ended December 31,              
|                                                                                                            |                                                   |                                      
|                                                                                                            |                                                   | 2002                                  |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                                                                                            |                                                   |                                       |        |      |  |      |        |      |  |     
|                                                                                                            |                                                   |                                      
|                                                                                                            |                                                   | (In thousands, except per share data)
|Pro forma amounts assuming the change in
    accounting principle was applied retroactively to prior years: |                                                   |                                       |        |      |  |      |        |      |  |      |        |  |  |  |        |         |   |  |        |        
|                                                                                                            | Net loss                                          |                                       |        |      |  |      |        |      |  |      |        |  |  |  | $      | (17,309 | ) |  | $      | (39,667 | )
|                                                                                                            | Net loss per common share  basic and
    diluted |                                       |        |      |  |      |        |      |  |      |        |  |  |  | $      | (0.40   | ) |  | $      | (0.99   | )
|Weighted-average common shares
    outstanding  basic                                                      |                                                   |                                       | 61,304 |      |  |      | 54,073 |      |  |      | 46,343 |  |  |  | 43,449 |         |   |  | 40,139 |        
|Weighted-average common shares
    outstanding  diluted                                                    |                                                   |                                       | 61,304 |      |  |      | 54,073 |      |  |      | 46,343 |  |  |  | 43,449 |         |   |  | 46,849 |        

|                                                                          |  |                |          |      |  |      |          |      |  |      |          |   |  |   |          |   |  |   |         |  
|------------------------------------------------------------------------- |  | -------------- | -------- | ---- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | - |  | - | ------- | -
|                                                                          |  |               
|                                                                          |  | December 31,  
|                                                                          |  |               
|                                                                          |  | 2002           |          | 2001 |  | 2000 |          | 1999 |  | 1998
|                                                                          |  |                |          |      |  |      |          |      |  |     
|                                                                          |  |               
|                                                                          |  | (In thousands)
|Balance Sheet Data:                                                       |  |                |          |      |  |      |          |      |  |      |          |   |  |   |          |   |  |   |         |  
|Cash, cash equivalents, investment securities and
    interest receivable |  | $              | 354,025  |      |  | $    | 470,707  |      |  | $    | 229,400  |   |  | $ | 69,254   |   |  | $ | 78,065  |  
|Working capital                                                           |  |                | 162,538  |      |  |      | 381,365  |      |  |      | 194,276  |   |  |   | 75,035   |   |  |   | 71,743  |  
|Total assets                                                              |  |                | 385,660  |      |  |      | 507,587  |      |  |      | 268,174  |   |  |   | 112,788  |   |  |   | 113,347 |  
|Accumulated deficit                                                       |  |                | (463,966 | )    |  |      | (302,349 | )    |  |      | (222,176 | ) |  |   | (124,310 | ) |  |   | (91,115 | )
|Stockholders equity                                                      |  |                | 317,632  |      |  |      | 453,750  |      |  |      | 211,095  |   |  |   | 99,399   |   |  |   | 98,733  |  



---

Notes to Selected Consolidated Financial Data:



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In the fourth quarter of 2000, we changed our
    accounting for nonrefundable upfront technology license fees and
    milestones received, for product candidates where we are
    providing continuing services related to product development.
    Upfront technology license fees are deferred and recognized as
    revenue over the estimated product development periods, based on
    estimated total future development costs. Milestones 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 estimated remaining product
    development period. Prior to 2000, milestones were recognized as
    revenue upon attainment of a specified event, and other
    nonrefundable 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, 1998.
|   
|(2) | The following tables summarize our revenue from
    collaborations with related parties and licenses of technology,
    and equity in losses of affiliates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                                            |                        |                         |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |        | 
|------------------------------------------- | ---------------------- | ----------------------- | ------ | ------ |  | ---- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                            |                        |                        
|                                            |                        | Year Ended December 31,
|                                            |                        |                        
|                                            |                        | 2002                    |        | 2001   |  | 2000 |        | 1999   |  | 1998
|                                            |                        |                         |        |        |  |      |        |        |  |     
|                                            |                        |                        
|                                            |                        | (In thousands)         
|Collaboration revenue from related parties: |                        |                         |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                            | Lilly ICOS             |                         | $      | 6,615  |  |      | $      | 9,965  |  |      | $      | 19,944 |  |   | $      | 19,902 |  |   | $      | 3,794  | 
|                                            | Suncos                 |                         |        | 56,478 |  |      |        | 30,373 |  |      |        | 15,175 |  |   |        | 25,053 |  |   |        | 14,894 | 
|                                            | ICOS-TBC               |                         |        | 14,635 |  |      |        | 12,676 |  |      |        | 2,816  |  |   |        |       |  |   |        |       | 
|                                            | ICOS Clinical Partners |                         |        |       |  |      |        | 1,740  |  |      |        | 9,469  |  |   |        | 19,145 |  |   |        | 15,070 | 
|                                            |                        |                         |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                            |                        | $                       | 77,728 |        |  | $    | 54,754 |        |  | $    | 47,404 |        |  | $ | 64,100 |        |  | $ | 33,758 |       
|                                            |                        |                         |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       

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|                                                          |                        |                         |          |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |        |  
|--------------------------------------------------------- | ---------------------- | ----------------------- | -------- | ------- | - | ---- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | - | - | ------ | ------ | -
|                                                          |                        |                        
|                                                          |                        | Year Ended December 31,
|                                                          |                        |                        
|                                                          |                        | 2002                    |          | 2001    |   | 2000 |         | 1999    |   | 1998
|                                                          |                        |                         |          |         |   |      |         |         |   |     
|                                                          |                        |                        
|                                                          |                        | (In thousands)         
|Licenses of technology, primarily to related
    parties: |                        |                         |          |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|                                                          | Lilly ICOS             |                         | $        | 1,557   |   |      | $       | 29,416  |   |      | $       | 42,331  |   |   | $       | 15,000  |   |   | $      | 75,000 |  
|                                                          | ICOS Clinical Partners |                         |          | 3,160   |   |      |         | 981     |   |      |         | 598     |   |   |         |        |   |   |        |       |  
|                                                          | Biogen                 |                         |          | 1,900   |   |      |         | 449     |   |      |         |        |   |   |         |        |   |   |        |       |  
|                                                          |                        |                         |          |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|                                                          |                        | $                       | 6,617    |         |   | $    | 30,846  |         |   | $    | 42,929  |         |   | $ | 15,000  |         |   | $ | 75,000 |       
|                                                          |                        |                         |          |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Equity in losses of affiliates:                           |                        |                         |          |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|                                                          | Lilly ICOS             |                         | $        | (65,669 | ) |      | $       | (38,219 | ) |      | $       | (23,612 | ) |   | $       |        |   |   | $      |       |  
|                                                          | Suncos                 |                         |          | (29,933 | ) |      |         | (15,200 | ) |      |         | (7,754  | ) |   |         | (11,802 | ) |   |        |       |  
|                                                          | ICOS-TBC               |                         |          | (8,558  | ) |      |         | (11,461 | ) |      |         | (5,476  | ) |   |         |        |   |   |        |       |  
|                                                          | ICOS Clinical Partners |                         |          |        |   |      |         | (22     | ) |      |         | (196    | ) |   |         | (240    | ) |   |        | (191   | )
|                                                          |                        |                         |          |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|                                                          |                        | $                       | (104,160 | )       |   | $    | (64,902 | )       |   | $    | (37,038 | )       |   | $ | (12,042 | )       |   | $ | (191   | )     
|                                                          |                        |                         |          |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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, possible,
potential, predict, project,
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 herein as
a result of various factors. Factors that could cause or
contribute to such differences include risks associated with
clinical development, manufacturing, collaboration arrangements
with affiliates and third parties, regulatory approvals, product
commercialization, intellectual property claims, litigation and
other risks 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 expected to have significant
commercial potential. We apply our integrated approach to
erectile dysfunction and other urologic disorders, sepsis,
psoriasis and other 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

33



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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 ongoing collaboration
partners include Lilly and Biogen.


Approved
Product

Cialis 
European Markets

In November 2002, Lilly ICOS received approval
from the European Commission to market Cialis, for the treatment
of erectile dysfunction. Lilly ICOS began shipping Cialis to
European wholesalers in January 2003, and Cialis is now
available, by prescription, in pharmacies across Europe.

Product
Candidates in Clinical Development

Cialis

In June 2001, Lilly ICOS submitted an NDA to the
FDA seeking marketing approval of Cialis for the treatment of
erectile dysfunction. In April 2002, Lilly ICOS received an
approvable letter from the FDA indicating the FDA is
prepared to approve the application upon the satisfaction of
conditions specified in the letter. Those conditions are the
successful completion of clinical pharmacology studies, labeling
discussions, and successful resolution of matters related to
Lillys manufacturing facilities. A U.S. regulatory
decision for Cialis is projected to occur in the second half of
2003, with product launch anticipated to occur shortly after
approval.

Lilly is pursuing approval of Cialis for the
treatment of erectile dysfunction in markets outside of the
European Union and North America under an exclusive license from
Lilly ICOS. In those countries, Lilly will market Cialis and pay
a royalty, equal to 20% of net sales, to Lilly ICOS.

In addition, Lilly ICOS has initiated a
Phase 2 clinical program evaluating tadalafil for the
treatment of diabetic gastroparesis.



| |      
| | -----
| | 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. In the third quarter of 2002, we began a Phase 2
clinical trial evaluating IC747 for patients with psoriasis.



| |    
| | ---
| | RTX

In November 2001, we acquired exclusive worldwide
rights to RTX for the treatment of bladder disease or function.
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, urinary urgency and high frequency of urination, including
at night. In January 2003, we began a Phase 2 clinical
trial evaluating RTX for patients with interstitial cystitis.



| |     
| | ----
| | IC14

IC14 is a monoclonal antibody that we are
currently evaluating in a Phase 2 clinical trial as a
treatment for sepsis resulting from CAP.



| |      
| | -----
| | IC485

IC485 is an orally administered, small molecule
PDE4 inhibitor. We completed Phase 1 clinical trials for
IC485 in the third quarter of 2002, and expect to initiate a
Phase 2 clinical trial in 2003 for the treatment of chronic
obstructive pulmonary disease.

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| |                                
| | -------------------------------
| | Endothelin Receptor Antagonists

Sitaxsentan completed a Phase 2b/3 clinical trial
in patients with pulmonary arterial hypertension in the fourth
quarter of 2002. In January 2003, we announced our conclusion
that joint development of the endothelin receptor antagonist
program, through ICOS-TBC, should not continue. We and Texas
Biotechnology are currently negotiating the terms pursuant to
which Texas Biotechnology might independently continue the
endothelin receptor antagonist program.



| |       
| | ------
| | Pafase

In December 2002, the Pafase development program
was terminated after an interim analysis did not demonstrate
clinical benefit in a Phase 3 study for severe sepsis.

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 costs are incurred. Payments
received that are related to future 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 estimated product development periods,
based on estimated total future development costs. Milestones
earned, 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 estimated remaining product
development period. 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.

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 estimated 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.

We recognize our share of the operating results
of our unconsolidated affiliates in proportion to our ownership
interest in the affiliate 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 partners could have a significant
impact on our overall operating results to the extent that our
negotiated reimbursement rates include indirect and overhead
costs that may not vary based on our collaboration activities.
Also, 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.

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

35



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##### Table of Contents



statements and the reported amounts of revenues
and expenses during the reporting period. Modifications to these
assumptions could result in estimates that are substantially
different from those reflected in the financial statements.


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

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 collaboration partners, and the timing and progress of our
research, development, marketing and sales activities. We may
experience significant fluctuations in cost reimbursement
revenue, revenue from licenses of technology and contract
manufacturing revenue. Revenue from licenses of technology will
vary as a result of the timing of milestone payments and changes
in estimated total development costs, which depend on the
success of clinical trials and other development efforts.
Contract manufacturing revenue may fluctuate depending upon our
needs to manufacture our own internal product candidates and our
ability to attract third parties to utilize any remaining
manufacturing capacity. In addition, significant changes in
collaboration activities could cause the amount of affiliate
losses to fluctuate from period to period. Our collaboration
activities are subject to the oversight of both parties.
Accordingly, the clinical, development, marketing and sales
activities of our affiliates are not entirely within our control.

We have incurred significant operating losses
since we began operations in September 1990. As of
December 31, 2002, we had an accumulated deficit of
$464.0 million. Our operating expenses have been increasing
during the past several years and are expected to increase
during 2003 and, possibly, thereafter, as we attempt to complete
development of our potential product candidates, obtain
necessary regulatory approvals and manufacture and market these
product candidates. Directly and through Lilly ICOS, we expect
to incur substantial marketing and other costs related to
commercializing Cialis in Europe and, to complete development,
obtain expected regulatory approval and launch Cialis in the
United States. We also expect to continue to incur substantial
costs under our collaborative agreement with Biogen. 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 currently do not expect to achieve
profitability for at least two-to-three years.



| |                                                                         
| | ------------------------------------------------------------------------
| | 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 estimated product development periods, based on
estimated total future development costs. Milestones, 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 estimated remaining product
development period. Previously, milestones were recognized as
revenue upon attainment of a specified event, and nonrefundable
upfront technology license fees were recognized as revenue when
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, to be recognized as revenue in
2000 and future years under SAB 101. During 2002, 2001, and
2000, we recognized, as revenue, $4.5 million,
$15.6 million and $42.9 million, respectively, of the
$63.1 million deferred in 2000 as a result of a change in
accounting for certain revenues.

36



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| |                                                                            
| | ---------------------------------------------------------------------------
| | Year Ended December 31, 2002 Compared
    With Year Ended December 31, 2001



| |        
| | -------
| | Revenue

Revenue for the year ended December 31,
2002, was $92.9 million compared to $93.0 million for
the year ended December 31, 2001. Cost reimbursement
revenue was $77.7 million for the year ended
December 31, 2002, compared to $54.8 million for the
year ended December 31, 2001. The increase in cost
reimbursement revenue primarily reflects manufacturing
activities and patient enrollment in the Phase 3 clinical
trial with Pafase for severe sepsis, prior to the December 2002
decision to discontinue the Pafase program. The increase also
includes the impact of the Phase 2b/3 clinical trial with
sitaxsentan for pulmonary arterial hypertension, which was
concluded in late 2002. These increases were partially offset by
a decline in cost reimbursement revenue related to Cialis,
primarily due to the completion, in 2001, of development
activities required to file the NDA. Revenue from ICOS Clinical
Partners, L.P. (ICOS Clinical Partners) also
declined, as funding under the related services agreement ended
in early 2001.

Revenue from licenses of technology was
$6.6 million in 2002, compared to $30.8 million in
2001. Revenue for the 2001 period included $14.8 million of
a $15.0 million license fee payment received from Lilly
ICOS following submission of the NDA for Cialis in June 2001.
During 2002 and 2001, we recognized, as revenue,
$4.5 million and $15.6 million, respectively of the
$63.1 million deferred in 2000 as a result of a change in
accounting for certain revenues. The decrease in 2002 was
primarily due to the completion, in 2001, of development
activities required to file the NDA for Cialis, partially offset
by $1.7 million of previously deferred, nonrefundable
license fees that were recognized as revenue in the fourth
quarter of 2002 upon the decision to terminate the Pafase
program.

Contract manufacturing revenue was
$8.5 million in 2002, compared to $7.4 million in the
prior year. We began our contract manufacturing program 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 was $145.0 million in 2002, compared to
$111.7 million in 2001. This increase was primarily due to
higher patient enrollment in the Phase 3 clinical trial
with Pafase for severe sepsis and costs associated with Pafase
manufacturing activities. The increase also reflects development
activities related to other clinical product candidates (IC485,
IC14, IC747 and sitaxsentan), and increased spending on
discovery and preclinical research activities. Research and
development costs for Cialis decreased during 2002, primarily
due to the completion of certain activities in 2001, prior to
the NDA filing.

General and
administrative.General and
administrative expense consists primarily of costs associated
with corporate support functions, general management and other
activities not directly related to research and development
efforts. General and administrative expense increased
$8.6 million, to $17.6 million in 2002. This increase
primarily reflects start-up costs incurred during the first half
of 2002 in anticipation of the U.S. commercial launch of
Cialis and an increase in market research activities.



| |                               
| | ------------------------------
| | Equity in losses of affiliates

In 2002, we recognized $104.2 million in
losses related to our equity interests in affiliates, compared
to $64.9 million in 2001. Our share of Lilly ICOS losses
increased $27.5 million, to $65.7 million in 2002.
This increase reflects higher Lilly ICOS sales and marketing
costs, in anticipation of the commercial launch of Cialis in the
U.S. and Europe, and higher research and development costs
associated with seeking regulatory approval in the U.S. and
other countries. Our share of Suncos losses increased
$14.7 million, to $29.9 million in 2002, reflecting
incremental clinical and manufacturing development activities
for Pafase, prior to the decision, in December 2002, to
discontinue the Pafase program. Upon discontinuation of the
program, Suncos accrued $3.3 million of estimated close-out
costs, consisting primarily of expenses associated with the
termination of clinical studies and manufacturing activities.
Our share of ICOS-TBC losses decreased to

37



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$8.6 million in 2002, compared to
$11.5 million in 2001. In 2001, we recognized
$2.0 million in losses associated with a milestone payment
to Texas Biotechnology upon the achievement of a clinical
objective.




| |                          
| | -------------------------
| | Interest and other income

Interest and other income totaled
$12.3 million in 2002, compared to $12.5 million in 2001.
Interest and other income in 2002 reflects the impact of an
increase in our average invested funds, due to the net proceeds
of our November 2001 equity financing, largely offset by
substantially lower interest rates.



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



| |        
| | -------
| | Revenue

Revenue for the year ended December 31,
2001, was $93.0 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 related to the Pafase
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, 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 from
licenses of technology 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 also recognized $15.6 million of the
$63.1 million deferred in 2000 as a result of a change in
accounting for certain revenues.

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 was
$111.7 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 increased to $9.1 million in 2001,
compared to $6.6 million in 2000. 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 and ICOS-TBC due to the progression of development
activities for Pafase, sitaxsentan and TBC3711.



| |                          
| | -------------------------
| | Interest and other income

Interest and other income totaled
$12.5 million in 2001, compared to $5.5 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 lower
interest rates.

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Liquidity and Capital Resources

At December 31, 2002, we had cash, cash
equivalents, investment securities available-for-sale and
interest receivable of $354.0 million, compared to
$470.7 million at December 31, 2001.

We used $41.0 million in cash for operating
activities during 2002 compared to $8.1 million during
2001. 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, timing of vendor payments and cost
reimbursements from our affiliates and an overall increase in
research and development and general and administrative spending
in 2002.

We used $210.0 million in cash for investing
activities during 2002 compared to $250.3 million in cash
for investing activities during 2001. Cash used in investing
activities in 2002 included a $106.7 million net increase
in our investment portfolio, compared to a $172.5 million
net increase in our investment portfolio in 2001. The increase
in our investment portfolio in both years primarily reflects our
conversion of cash equivalents held at the end of the prior year
into investments with slightly longer maturities. Agreements
with our affiliates obligate us to fund a portion of the
development and commercialization activities of the relevant
collaboration. We generally fund these obligations in the form
of capital contributions to the affiliate. Investing outflows in
2002 included $97.0 million of affiliate capital
contributions, compared to $71.6 million of affiliate
capital contributions in 2001. The increase in affiliate capital
contributions reflects increased research and development
spending by certain of the affiliates and the timing of partner
expense reimbursements. None of our affiliates have any third
party indebtedness. Each affiliates liabilities are
principally payable to its owners for reimbursable research,
development, sales, marketing or other expenses.

We generated $30.5 million in cash from
financing activities in 2002, compared to $324.6 million in
2001. Proceeds from stock options and warrants totaled
$22.9 million in 2002, for 2.3 million shares of our
common stock, compared to $25.2 million in 2001, for
1.9 million shares of our common stock. The 2002 and 2001
proceeds included $17.4 million and $7.3 million,
respectively, from the exercise of Series A warrants to
purchase 1.8 million and 0.8 million shares,
respectively, of our common stock. The Series A warrants
were issued in 1997, exercisable at $9.13 and $10.35 per share
and, if unexercised, expired on May 31, 2002. Financing
cash inflows during 2002 also included $7.7 million in
borrowings under our line of credit with Biogen, of which
$6.7 million was forgiven upon the achievement of a
clinical milestone in 2002. Financing cash inflows during 2001
included $2.3 million in borrowings under our line of
credit with Biogen, all of which was forgiven in 2001 upon the
achievement of a clinical milestone. Some or all future loans
from Biogen, of up to an additional $10.0 million as of
December 31, 2002, may also be forgiven upon the
achievement of development milestones. Cash inflows from
financing activities in 2001 also included $297.0 million
in net proceeds received from our November 2001 public offering
of 5.5 million shares of common stock at $57 per share.

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



| |   |                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | obtaining regulatory approval for Cialis in the
    U.S., Canada and Mexico, and continued progress in
    commercializing Cialis in Europe, the U.S. and elsewhere;
|
| |  | funding levels for research and development
    programs, including continued funding from our collaboration
    partners;                                          
|
| |  | the results of clinical trials and preclinical
    studies;                                                                                                         
|
| |  | the time and costs involved in filing and
    prosecuting patents and enforcing and defending patent claims;                                                        
|
| |  | the regulatory process in the U.S. and other
    countries;                                                                                                         
|
| |  | acquisitions of products or technologies, if any;                                                                                                                   
|
| |  | relationships with research and development
    collaborators;                                                                                                      
|
| |  | capital contributions to our affiliates;                                                                                                                            

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| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | competing technological and market development
    activities; 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. Substantially all of our cost reimbursement revenue
to date 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
related to product commercialization.

We intend to expand our operations and hire the
additional personnel necessary to commercialize Cialis and
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, cash flow from
potential future collaborations, and the line of credit
available to us under an agreement with Biogen, will be
sufficient to fund operations for approximately two years.
However, given our product development and marketing and sales
efforts, including those associated with the recent commercial
launch of Cialis in Europe, and the anticipated commercial
launch of Cialis in the U.S. and other countries, there is a
reasonable likelihood that we will seek additional financing
during the next year or so. 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 on our own.

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, 2002,
are as follows:

|           |  |   |        | 
|---------- |  | - | ------ | 
|2003       |  | $ | 4,996  | 
|2004       |  |   | 6,550  | 
|2005       |  |   | 6,574  | 
|2006       |  |   | 6,299  | 
|2007       |  |   | 5,261  | 
|Thereafter |  |   | 3,932  | 
|           |  |   |        | 
|           |  | $ | 33,612 | 
|           |  |   |        | 

We have entered into various licensing and
research and development arrangements under which we may be
obligated to make future payments to third parties upon the
achievement of certain success-based objectives.

In connection with our acquisition of technology
rights to certain PDE5 inhibitors, including Cialis (tadalafil),
we committed to pay a third party a royalty equal to 5% of the
net sales of products developed utilizing the acquired
technology. Lilly ICOS and Lilly have accepted primary
responsibility for any royalty obligations resulting from
ICOS previous arrangement.

40



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##### Table of Contents



New Accounting Standard

In November 2002, the Financial Accounting
Standards Board Emerging Issues Task Force issued its consensus
concerning Revenue Arrangements with Multiple Deliverables
(EITF 00-21). EITF 00-21 addresses how to determine
whether a revenue arrangement involving multiple deliverables
should be divided into separate units of accounting, and, if
separation is appropriate, how the arrangement consideration
should be measured and allocated to the identified accounting
units. The guidance in EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after
June 15, 2003. We do not anticipate that adoption of EITF
00-21 will have a material impact on our consolidated financial
statements.

Legal Proceedings

On October 22, 2002, Pfizer Inc., Pfizer
Limited, and Pfizer Ireland Pharmaceuticals filed a patent
infringement lawsuit against ICOS, Lilly ICOS, and Lilly in the
United States District Court for the District of Delaware. The
complaint alleges that the intended and imminent use, offering
for sale, selling, manufacture, or importing into the United
States upon FDA approval of Cialis for the treatment of erectile
dysfunction by ICOS, Lilly ICOS and Lilly will constitute
infringement of plaintiffs U.S. Patent
No. 6,469,012, which issued on October 22, 2002. The
plaintiffs seek a judgment declaring that the defendants
using, selling, offering for sale, making or importing of Cialis
for the treatment of erectile dysfunction will infringe this
patent. The plaintiffs also seek a permanent injunction,
attorneys fees, costs and expenses. On January 6,
2003, we filed an answer denying the central allegations of
plaintiffs complaint and setting forth various affirmative
defenses. Litigation is inherently unpredictable and the
eventual outcome in a particular case is impossible to determine
in advance. We believe that Pfizers suit lacks merit and
intend to vigorously pursue our various defenses. If Pfizer were
to prevail, however, we might be subject to substantial damages,
prohibited from marketing Cialis for the treatment of erectile
dysfunction in the United States, or required to enter into a
licensing agreement to market Cialis in the United States. Any
such adverse result could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.






|         |                                                          
|-------- | ---------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure about Market Risk

At December 31, 2002 and 2001, our financial
instruments consist principally 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.

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|        |                                                         
|------- | --------------------------------------------------------
|Item 8. | Consolidated Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                                    |  |           |    | 
|----------------------------------------------------------------------------------------------------------------------------------- |  | --------- | -- | 
|                                                                                                                                    |  | Page in  
|Consolidated Financial Statements                                                                                                   |  | Form 10-K
|                                                                                                                                    |  |          
|Independent Auditors Report                                                                                                        |  |           | 43 | 
|Consolidated Balance Sheets at December 31,
    2002 and 2001                                                                       |  |           | 44 | 
|Consolidated Statements of Operations for the
    Years Ended December 31, 2002, 2001 and 2000                                      |  |           | 45 | 
|Consolidated Statements of Stockholders
    Equity and Comprehensive Loss for the Years Ended
    December 31, 2002, 2001 and 2000 |  |           | 46 | 
|Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2002, 2001 and 2000                                      |  |           | 47 | 
|Notes to Consolidated Financial Statements                                                                                          |  |           | 48 | 

SUPPLEMENTARY DATA

Balance sheets of Lilly ICOS LLC as of
December 31, 2002 and 2001, 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, 2002, and the period
from October 2, 1998 (inception) through
December 31, 2002, are included elsewhere in this report.

Balance sheets of Suncos Corporation as of
December 31, 2002 and 2001, and the related statements of
operations, stockholders equity (deficit) and
comprehensive loss, and cash flows for each of the years in the
three-year period ended December 31, 2002, and the period
from February 6, 1997 (inception) through
December 31, 2002, 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.

42



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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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2002, 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
milestones in 2000.



| |             
| | ------------
| | /s/ KPMG LLP

Seattle, Washington

January 30, 2003


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ICOS CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                                 |                            |         |          |         |   |         |          |         | 
|---------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | -------- | ------- | - | ------- | -------- | ------- | 
|                                         |                                                                                                                                                                 |                           
|                                         |                                                                                                                                                                 | December 31,              
|                                         |                                                                                                                                                                 |                           
|                                         |                                                                                                                                                                 | 2002                       |         | 2001    
|                                         |                                                                                                                                                                 |                            |         |         
|                                         |                                                                                                                                                                 |                           
|                                         |                                                                                                                                                                 | (In thousands,            
|                                         |                                                                                                                                                                 | except share data)        
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                 |                            |         |          |         |   |         |         
|                                         | Cash and cash equivalents                                                                                                                                       |                            | $       | 40,450   |         |   | $       | 260,905  |        
|                                         | Investment securities, at market value                                                                                                                          |                            |         | 159,680  |         |   |         | 143,435  |        
|                                         | Interest receivable                                                                                                                                             |                            |         | 5,099    |         |   |         | 3,834    |        
|                                         | Receivables from affiliates                                                                                                                                     |                            |         | 7,959    |         |   |         | 11,405   |        
|                                         | Other                                                                                                                                                           |                            |         | 2,652    |         |   |         | 5,326    |        
|                                         |                                                                                                                                                                 |                            |         |          |         |   |         |         
|                                         |                                                                                                                                                                 | Total current assets       |         |          | 215,840 |   |         |          | 424,905 | 
|Investment securities, at market value   |                                                                                                                                                                 |                            | 148,796 |          |         |   | 62,533  |         
|Property and equipment, net              |                                                                                                                                                                 |                            | 20,209  |          |         |   | 19,754  |         
|Investments in affiliates                |                                                                                                                                                                 |                            |        |          |         |   | 244     |         
|Other                                    |                                                                                                                                                                 |                            | 815     |          |         |   | 151     |         
|                                         |                                                                                                                                                                 |                            |         |          |         |   |         |         
|                                         |                                                                                                                                                                 | $                          | 385,660 |          |         | $ | 507,587 |         
|                                         |                                                                                                                                                                 |                            |         |          |         |   |         |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                 |                            |         |          |         |   |         |         
|                                         | Accounts payable                                                                                                                                                |                            | $       | 4,125    |         |   | $       | 5,701    |        
|                                         | Accrued payroll and benefits                                                                                                                                    |                            |         | 3,188    |         |   |         | 2,265    |        
|                                         | Accrued clinical expenses                                                                                                                                       |                            |         | 7,841    |         |   |         | 5,372    |        
|                                         | Other accrued expenses                                                                                                                                          |                            |         | 10,831   |         |   |         | 7,741    |        
|                                         | Due to affiliates                                                                                                                                               |                            |         | 25,012   |         |   |         | 18,132   |        
|                                         | Deferred revenue                                                                                                                                                |                            |         | 2,305    |         |   |         | 4,329    |        
|                                         |                                                                                                                                                                 |                            |         |          |         |   |         |         
|                                         |                                                                                                                                                                 | Total current liabilities  |         |          | 53,302  |   |         |          | 43,540  | 
|Deferred revenue                         |                                                                                                                                                                 |                            | 14,726  |          |         |   | 10,297  |         
|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 62,104,891 at
    December 31, 2002 and 59,744,194 at December 31, 2001 |                            |         | 621      |         |   |         | 597      |        
|                                         | Additional paid-in capital                                                                                                                                      |                            |         | 777,697  |         |   |         | 754,674  |        
|                                         | Accumulated other comprehensive income                                                                                                                          |                            |         | 3,280    |         |   |         | 828      |        
|                                         | Accumulated deficit                                                                                                                                             |                            |         | (463,966 | )       |   |         | (302,349 | )      
|                                         |                                                                                                                                                                 |                            |         |          |         |   |         |         
|                                         |                                                                                                                                                                 | Total stockholders equity |         |          | 317,632 |   |         |          | 453,750 | 
|                                         |                                                                                                                                                                 |                            |         |          |         |   |         |         
|                                         |                                                                                                                                                                 | $                          | 385,660 |          |         | $ | 507,587 |         
|                                         |                                                                                                                                                                 |                            |         |          |         |   |         |         

See accompanying notes to consolidated financial
statements.

44



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##### Table of Contents



ICOS CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                    |                                                                     |                                       |          |          |         |      |         |         |         |   |         |         |         |  
|------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------------- | -------- | -------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                                    |                                                                     |                                      
|                                                                    |                                                                     | Year Ended December 31,              
|                                                                    |                                                                     |                                      
|                                                                    |                                                                     | 2002                                  |          | 2001     |         | 2000
|                                                                    |                                                                     |                                       |          |          |         |     
|                                                                    |                                                                     |                                      
|                                                                    |                                                                     | (In thousands, except per share data)
|Revenue:                                                            |                                                                     |                                       |          |          |         |      |         |         |         |   |         |        
|                                                                    | Collaboration revenue from related parties                          |                                       | $        | 77,728   |         |      | $       | 54,754  |         |   | $       | 47,404  |        
|                                                                    | Licenses of technology, primarily to related
    parties            |                                       |          | 6,617    |         |      |         | 30,846  |         |   |         | 42,929  |        
|                                                                    | Contract manufacturing                                              |                                       |          | 8,532    |         |      |         | 7,402   |         |   |         | 400     |        
|                                                                    |                                                                     |                                       |          |          |         |      |         |         |         |   |         |        
|                                                                    |                                                                     | Total revenue                         |          |          | 92,877  |      |         |         | 93,002  |   |         |         | 90,733  |  
|                                                                    |                                                                     |                                       |          |          |         |      |         |         |         |   |         |        
|Operating expenses:                                                 |                                                                     |                                       |          |          |         |      |         |         |         |   |         |        
|                                                                    | Research and development                                            |                                       |          | 145,013  |         |      |         | 111,684 |         |   |         | 87,435  |        
|                                                                    | General and administrative                                          |                                       |          | 17,613   |         |      |         | 9,059   |         |   |         | 6,582   |        
|                                                                    |                                                                     |                                       |          |          |         |      |         |         |         |   |         |        
|                                                                    |                                                                     | Total operating expenses              |          |          | 162,626 |      |         |         | 120,743 |   |         |         | 94,017  |  
|                                                                    |                                                                     |                                       |          |          |         |      |         |         |         |   |         |        
|                                                                    | Operating loss                                                      |                                       |          | (69,749  | )       |      |         | (27,741 | )       |   |         | (3,284  | )      
|                                                                    |                                                                     |                                       |          |          |         |      |         |         |         |   |         |        
|Other income (expense):                                             |                                                                     |                                       |          |          |         |      |         |         |         |   |         |        
|                                                                    | Equity in losses of affiliates                                      |                                       |          | (104,160 | )       |      |         | (64,902 | )       |   |         | (37,038 | )      
|                                                                    | Interest and other income                                           |                                       |          | 12,292   |         |      |         | 12,470  |         |   |         | 5,531   |        
|                                                                    |                                                                     |                                       |          |          |         |      |         |         |         |   |         |        
|                                                                    |                                                                     | Total other income (expense)          |          |          | (91,868 | )    |         |         | (52,432 | ) |         |         | (31,507 | )
|                                                                    |                                                                     |                                       |          |          |         |      |         |         |         |   |         |        
|Loss before cumulative effect of change in
    accounting principle |                                                                     |                                       | (161,617 | )        |         |      | (80,173 | )       |         |   | (34,791 | )      
|                                                                    | Cumulative effect of change in accounting
    principle             |                                       |          |         |         |      |         |        |         |   |         | (63,075 | )      
|                                                                    |                                                                     |                                       |          |          |         |      |         |         |         |   |         |        
|Net loss                                                            |                                                                     | $                                     | (161,617 | )        |         | $    | (80,173 | )       |         | $ | (97,866 | )      
|                                                                    |                                                                     |                                       |          |          |         |      |         |         |         |   |         |        
|Per common share  basic and diluted:                               |                                                                     |                                       |          |          |         |      |         |         |         |   |         |        
|                                                                    | Loss before cumulative effect of change in
    accounting principle |                                       | $        | (2.64    | )       |      | $       | (1.48   | )       |   | $       | (0.75   | )      
|                                                                    | Cumulative effect of change in accounting
    principle             |                                       |          |         |         |      |         |        |         |   |         | (1.36   | )      
|                                                                    |                                                                     |                                       |          |          |         |      |         |         |         |   |         |        
|                                                                    | Net loss                                                            |                                       | $        | (2.64    | )       |      | $       | (1.48   | )       |   | $       | (2.11   | )      
|                                                                    |                                                                     |                                       |          |          |         |      |         |         |         |   |         |        
|Weighted-average common shares
    outstanding  basic and diluted  |                                                                     |                                       | 61,304   |          |         |      | 54,073  |         |         |   | 46,343  |        
|                                                                    |                                                                     |                                       |          |          |         |      |         |         |         |   |         |        

See accompanying notes to consolidated financial
statements.

45



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##### Table of Contents



ICOS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

AND COMPREHENSIVE LOSS


|                                                                                                       |                                               |                                                            |     |                 |  |               |         |             |  |               |       |       |  |   |          |          |   |   |         |          |  
|------------------------------------------------------------------------------------------------------ | --------------------------------------------- | ---------------------------------------------------------- | --- | --------------- |  | ------------- | ------- | ----------- |  | ------------- | ----- | ----- |  | - | -------- | -------- | - | - | ------- | -------- | -
|                                                                                                       |                                               |                                                            |     |                 |  | Accumulated   |         |             |  |              
|                                                                                                       |                                               |                                                            |     |                 |  | Other         |         |             |  | Total        
|                                                                                                       |                                               | Common                                                     |     | Additional      |  | Comprehensive |         | Accumulated |  | Stockholders
|                                                                                                       |                                               | Stock                                                      |     | Paid-in Capital |  | Income (Loss) |         | Deficit     |  | Equity       
|                                                                                                       |                                               |                                                            |     |                 |  |               |         |             |  |              
|                                                                                                       |                                               |                                                           
|                                                                                                       |                                               | (In thousands, except number of shares and per share data)
|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 certain 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 certain 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 |         
|Comprehensive income (loss):                                                                           |                                               |                                                            |     |                 |  |               |         |             |  |               |       |       |  |   |          |          |   |   |         |         
|                                                                                                       | Net loss                                      |                                                            |     |                |  |               |         |            |  |               |       |      |  |   |          | (161,617 | ) |   |         | (161,617 | )
|                                                                                                       | Net unrealized gains on investment securities |                                                            |     |                |  |               |         |            |  |               |       | 2,452 |  |   |          |         |   |   |         | 2,452    |  
|                                                                                                       |                                               |                                                            |     |                 |  |               |         |             |  |               |       |       |  |   |          |          |   |   |         |         
|                                                                                                       | Total comprehensive income (loss)             |                                                            |     |                |  |               |         |            |  |               |       | 2,452 |  |   |          | (161,617 | ) |   |         | (159,165 | )
|Stock (including issuance of 20,000 shares of
    restricted stock) and option compensation expense    |                                               |                                                            |    |                 |  |               | 194     |             |  |               |      |       |  |   |         |          |   |   | 194     |         
|Issuance of 500,247 shares of common stock from
    exercise of options                                |                                               |                                                            | 5   |                 |  |               | 5,217   |             |  |               |      |       |  |   |         |          |   |   | 5,222   |         
|Issuance of 1,840,540 shares of common stock from
    exercise of warrants                             |                                               |                                                            | 19  |                 |  |               | 17,612  |             |  |               |      |       |  |   |         |          |   |   | 17,631  |         
|                                                                                                       |                                               |                                                            |     |                 |  |               |         |             |  |               |       |       |  |   |          |          |   |   |         |         
|Balances at December 31, 2002                                                                          |                                               | $                                                          | 621 |                 |  | $             | 777,697 |             |  | $             | 3,280 |       |  | $ | (463,966 | )        |   | $ | 317,632 |         
|                                                                                                       |                                               |                                                            |     |                 |  |               |         |             |  |               |       |       |  |   |          |          |   |   |         |         

See accompanying notes to consolidated financial
statements.

46



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##### Table of Contents



ICOS CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                 |                                                                    |                              |                                                         |         |        |          |          |        |        |          |         |         |        |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ---------------------------- | ------------------------------------------------------- | ------- | ------ | -------- | -------- | ------ | ------ | -------- | ------- | ------- | ------ | ------- | -
|                                                         |                                                                                 |                                                                   
|                                                         |                                                                                 | Year Ended December 31,                                           
|                                                         |                                                                                 |                                                                   
|                                                         |                                                                                 | 2002                                                               |                              | 2001                                                    |         | 2000  
|                                                         |                                                                                 |                                                                    |                              |                                                         |         |       
|                                                         |                                                                                 |                                                                   
|                                                         |                                                                                 | (In thousands)                                                    
|Cash flows from operating activities:                    |                                                                                 |                                                                    |                              |                                                         |         |        |          |          |        |        |          |        
|                                                         | Net loss                                                                        |                                                                    | $                            | (161,617                                                | )       |        | $        | (80,173  | )      |        | $        | (97,866 | )      
|                                                         | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                    |                              |                                                         |         |        |          |          |        |        |          |         |        
|                                                         |                                                                                 | Cumulative effect of change in accounting
    principle            |                              |                                                         |        |        |          |          |       |        |          |         | 63,075  |       
|                                                         |                                                                                 | Depreciation and amortization                                      |                              |                                                         | 5,764   |        |          |          | 5,486  |        |          |         | 5,056   |       
|                                                         |                                                                                 | Amortization of investment premiums (discounts),
    net           |                              |                                                         | 6,078   |        |          |          | 1,602  |        |          |         | (79     | )     
|                                                         |                                                                                 | Equity in losses of affiliates                                     |                              |                                                         | 104,160 |        |          |          | 64,902 |        |          |         | 37,038  |       
|                                                         |                                                                                 | Revenue from licenses of technology in excess of
    cash received |                              |                                                         | (4,617  | )      |          |          | (7,846 | )      |          |         | (42,929 | )     
|                                                         |                                                                                 | Stock compensation expense                                         |                              |                                                         | 194     |        |          |          | 25     |        |          |         | 555     |       
|                                                         |                                                                                 | Change in operating assets and liabilities:                        |                              |                                                         |         |        |          |          |        |        |          |         |         |       
|                                                         |                                                                                 |                                                                    | Receivables                  |                                                         |         | 4,459  |          |          |        | 100    |          |         |         | (6,973 | )      
|                                                         |                                                                                 |                                                                    | Other assets                 |                                                         |         | 360    |          |          |        | (1,427 | )        |         |         | 123    |        
|                                                         |                                                                                 |                                                                    | Accounts payable             |                                                         |         | (1,576 | )        |          |        | 2,428  |          |         |         | (1,581 | )      
|                                                         |                                                                                 |                                                                    | Accrued payroll and benefits |                                                         |         | 923    |          |          |        | 625    |          |         |         | (1,925 | )      
|                                                         |                                                                                 |                                                                    | Accrued clinical expenses    |                                                         |         | 2,469  |          |          |        | 1,475  |          |         |         | 488    |        
|                                                         |                                                                                 |                                                                    | Other accrued expenses       |                                                         |         | 2,450  |          |          |        | 4,671  |          |         |         | 1,509  |        
|                                                         |                                                                                 |                                                                    |                              |                                                         |         |        |          |          |        |        |          |        
|                                                         |                                                                                 |                                                                    |                              | Net cash used in operating activities                   |         |        | (40,953  | )        |        |        | (8,132   | )       |         |        | (43,509 | )
|                                                         |                                                                                 |                                                                    |                              |                                                         |         |        |          |          |        |        |          |        
|Cash flows from investing activities:                    |                                                                                 |                                                                    |                              |                                                         |         |        |          |          |        |        |          |        
|                                                         | Purchases of investment securities                                              |                                                                    |                              | (375,157                                                | )       |        |          | (291,499 | )      |        |          | (33,772 | )      
|                                                         | Maturities of investment securities                                             |                                                                    |                              | 104,270                                                 |         |        |          | 104,152  |        |        |          | 43,823  |        
|                                                         | Sales of investment securities                                                  |                                                                    |                              | 164,127                                                 |         |        |          | 14,807   |        |        |          | 11,391  |        
|                                                         | Acquisitions of property and equipment                                          |                                                                    |                              | (6,219                                                  | )       |        |          | (6,113   | )      |        |          | (3,142  | )      
|                                                         | Collection of receivable from affiliate                                         |                                                                    |                              |                                                        |         |        |          |         |        |        |          | 7,341   |        
|                                                         | Investments in affiliates                                                       |                                                                    |                              | (97,036                                                 | )       |        |          | (71,601  | )      |        |          | (9,210  | )      
|                                                         |                                                                                 |                                                                    |                              |                                                         |         |        |          |          |        |        |          |        
|                                                         |                                                                                 |                                                                    |                              | Net cash provided by (used in) investing
    activities |         |        | (210,015 | )        |        |        | (250,254 | )       |         |        | 16,431  |  
|                                                         |                                                                                 |                                                                    |                              |                                                         |         |        |          |          |        |        |          |        
|Cash flows from financing activities:                    |                                                                                 |                                                                    |                              |                                                         |         |        |          |          |        |        |          |        
|                                                         | Proceeds from stock options and warrants                                        |                                                                    |                              | 22,853                                                  |         |        |          | 25,212   |        |        |          | 27,803  |        
|                                                         | Borrowings under line of credit                                                 |                                                                    |                              | 7,660                                                   |         |        |          | 2,326    |        |        |          |        |        
|                                                         | Proceeds from stock offering, net of related costs                              |                                                                    |                              |                                                        |         |        |          | 297,045  |        |        |          | 181,098 |        
|                                                         |                                                                                 |                                                                    |                              |                                                         |         |        |          |          |        |        |          |        
|                                                         |                                                                                 |                                                                    |                              | Net cash provided by financing activities               |         |        | 30,513   |          |        |        | 324,583  |         |         |        | 208,901 |  
|                                                         |                                                                                 |                                                                    |                              |                                                         |         |        |          |          |        |        |          |        
|Net increase (decrease) in cash and cash
    equivalents |                                                                                 |                                                                    | (220,455                     | )                                                       |         |        | 66,197   |          |        |        | 181,823  |        
|                                                         | Cash and cash equivalents at beginning of year                                  |                                                                    |                              | 260,905                                                 |         |        |          | 194,708  |        |        |          | 12,885  |        
|                                                         |                                                                                 |                                                                    |                              |                                                         |         |        |          |          |        |        |          |        
|Cash and cash equivalents at end of year                 |                                                                                 | $                                                                  | 40,450                       |                                                         |         | $      | 260,905  |          |        | $      | 194,708  |        
|                                                         |                                                                                 |                                                                    |                              |                                                         |         |        |          |          |        |        |          |        
|Supplemental disclosure of cash flow information:        |                                                                                 |                                                                    |                              |                                                         |         |        |          |          |        |        |          |        
|                                                         | Debt forgiveness upon achievement of clinical
    milestones                    |                                                                    | $                            | 6,674                                                   |         |        | $        | 2,326    |        |        | $        |        |        
|                                                         |                                                                                 |                                                                    |                              |                                                         |         |        |          |          |        |        |          |        

See accompanying notes to consolidated financial
statements.

47



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##### Table of Contents



ICOS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2002 and 2001

(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. 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 expected to have significant
commercial potential.



|    |                            
|--- | ---------------------------
|(b) | Principles of Consolidation

The consolidated financial statements include the
accounts of ICOS Corporation and its subsidiaries (herein
collectively referred to as ICOS), all of which are
wholly-owned. 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 determined
using the straight-line method over 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
estimated useful lives or the term of the lease. Building
improvements are amortized over the shorter of their estimated
useful lives or the estimated remaining economic life of the
building.



|    |                          
|--- | -------------------------
|(g) | Investments in Affiliates

Investments in Lilly ICOS, Suncos, ICOS-TBC and
ICOS Clinical Partners are accounted for using the equity
method. Accordingly, the investments are recorded at cost,
adjusted for our share of income or losses of

48



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##### Table of Contents



ICOS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.



|    |                    
|--- | -------------------
|(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 milestones) 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. Contract
manufacturing revenue, including fees earned for process
development and manufacturing services performed for third
parties, is recognized when services are provided and
collectibility is reasonably assured. Technology license fees
are for the transfer of technology rights for which we receive
nonrefundable cash payments. Milestones are received for the
achievement of specified levels of progress related to research
and development under collaborative agreements.

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 estimated product development periods, based on
estimated total future development costs. Milestones, 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 estimated remaining product
development period.

Prior to 2000, milestones were recognized as
revenue upon attainment of a specified event and other
nonrefundable technology license fees were recognized as revenue
when received, provided any required work had been performed,
and we had no continuing performance obligations with respect to
that work.

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, resulting from 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.

Certain research and 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. Our
estimates of these costs are reconciled to actual invoices from
the service providers on a regular basis, 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

49



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ICOS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.



|    |                         
|--- | ------------------------
|(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.
We recognize compensation expense for restricted stock grants
over the applicable vesting period.

Had we determined compensation cost based on the
fair value of our stock options on the grant date under
Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation, our net
loss and net loss per share would have been the pro forma
amounts indicated below:

|                                        |                                                                                                       |                         |   |          |   |      |   |          |   |  |   |          |  
|--------------------------------------- | ----------------------------------------------------------------------------------------------------- | ----------------------- | - | -------- | - | ---- | - | -------- | - |  | - | -------- | -
|                                        |                                                                                                       |                        
|                                        |                                                                                                       | Year Ended December 31,
|                                        |                                                                                                       |                        
|                                        |                                                                                                       | 2002                    |   | 2001     |   | 2000
|                                        |                                                                                                       |                         |   |          |   |     
|Net loss:                               |                                                                                                       |                         |   |          |   |      |   |          |   |  |   |         
|                                        | As reported                                                                                           |                         | $ | (161,617 | ) |      | $ | (80,173  | ) |  | $ | (97,866  | )
|                                        | Add: Stock based employee compensation expense
    included in reported net loss                      |                         |   | 92       |   |      |   |         |   |  |   | 555      |  
|                                        | Deduct: Stock based employee compensation
    determined under fair value based method for all awards |                         |   | (38,159  | ) |      |   | (30,053  | ) |  |   | (24,413  | )
|                                        |                                                                                                       |                         |   |          |   |      |   |          |   |  |   |         
|                                        | Pro forma                                                                                             |                         | $ | (199,684 | ) |      | $ | (110,226 | ) |  | $ | (121,724 | )
|                                        |                                                                                                       |                         |   |          |   |      |   |          |   |  |   |         
|Net loss per share  basic and diluted: |                                                                                                       |                         |   |          |   |      |   |          |   |  |   |         
|                                        | As reported                                                                                           |                         | $ | (2.64    | ) |      | $ | (1.48    | ) |  | $ | (2.11    | )
|                                        |                                                                                                       |                         |   |          |   |      |   |          |   |  |   |         
|                                        | Pro forma                                                                                             |                         | $ | (3.26    | ) |      | $ | (2.04    | ) |  | $ | (2.63    | )
|                                        |                                                                                                       |                         |   |          |   |      |   |          |   |  |   |         

The per share weighted-average fair value of
stock options granted during 2002, 2001 and 2000, was $22.29,
$37.06 and $22.57, respectively, on the grant date using the
Black-Scholes option pricing model with the following
assumptions:

|                        |  |              |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ------------ | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  |             
|                        |  | Year Ended  
|                        |  | December 31,
|                        |  |             
|                        |  | 2002         |      | 2001 |  | 2000
|                        |  |              |      |      |  |     
|Expected dividend yield |  |              | 0.0  | %    |  |      | 0.0  | % |  |  | 0.0  | %
|Risk-free interest rate |  |              | 4.1  | %    |  |      | 5.0  | % |  |  | 6.6  | %
|Expected volatility     |  |              | 68.8 | %    |  |      | 73.0 | % |  |  | 74.1 | %
|Expected life in years  |  |              | 6.3  |      |  |      | 6.3  |   |  |  | 6.8  |  

50



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##### Table of Contents



ICOS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                   
|--- | ------------------
|(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 Standard

In November 2002, the Financial Accounting
Standards Board Emerging Issues Task Force issued its consensus
concerning Revenue Arrangements with Multiple Deliverables
(EITF 00-21). EITF 00-21 addresses how to determine
whether a revenue arrangement involving multiple deliverables
should be divided into separate units of accounting, and, if
separation is appropriate, how the arrangement consideration
should be measured and allocated to the identified accounting
units. The guidance in EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after
June 15, 2003. We do not anticipate that adoption of EITF
00-21 will have a material impact on our consolidated financial
statements.



|    |                  
|--- | -----------------
|(o) | Reclassifications

Certain amounts reported in prior years have been
reclassified to conform to the 2002 presentation.



|    |               
|--- | --------------
|(2) | Collaborations

The following tables summarize our revenue from
collaborations with related parties and licenses of technology,
equity in losses of affiliates and cash invested in affiliates
during the periods presented.

|                                                          |                        |                         |          |         |   |      |         |         |   |   |         |         |  
|--------------------------------------------------------- | ---------------------- | ----------------------- | -------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                                          |                        |                        
|                                                          |                        | Year Ended December 31,
|                                                          |                        |                        
|                                                          |                        | 2002                    |          | 2001    |   | 2000
|                                                          |                        |                         |          |         |   |     
|Collaboration revenue from related parties:               |                        |                         |          |         |   |      |         |         |   |   |         |        
|                                                          | Lilly ICOS             |                         | $        | 6,615   |   |      | $       | 9,965   |   |   | $       | 19,944  |  
|                                                          | Suncos                 |                         |          | 56,478  |   |      |         | 30,373  |   |   |         | 15,175  |  
|                                                          | ICOS-TBC               |                         |          | 14,635  |   |      |         | 12,676  |   |   |         | 2,816   |  
|                                                          | ICOS Clinical Partners |                         |          |        |   |      |         | 1,740   |   |   |         | 9,469   |  
|                                                          |                        |                         |          |         |   |      |         |         |   |   |         |        
|                                                          |                        | $                       | 77,728   |         |   | $    | 54,754  |         |   | $ | 47,404  |        
|                                                          |                        |                         |          |         |   |      |         |         |   |   |         |        
|Licenses of technology, primarily to related
    parties: |                        |                         |          |         |   |      |         |         |   |   |         |        
|                                                          | Lilly ICOS             |                         | $        | 1,557   |   |      | $       | 29,416  |   |   | $       | 42,331  |  
|                                                          | ICOS Clinical Partners |                         |          | 3,160   |   |      |         | 981     |   |   |         | 598     |  
|                                                          | Biogen                 |                         |          | 1,900   |   |      |         | 449     |   |   |         |        |  
|                                                          |                        |                         |          |         |   |      |         |         |   |   |         |        
|                                                          |                        | $                       | 6,617    |         |   | $    | 30,846  |         |   | $ | 42,929  |        
|                                                          |                        |                         |          |         |   |      |         |         |   |   |         |        
|Equity in losses of affiliates:                           |                        |                         |          |         |   |      |         |         |   |   |         |        
|                                                          | Lilly ICOS             |                         | $        | (65,669 | ) |      | $       | (38,219 | ) |   | $       | (23,612 | )
|                                                          | Suncos                 |                         |          | (29,933 | ) |      |         | (15,200 | ) |   |         | (7,754  | )
|                                                          | ICOS-TBC               |                         |          | (8,558  | ) |      |         | (11,461 | ) |   |         | (5,476  | )
|                                                          | ICOS Clinical Partners |                         |          |        |   |      |         | (22     | ) |   |         | (196    | )
|                                                          |                        |                         |          |         |   |      |         |         |   |   |         |        
|                                                          |                        | $                       | (104,160 | )       |   | $    | (64,902 | )       |   | $ | (37,038 | )      
|                                                          |                        |                         |          |         |   |      |         |         |   |   |         |        

51



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##### Table of Contents



ICOS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                             |            |                         |        |        |  |      |        |        |  |   |       |       | 
|---------------------------- | ---------- | ----------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ----- | ----- | 
|                             |            |                        
|                             |            | Year Ended December 31,
|                             |            |                        
|                             |            | 2002                    |        | 2001   |  | 2000
|                             |            |                         |        |        |  |     
|Cash invested in affiliates: |            |                         |        |        |  |      |        |        |  |   |       |      
|                             | Lilly ICOS |                         | $      | 59,685 |  |      | $      | 47,228 |  |   | $     |      | 
|                             | Suncos     |                         |        | 27,881 |  |      |        | 15,000 |  |   |       | 5,000 | 
|                             | ICOS-TBC   |                         |        | 9,470  |  |      |        | 9,373  |  |   |       | 4,210 | 
|                             |            |                         |        |        |  |      |        |        |  |   |       |      
|                             |            | $                       | 97,036 |        |  | $    | 71,601 |        |  | $ | 9,210 |      
|                             |            |                         |        |        |  |      |        |        |  |   |       |      

Lilly ICOS

In October 1998, ICOS and Lilly formed Lilly
ICOS, which is 50/50-owned, to develop and commercialize PDE5
inhibitors. 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 NDA with the FDA. We could receive
up to $45.0 million in additional payments based on the
achievement of further development and commercialization
objectives. Lilly ICOS was initially capitalized through cash
contributions from Lilly 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 Lilly and ICOS in equal
amounts. ICOS and Lilly jointly manage Lilly ICOS and, together,
provide it with services required for research, development and
commercialization. Lilly is the sole manufacturer of Cialis,
under contract with Lilly ICOS.

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
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 technology that we contributed, as those expenses are solely
applicable to Lilly.

ICOS acquired the rights to the contributed
technology under an agreement with a third party in association
with a previous collaboration. Pursuant to the terms of the
third party agreement, ICOS committed to pay the party a royalty
equal to 5% of the net sales of products developed utilizing the
acquired technology. Lilly ICOS and Lilly have accepted primary
responsibility for any royalty obligations resulting from
ICOS previous arrangement.

In November 2002, Lilly ICOS received approval
from the European Commission to market Cialis, for the treatment
of erectile dysfunction, in all 15 member states of the European
Union. Lilly ICOS began shipping Cialis in Europe in January
2003.

Lilly ICOS continues to develop Cialis as an oral
therapeutic agent for the treatment of erectile dysfunction in
North America and other countries, and is also evaluating
tadalafil for the treatment of diabetic gastroparesis. Lilly
ICOS expects to commercialize products approved in North America
and Europe using the services of both ICOS and Lilly. For
countries outside of the European Union and North America, in
exchange for royalty payments, Lilly ICOS has granted Lilly an
exclusive license to develop, manufacture and commercialize the
PDE5 inhibitors developed in the collaboration.

52



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ICOS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Summarized unaudited financial information for
Lilly ICOS is as follows:

|                                                        |  |              |         |      |  |   |         |   |  |  |  | 
|------------------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | - |  |  |  | 
|                                                        |  |              |         |     
|                                                        |  | December 31, |         |     
|                                                        |  |              |         |     
|                                                        |  | 2002         |         | 2001 |  |  
|Financial position:                                     |  |              |         |      |  |  
|Total current assets                                    |  | $            | 9,335   |      |  | $ |        |   |  |  |  | 
|Total noncurrent assets                                 |  |              | 1,413   |      |  |   |        |   |  |  |  | 
|                                                        |  |              |         |      |  |   |         |   |  |  |  | 
|Total assets                                            |  | $            | 10,748  |      |  | $ |        |   |  |  |  | 
|                                                        |  |              |         |      |  |   |         |   |  |  |  | 
|Total liabilities  all current,
    payable to members |  | $            | 51,922  |      |  | $ | 29,206  |   |  |  |  | 
|Members deficit                                        |  |              | (41,174 | )    |  |   | (29,206 | ) |  |  |  | 
|                                                        |  |              |         |      |  |   |         |   |  |  |  | 
|Total liabilities and members deficit                  |  | $            | 10,748  |      |  | $ |        |   |  |  |  | 
|                                                        |  |              |         |      |  |   |         |   |  |  |  | 

|                                                                  |  |                         |          |      |  |      |          |   |  |   |          |  
|----------------------------------------------------------------- |  | ----------------------- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                                                  |  |                        
|                                                                  |  | Year Ended December 31,
|                                                                  |  |                        
|                                                                  |  | 2002                    |          | 2001 |  | 2000
|Operating results:                                                |  |                         |          |      |  |     
|Research and development expenses, related parties                |  | $                       | 57,384   |      |  | $    | 39,352   |   |  | $ | 87,950   |  
|Contribution of technology, related party                         |  |                         |         |      |  |      | 30,000   |   |  |   | 40,000   |  
|Selling, general and administrative expenses,
    related parties |  |                         | 73,954   |      |  |      | 37,280   |   |  |   | 183      |  
|Interest income                                                   |  |                         |         |      |  |      | 196      |   |  |   | 663      |  
|                                                                  |  |                         |          |      |  |      |          |   |  |   |          |  
|Net loss                                                          |  | $                       | (131,338 | )    |  | $    | (106,436 | ) |  | $ | (127,470 | )
|                                                                  |  |                         |          |      |  |      |          |   |  |   |          |  

Biogen

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 those related to 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 upfront fee upon
executing the agreement, and received an additional
$3.0 million in milestones in 2002, upon the successful
completion of Phase 1 clinical trials and the subsequent
initiation of a Phase 2 clinical program. We could receive
future success-based milestones from Biogen based on the
progression of IC747 and other LFA-1 antagonists through
development. In 2002 and 2001, we also received
$7.7 million and $2.3 million, respectively, in
periodic loans from Biogen to help fund our share of the related
development costs, of which $6.7 million and
$2.3 million was forgiven in 2002 and 2001, respectively,
upon the achievement of certain objectives. Some or all future
loans, of up to an additional $10.0 million as of
December 31, 2002, may also be forgiven upon the
achievement of further development milestones. Loans that are
forgiven are treated as milestones and recorded as revenue at
the time of forgiveness, based on the ratio of cumulative costs
incurred to date, to total estimated development costs. Any
remaining forgiven balance is reported as deferred revenue to be
recognized as revenue over the estimated remaining product
development period.

Suncos

In February 1997, ICOS and Suntory Ltd. (the
predecessor to Daiichi Suntory Pharma Co., Ltd.) formed Suncos,
a 50/ 50-owned corporation, to develop and commercialize Pafase.
Suncos was established with a $30.0 million cash investment
by Suntory Ltd., and ICOS contribution of an exclusive
license for Pafase technology. Subsequent capital contributions
have been made by Suntory Ltd. and ICOS in equal amounts. Both
Suntory Ltd. and ICOS provided Suncos with research and
development services in support of

53



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ICOS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the Pafase development program. In December 2002,
the Pafase development program was terminated after an interim
analysis did not demonstrate clinical benefit in a Phase 3
study for severe sepsis. There are no current plans for further
development activities by Suncos.

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 $244.0 at
December 31, 2001.

Summarized unaudited financial information for
Suncos is as follows:

|                                                             |  |              |        |      |  |   |       |  |  |  |  | 
|------------------------------------------------------------ |  | ------------ | ------ | ---- |  | - | ----- |  |  |  |  | 
|                                                             |  |              |        |     
|                                                             |  | December 31, |        |     
|                                                             |  |              |        |     
|                                                             |  | 2002         |        | 2001 |  |  
|Financial position:                                          |  |              |        |      |  |  
|Total assets  all current                                   |  | $            | 25     |      |  | $ | 4,363 |  |  |  |  | 
|                                                             |  |              |        |      |  |   |       |  |  |  |  | 
|Total liabilities  all current,
    payable to stockholders |  | $            | 3,600  |      |  | $ | 3,834 |  |  |  |  | 
|Stockholders equity (deficit)                               |  |              | (3,575 | )    |  |   | 529   |  |  |  |  | 
|                                                             |  |              |        |      |  |   |       |  |  |  |  | 
|Total liabilities and stockholders equity
    (deficit)     |  | $            | 25     |      |  | $ | 4,363 |  |  |  |  | 
|                                                             |  |              |        |      |  |   |       |  |  |  |  | 

|                                                         |  |                         |         |      |  |      |         |   |  |   |         |  
|-------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                         |  |                        
|                                                         |  | Year Ended December 31,
|                                                         |  |                        
|                                                         |  | 2002                    |         | 2001 |  | 2000
|Operating results:                                       |  |                         |         |      |  |     
|Research and development expenses, related parties       |  | $                       | 59,172  |      |  | $    | 30,221  |   |  | $ | 15,071  |  
|General and administrative expenses, related
    parties |  |                         | 744     |      |  |      | 318     |   |  |   | 601     |  
|Interest income                                          |  |                         | 50      |      |  |      | 140     |   |  |   | 166     |  
|                                                         |  |                         |         |      |  |      |         |   |  |   |         |  
|Net loss                                                 |  | $                       | (59,866 | )    |  | $    | (30,399 | ) |  | $ | (15,506 | )
|                                                         |  |                         |         |      |  |      |         |   |  |   |         |  

ICOS-TBC

In June 2000, ICOS and Texas Biotechnology formed
ICOS-TBC, a 50/50-owned limited partnership, to develop and
commercialize endothelin receptor antagonists, such as
sitaxsentan. Under the terms of this arrangement, ICOS and Texas
Biotechnology equally funded the development of endothelin
receptor antagonists and are entitled to 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. 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. ICOS-TBC is
managed jointly by Texas Biotechnology and ICOS. Both parties
provided the partnership with research and development services.
In January 2003, we announced our conclusion that joint
development of the endothelin receptor antagonist program,
through ICOS-TBC, should not continue. We and Texas
Biotechnology are currently negotiating the terms pursuant to
which Texas Biotechnology might independently continue the
endothelin receptor antagonist program.

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

|                                                         |  |              |        |      |  |   |        |   |  |  |  | 
|-------------------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | - |  |  |  | 
|                                                         |  |              |        |     
|                                                         |  | December 31, |        |     
|                                                         |  |              |        |     
|                                                         |  | 2002         |        | 2001 |  |  
|Financial position:                                      |  |              |        |      |  |  
|Total assets  all current                               |  | $            | 1      |      |  | $ | 1      |   |  |  |  | 
|                                                         |  |              |        |      |  |   |        |   |  |  |  | 
|Total liabilities  all current,
    payable to partners |  | $            | 5,235  |      |  | $ | 7,059  |   |  |  |  | 
|Partners deficit                                        |  |              | (5,234 | )    |  |   | (7,058 | ) |  |  |  | 
|                                                         |  |              |        |      |  |   |        |   |  |  |  | 
|Total liabilities and partners deficit                  |  | $            | 1      |      |  | $ | 1      |   |  |  |  | 
|                                                         |  |              |        |      |  |   |        |   |  |  |  | 

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ICOS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                         |  |                         |         |      |  |      |         |   |  |   |         |  
|-------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                         |  |                        
|                                                         |  | Year Ended December 31,
|                                                         |  |                        
|                                                         |  | 2002                    |         | 2001 |  | 2000
|Operating results:                                       |  |                         |         |      |  |     
|Revenue                                                  |  | $                       |        |      |  | $    |        |   |  | $ | 547     |  
|Research and development expenses, related parties       |  |                         | 16,633  |      |  |      | 18,872  |   |  |   | 7,515   |  
|Contribution of technology, related party                |  |                         |        |      |  |      | 4,000   |   |  |   | 4,000   |  
|General and administrative expenses, related
    parties |  |                         | 483     |      |  |      | 26      |   |  |   | 8       |  
|                                                         |  |                         |         |      |  |      |         |   |  |   |         |  
|Net loss                                                 |  | $                       | (17,116 | )    |  | $    | (22,898 | ) |  | $ | (10,976 | )
|                                                         |  |                         |         |      |  |      |         |   |  |   |         |  

ICOS Clinical Partners

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. 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 a
product development agreement. We will not receive any further
funding under this agreement, as the partnerships assets
have been depleted and it is inactive.

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.

We have a 1% interest in ICOS Clinical Partners
and are the sole general partner.

Other Collaborative
Arrangements

We have entered into other collaborative
arrangements under which we may be obligated to pay royalties or
milestones 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.



|    |                                              
|--- | ---------------------------------------------
|(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 estimated product development
periods, based on estimated total future development costs.
Milestones to be received, in the form of additional license
fees, are recognized as revenue at the time 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 estimated 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, 2002 and 2001, we
recognized $4.5 million and $15.6 million,
respectively, of revenue previously deferred as a result of the
accounting change.

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ICOS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                      
|--- | ---------------------
|(4) | Investment Securities

The following table summarizes our investment
securities at December 31, 2002 and 2001:

|                   |                                                       |        |   |            |         |            |   |           |       |  |   |     |     |  |   |         |         | 
|------------------ | ----------------------------------------------------- | ------ | - | ---------- | ------- | ---------- | - | --------- | ----- |  | - | --- | --- |  | - | ------- | ------- | 
|                   |                                                       |        |   | Gross      |         | Gross      |   |          
|                   |                                                       | Market |   | Unrealized |         | Unrealized |   | Amortized
|                   |                                                       | Value  |   | Gains      |         | Losses     |   | Cost     
|                   |                                                       |        |   |            |         |            |   |          
|December 31, 2002: |                                                       |        |   |            |         |            |   |           |       |  |   |     |     |  |   |        
|                   | Corporate debt securities                             |        | $ | 252,406    |         |            | $ | 3,048     |       |  | $ | 13  |     |  | $ | 249,371 |        
|                   | U.S. government agency mortgage-backed
    securities |        |   | 56,070     |         |            |   | 245       |       |  |   |    |     |  |   | 55,825  |        
|                   |                                                       |        |   |            |         |            |   |           |       |  |   |     |     |  |   |        
|                   |                                                       | Total  |   | $          | 308,476 |            |   | $         | 3,293 |  |   | $   | 13  |  |   | $       | 305,196 | 
|                   |                                                       |        |   |            |         |            |   |           |       |  |   |     |     |  |   |        
|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 | 
|                   |                                                       |        |   |            |         |            |   |           |       |  |   |     |     |  |   |        

Market value and amortized cost of investment
securities at December 31, 2002, by contractual maturity,
are shown below.

|                 |  |        |         |           |  |   |         | 
|---------------- |  | ------ | ------- | --------- |  | - | ------- | 
|                 |  | Market |         | Amortized
|Maturing within: |  | Value  |         | Cost     
|                 |  |        |         |          
|1 year           |  | $      | 159,680 |           |  | $ | 158,571 | 
|2 years          |  |        | 70,385  |           |  |   | 69,513  | 
|3 years          |  |        | 78,411  |           |  |   | 77,112  | 
|                 |  |        |         |           |  |   |         | 
|                 |  | $      | 308,476 |           |  | $ | 305,196 | 
|                 |  |        |         |           |  |   |         | 

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

|           |  |              |       |      |  |   |        | 
|---------- |  | ------------ | ----- | ---- |  | - | ------ | 
|           |  |             
|           |  | December 31,
|           |  |             
|           |  | 2002         |       | 2001
|           |  |              |       |     
|Lilly ICOS |  | $            | 2,631 |      |  | $ | 1,612  | 
|Suncos     |  |              | 337   |      |  |   | 3,814  | 
|ICOS-TBC   |  |              | 4,841 |      |  |   | 5,976  | 
|Other      |  |              | 150   |      |  |   | 3      | 
|           |  |              |       |      |  |   |        | 
|           |  | $            | 7,959 |      |  | $ | 11,405 | 
|           |  |              |       |      |  |   |        | 

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

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ICOS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                            
|--- | ---------------------------
|(6) | Property and Equipment, Net

|                                               |  |              |         |      |  |   |         |  
|---------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |         | 2001
|                                               |  |              |         |     
|Land                                           |  | $            | 2,310   |      |  | $ | 2,310   |  
|Building and improvements                      |  |              | 10,088  |      |  |   | 10,088  |  
|Leasehold improvements                         |  |              | 14,310  |      |  |   | 12,890  |  
|Furniture and equipment                        |  |              | 34,681  |      |  |   | 29,882  |  
|                                               |  |              |         |      |  |   |         |  
|Total cost                                     |  |              | 61,389  |      |  |   | 55,170  |  
|Less accumulated depreciation and amortization |  |              | (41,180 | )    |  |   | (35,416 | )
|                                               |  |              |         |      |  |   |         |  
|                                               |  | $            | 20,209  |      |  | $ | 19,754  |  
|                                               |  |              |         |      |  |   |         |  



|    |                  
|--- | -----------------
|(7) | Due to Affiliates

|           |  |              |        |      |  |   |        | 
|---------- |  | ------------ | ------ | ---- |  | - | ------ | 
|           |  |             
|           |  | December 31,
|           |  |             
|           |  | 2002         |        | 2001
|           |  |              |        |     
|Lilly ICOS |  | $            | 20,587 |      |  | $ | 14,603 | 
|Suncos     |  |              | 1,808  |      |  |   |       | 
|ICOS-TBC   |  |              | 2,617  |      |  |   | 3,529  | 
|           |  |              |        |      |  |   |        | 
|           |  | $            | 25,012 |      |  | $ | 18,132 | 
|           |  |              |        |      |  |   |        | 

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



|    |                 
|--- | ----------------
|(8) | Deferred Revenue

|             |                        |              |        |        |  |   |        |       | 
|------------ | ---------------------- | ------------ | ------ | ------ |  | - | ------ | ----- | 
|             |                        |             
|             |                        | December 31,
|             |                        |             
|             |                        | 2002         |        | 2001  
|             |                        |              |        |       
|Current:     |                        |              |        |        |  |   |        |      
|             | Biogen                 |              | $      | 1,926  |  |   | $      | 1,197 | 
|             | Lilly ICOS             |              |        | 31     |  |   |        | 1,589 | 
|             | ICOS Clinical Partners |              |        |       |  |   |        | 1,543 | 
|             | Other                  |              |        | 348    |  |   |        |      | 
|             |                        |              |        |        |  |   |        |      
|             |                        | $            | 2,305  |        |  | $ | 4,329  |      
|             |                        |              |        |        |  |   |        |      
|Non-current: |                        |              |        |        |  |   |        |      
|             | Biogen                 |              | $      | 14,726 |  |   | $      | 8,680 | 
|             | ICOS Clinical Partners |              |        |       |  |   |        | 1,617 | 
|             |                        |              |        |        |  |   |        |      
|             |                        | $            | 14,726 |        |  | $ | 10,297 |      
|             |                        |              |        |        |  |   |        |      

Substantially all of the above balances represent
deferred revenue from upfront license fees, milestones and debt
forgiven under our line of credit with Biogen.

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ICOS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(9) 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 $5.0 million,
$4.0 million and $3.5 million for 2002, 2001 and 2000,
respectively.

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

|           |  |   |        | 
|---------- |  | - | ------ | 
|2003       |  | $ | 4,996  | 
|2004       |  |   | 6,550  | 
|2005       |  |   | 6,574  | 
|2006       |  |   | 6,299  | 
|2007       |  |   | 5,261  | 
|Thereafter |  |   | 3,932  | 
|           |  |   |        | 
|           |  | $ | 33,612 | 
|           |  |   |        | 

(10) 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:

|                                                          |  |                         |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                          |  |                        
|                                                          |  | Year Ended December 31,
|                                                          |  |                        
|                                                          |  | 2002                    |         | 2001 |  | 2000
|                                                          |  |                         |         |      |  |     
|Estimated federal income tax benefit                      |  | $                       | (56,566 | )    |  | $    | (28,061 | ) |  | $ | (34,253 | )
|Research and experimentation tax credit
    carryforwards |  |                         | (2,866  | )    |  |      | (2,905  | ) |  |   | (2,233  | )
|Other                                                     |  |                         | 61      |      |  |      | 223     |   |  |   | 862     |  
|Change in valuation allowance                             |  |                         | 59,371  |      |  |      | 30,743  |   |  |   | 35,624  |  
|                                                          |  |                         |         |      |  |      |         |   |  |   |         |  
|                                                          |  | $                       |        |      |  | $    |        |   |  | $ |        |  
|                                                          |  |                         |         |      |  |      |         |   |  |   |         |  

The change in valuation allowance shown above
excludes, in each year, the tax benefit of deductions generated
by non-qualified stock option exercises. Those tax benefits will
be credited directly to stockholders equity upon
realization.

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ICOS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                          |  |              |          |      |  |   |          |  
|--------------------------------------------------------- |  | ------------ | -------- | ---- |  | - | -------- | -
|                                                          |  |             
|                                                          |  | December 31,
|                                                          |  |             
|                                                          |  | 2002         |          | 2001
|                                                          |  |              |          |     
|Depreciation                                              |  | $            | 4,212    |      |  | $ | 4,432    |  
|Deferred revenue                                          |  |              | 5,961    |      |  |   | 5,119    |  
|Net operating loss carryforwards                          |  |              | 144,635  |      |  |   | 97,634   |  
|Research and experimentation tax credit
    carryforwards |  |              | 15,213   |      |  |   | 12,165   |  
|Alternative minimum tax credit carryforward               |  |              | 612      |      |  |   | 612      |  
|Investments in affiliates                                 |  |              | 30,447   |      |  |   | 19,785   |  
|Other                                                     |  |              | 2,655    |      |  |   | 2,705    |  
|                                                          |  |              |          |      |  |   |          |  
|Gross deferred tax assets                                 |  |              | 203,735  |      |  |   | 142,452  |  
|Valuation allowance                                       |  |              | (203,735 | )    |  |   | (142,452 | )
|                                                          |  |              |          |      |  |   |          |  
|                                                          |  | $            |         |      |  | $ |         |  
|                                                          |  |              |          |      |  |   |          |  

The increases in the valuation allowance for
deferred tax assets of $61.3 million, $42.5 million and
$47.4 million, in 2002, 2001 and 2000, respectively, are
attributable primarily to net operating loss carryforwards and
investments in affiliates.

At December 31, 2002, we have net operating
loss carryforwards available to offset future taxable income as
follows:

|                   |  |   |         | 
|------------------ |  | - | ------- | 
|Year of Expiration |  |  
|                   |  |  
|2009               |  | $ | 5,060   | 
|2010               |  |   | 21,507  | 
|2011               |  |   | 21,039  | 
|2012               |  |   | 26,774  | 
|2013               |  |   | 7,688   | 
|2018               |  |   | 359     | 
|2019               |  |   | 36,832  | 
|2020               |  |   | 71,234  | 
|2021               |  |   | 92,794  | 
|2022               |  |   | 129,956 | 
|                   |  |   |         | 
|                   |  | $ | 413,243 | 
|                   |  |   |         | 

Approximately $84.3 million of the net
operating loss carryforwards as of December 31, 2002,
results from stock option deductions, the realization of which
would result in a credit to stockholders equity. At
December 31, 2002, we also had available approximately
$15.2 million of research and experimentation tax credit
carryforwards to offset future tax liabilities. These credits
expire from 2009 to 2022.

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.

(11) 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,

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ICOS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 or pursuant to our Stockholder Rights Plan as
described below.

Stockholder Rights Plan

In August 2002, we implemented a Stockholder
Rights Plan (the Rights Plan) under which the Board
of Directors declared a dividend of one preferred share purchase
Right for each outstanding share of our common stock. Each Right
entitles its registered holder, under certain circumstances and
upon the occurrence of certain events, to purchase from us one
one-hundredth of a share of our Series A Junior
Participating Preferred Stock, at a price of $250.00 per one
one-hundredth of a preferred share, subject to adjustment. The
Rights are not exercisable until the distribution date. Until
the distribution date, or earlier redemption or expiration of
the Rights, the Rights may only be transferred with the shares
of our common stock.

If a person or group (collectively, an
Acquiring Person) acquires beneficial ownership of
15% or more of our outstanding shares of common stock, then each
Right (other than those held by an Acquiring Person, an
affiliate, or an associate of that person) will entitle the
holder to purchase, for the purchase price, the number of shares
of common stock which at the time of the transaction would have
a market value of twice the purchase price. Any Rights owned by
an Acquiring Person, an affiliate, or an associate of that
person, will be void and non-transferable. The Board of
Directors may also elect to exchange each Right, other than
those which become void and non-transferable as described above,
for shares of common stock, without payment of the purchase
price. Should the Board of Directors make this election, the
exchange rate would be one-half of the number of shares of
common stock that would otherwise be issuable at that time upon
the exercise of one Right.

(12) Common Stock Options and
Warrants

Stock Option Plan

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

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.

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ICOS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of stock options is presented below
(shares stated in thousands):

|                             |                   |                           |        |           |   |   |       |       | 
|---------------------------- | ----------------- | ------------------------- | ------ | --------- | - | - | ----- | ----- | 
|                             |                   |                          
|                             |                   | Stock Options Outstanding
|                             |                   |                          
|                             |                   |                           |        | Weighted-
|                             |                   |                           |        | Average  
|                             |                   |                           |        | Exercise 
|                             |                   | Number of                 |        | Price Per
|                             |                   | Shares                    |        | Share    
|                             |                   |                           |        |          
|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 |      
|                             | Options granted   |                           |        | 3,756     |   |   |       | 33.70 | 
|                             | Cancellations     |                           |        | (130      | ) |   |       | 43.98 | 
|                             | Options exercised |                           |        | (500      | ) |   |       | 10.25 | 
|                             |                   |                           |        |           |   |   |       |      
|Balance at December 31, 2002 |                   |                           | 10,983 |           |   | $ | 30.15 |      
|                             |                   |                           |        |           |   |   |       |      

At December 31, 2002, 2.9 million
shares were reserved and available for grant under the 1999
Stock Option Plan.

The following table summarizes information about
stock options outstanding and exercisable at December 31,
2002 (shares stated in thousands):

|                |  |                           |        |                           |  |                    |     |        |  |                    |       |  |  |  |       |  |  |   |       | 
|--------------- |  | ------------------------- | ------ | ------------------------- |  | ------------------ | --- | ------ |  | ------------------ | ----- |  |  |  | ----- |  |  | - | ----- | 
|                |  |                           |        |                          
|                |  | Stock Options Outstanding |        | Stock Options Exercisable
|                |  |                           |        |                          
|                |  |                           |        | Weighted-                 |  |                    |     |       
|                |  |                           |        | Average                   |  |                    |     |       
|                |  |                           |        | Remaining                 |  | Weighted-Average   |     |        |  | Weighted-Average  
|Range of        |  |                           |        | Contractual Life          |  | Exercise Price Per |     |        |  | Exercise Price Per
|Exercise Prices |  | Number                    |        | (In Years)                |  | Share              |     | Number |  | Share             
|                |  |                           |        |                           |  |                    |     |        |  |                   
|$ 3.70 - $ 7.38 |  |                           | 1,300  |                           |  |                    | 1.8 |        |  | $                  | 5.83  |  |  |  | 1,300 |  |  | $ | 5.83  | 
|7.50 -  17.06   |  |                           | 1,596  |                           |  |                    | 4.4 |        |  |                    | 12.31 |  |  |  | 1,582 |  |  |   | 12.28 | 
|17.13 -  30.31  |  |                           | 3,406  |                           |  |                    | 9.0 |        |  |                    | 27.75 |  |  |  | 958   |  |  |   | 26.36 | 
|30.38 -  42.88  |  |                           | 2,500  |                           |  |                    | 6.5 |        |  |                    | 39.41 |  |  |  | 1,800 |  |  |   | 39.15 | 
|43.00 -  66.53  |  |                           | 2,181  |                           |  |                    | 8.6 |        |  |                    | 50.83 |  |  |  | 896   |  |  |   | 51.22 | 
|                |  |                           |        |                           |  |                    |     |        |  |                    |       |  |  |  |       |  |  |   |       | 
|$ 3.70 - $66.53 |  |                           | 10,983 |                           |  |                    | 6.8 |        |  | $                  | 30.15 |  |  |  | 6,536 |  |  | $ | 25.80 | 
|                |  |                           |        |                           |  |                    |     |        |  |                    |       |  |  |  |       |  |  |   |       | 

Warrants To Purchase Common
Stock

In connection with ICOS Clinical Partners
sale of limited partnership units, we issued Series A
warrants to purchase an aggregate of 7.6 million shares of
our common stock at a weighted-average exercise price of $9.45
per share. Substantially all of the Series A warrants were
exercised prior to expiration on May 31, 2002. On
June 30, 1999, we issued Series B warrants,
exercisable through June 30, 2004, to purchase an aggregate
of 7.6 million shares of our common stock at $52.49 per
share.

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ICOS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During 2002, Series A and B warrants to
purchase 1.8 million shares were exercised at a
weighted-average exercise price of $9.58 per share. 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. At December 31, 2002,
Series B warrants to purchase 7.4 million shares were
outstanding.



|     |                          
|---- | -------------------------
|(13) | Net Loss per Common Share

|                                                         |              |                                |       |      |          |      |       |   |         |   |       |   |         |  
|-------------------------------------------------------- | ------------ | ------------------------------ | ----- | ---- | -------- | ---- | ----- | - | ------- | - | ----- | - | ------- | -
|                                                         |              |                               
|                                                         |              | Year Ended December 31,       
|                                                         |              |                               
|                                                         |              | 2002                           |       | 2001 |          | 2000
|                                                         |              |                                |       |      |          |     
|Net loss per share computations  basic
    and diluted: |              |                                |       |      |          |      |       |   |         |   |       |  
|                                                         | Numerator:   |                                |       |      |          |      |       |   |         |   |       |   |        
|                                                         |              | Net loss                       |       | $    | (161,617 | )    |       | $ | (80,173 | ) |       | $ | (97,866 | )
|                                                         | Denominator: |                                |       |      |          |      |       |   |         |   |       |   |        
|                                                         |              | Weighted-average common shares |       |      | 61,304   |      |       |   | 54,073  |   |       |   | 46,343  |  
|                                                         |              |                                |       |      |          |      |       |   |         |   |       |  
|Net loss per share  basic and diluted                   |              | $                              | (2.64 | )    |          | $    | (1.48 | ) |         | $ | (2.11 | )
|                                                         |              |                                |       |      |          |      |       |   |         |   |       |  

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

|               |  |                         |        |      |  |      |       |  |  |  |        | 
|-------------- |  | ----------------------- | ------ | ---- |  | ---- | ----- |  |  |  | ------ | 
|               |  |                        
|               |  | Year Ended December 31,
|               |  |                        
|               |  | 2002                    |        | 2001 |  | 2000
|               |  |                         |        |      |  |     
|Stock options  |  |                         | 10,983 |      |  |      | 7,857 |  |  |  | 7,702  | 
|Stock warrants |  |                         | 7,429  |      |  |      | 9,273 |  |  |  | 10,157 | 



|     |                  
|---- | -----------------
|(14) | Legal Proceedings

On October 22, 2002, Pfizer Inc., Pfizer
Limited, and Pfizer Ireland Pharmaceuticals filed a patent
infringement lawsuit against ICOS, Lilly ICOS, and Lilly in the
United States District Court for the District of Delaware. The
complaint alleges that the intended and imminent use, offering
for sale, selling, manufacture, or importing into the United
States upon FDA approval of Cialis for the treatment of erectile
dysfunction by ICOS, Lilly ICOS and Lilly will constitute
infringement of plaintiffs U.S. Patent
No. 6,469,012, which issued on October 22, 2002. The
plaintiffs seek a judgment declaring that the defendants
using, selling, offering for sale, making or importing of Cialis
for the treatment of erectile dysfunction will infringe this
patent. The plaintiffs also seek a permanent injunction,
attorneys fees, costs and expenses. On January 6,
2003, we filed an answer denying the central allegations of
plaintiffs complaint and setting forth various affirmative
defenses. Litigation is inherently unpredictable and the
eventual outcome in a particular case is impossible to determine
in advance. We believe that Pfizers suit lacks merit and
intend to vigorously pursue our various defenses. If Pfizer were
to prevail, however, we might be subject to substantial damages,
prohibited from marketing Cialis for the treatment of erectile
dysfunction in the United States, or required to enter into a
licensing agreement to market Cialis in the United States. Any
such adverse result could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.



|     |                                 
|---- | --------------------------------
|(15) | Other Related Party Transactions

We provide certain administrative, research and
support services to Ceptyr, Inc. (Ceptyr). Ceptyr
also subleases space from us under an operating lease expiring
in 2003. We recognized income of approximately $567, $561 and
$818 from Ceptyr in 2002, 2001 and 2000, respectively.
Dr. Wilcox, our Executive Vice President, Operations, is a
director of Ceptyr.

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ICOS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(16) Quarterly Financial Data
(Unaudited)

Summary operating data for each quarter of the
years ended December 31, 2002 and 2001 follows:

|      |                           |          |   |         |   |       |   |         |   |       |   |         |   |  |   |         |   |  |   |          |  
|----- | ------------------------- | -------- | - | ------- | - | ----- | - | ------- | - | ----- | - | ------- | - |  | - | ------- | - |  | - | -------- | -
|      |                           |          |   |        
|      |                           | Quarters |   |        
|      |                           |          |   |        
|      |                           | First    |   | Second  |   | Third |   | Fourth  |   | Total
|      |                           |          |   |         |   |       |   |         |   |      
|2002: |                           |          |   |         |   |       |   |         |   |       |   |         |   |  |   |         |   |  |   |         
|      | Revenue                   |          | $ | 22,536  |   |       | $ | 21,975  |   |       | $ | 22,210  |   |  | $ | 26,156  |   |  | $ | 92,877   |  
|      | Net loss                  |          |   | (39,220 | ) |       |   | (40,405 | ) |       |   | (34,531 | ) |  |   | (47,461 | ) |  |   | (161,617 | )
|      | Net loss per common share |          | $ | (0.65   | ) |       | $ | (0.66   | ) |       | $ | (0.56   | ) |  | $ | (0.76   | ) |  | $ | (2.64    | )
|2001: |                           |          |   |         |   |       |   |         |   |       |   |         |   |  |   |         |   |  |   |         
|      | Revenue                   |          | $ | 18,900  |   |       | $ | 33,714  |   |       | $ | 18,865  |   |  | $ | 21,523  |   |  | $ | 93,002   |  
|      | 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    | )

63



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##### Table of Contents






PART III






|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant

The information required by this item is
incorporated by reference from the sections entitled
Security Ownership of Principal Stockholders and
Management, Election of Directors,
Continuing Class 2 Directors (until 2004),
Continuing Class 3 Directors (until 2005),
Executive Officers and Section 16(a)
Beneficial Ownership Reporting Compliance in ICOS
Proxy Statement for the Annual Meeting of Stockholders to be
held on May 2, 2003.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item is
incorporated by reference from the sections entitled
Compensation of Directors, Executive
Compensation, 2002 Option Grants, 2002
Aggregate Option Exercises and Year-end Option Values,
Compensation Committee Interlocks and Insider
Participation, Report of the Compensation Committee
on Executive Compensation, Stock Price Performance
Graph and Employment Contracts, Termination of
Employment and Change of Control Arrangements in
ICOS Proxy Statement for the Annual Meeting of
Stockholders to be held on May 2, 2003.






|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters

The following table sets forth information as of
December 31, 2002, with respect to our compensation plans,
for which our common stock is authorized for issuance. All of
our compensation plans have been approved by security holders
(see note 12 in the Notes to Consolidated Financial
Statements for a description of our plans).

|                                                           |  |                  |            |                |  |                      |       |  |  |  |           | 
|---------------------------------------------------------- |  | ---------------- | ---------- | -------------- |  | -------------------- | ----- |  |  |  | --------- | 
|                                                           |  | Number of        |            | Weighted-      |  |                     
|                                                           |  | Securities to be |            | Average        |  | Number of Securities
|                                                           |  | Issued Upon      |            | Exercise Price |  | Remaining Available 
|                                                           |  | Exercise of      |            | per Share of   |  | for Future Issuance 
|                                                           |  | Outstanding      |            | Outstanding    |  | Under Equity        
|                                                           |  | Options          |            | Options        |  | Compensation Plans  
|                                                           |  |                  |            |                |  |                     
|Equity compensation plans approved by security
    holders |  |                  | 10,983,288 |                |  | $                    | 30.15 |  |  |  | 2,880,367 | 

The other information required by this item is
incorporated by reference from the section entitled
Security Ownership of Principal Stockholders and
Management in ICOS Proxy Statement for the Annual
Meeting of Stockholders to be held on May 2, 2003.






|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions

The information required by this item is
incorporated by reference from the section entitled
Related Party Transactions in ICOS Proxy
Statement for the Annual Meeting of Stockholders to be held on
May 2, 2003.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

(a) Evaluation of disclosure controls and
procedures. Our chief executive officer and our chief
financial officer, after evaluating the effectiveness of
ICOS disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as
of a date (the Evaluation Date) within 90 days
prior to the filing date of this annual report on
Form 10-K, have concluded that, as of the Evaluation Date,
our disclosure controls and procedures were adequate to ensure
that material information relating to the registrant and its
consolidated subsidiaries would be made known to them by others
within those entities.

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##### Table of Contents



(b) Changes in internal controls. To
our knowledge, there were no significant changes in ICOS
internal controls or in other factors that could significantly
affect internal controls subsequent to the Evaluation Date.




PART IV






|         |                                                                                  
|-------- | ---------------------------------------------------------------------------------
|Item 15. | 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, 2002 and 2001, 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, 2002, and the period
from October 2, 1998 (inception) through December 31,
2002.

Balance sheets of Suncos Corporation as of
December 31, 2002 and 2001, and the related statements of
operations, stockholders equity (deficit) and
comprehensive loss, and cash flows for each of the years in the
three-year period ended December 31, 2002, and the period
from February 6, 1997 (inception) through
December 31, 2002.

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, 2002:

On October 30, 2002, ICOS filed a report
containing the Lilly ICOS LLC press release issued on
October 23, 2002, announcing that Pfizer filed a patent
infringement lawsuit against ICOS, Lilly ICOS and Lilly in the
United States District Court.



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

Suncos Corporation Financial
Statements

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##### Table of Contents



LILLY ICOS LLC

(A Development Stage Company)


TABLE OF CONTENTS

|                                                                                                                                                                                                      |  |      |    | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                                                                                      |  | Page
|                                                                                                                                                                                                      |  |     
|Independent Auditors Report                                                                                                                                                                          |  |      | 67 | 
|                                                                                                                                                                                                     
|Balance Sheets as of December 31, 2002 and
    2001                                                                                                                                                   |  |      | 68 | 
|                                                                                                                                                                                                     
|Statements of Operations for each of the years in
    the three-year period ended December 31, 2002, and the
    period from October 2, 1998 (inception) through
    December 31, 2002                |  |      | 69 | 
|                                                                                                                                                                                                     
|Statements of Comprehensive Operations for each
    of the years in the three-year period ended December 31,
    2002, and the period from October 2, 1998 (inception)
    through December 31, 2002  |  |      | 70 | 
|                                                                                                                                                                                                     
|Statements of Members Equity (Deficit) for
    each of the years in the three-year period ended
    December 31, 2002, and the period from October 2, 1998
    (inception) through December 31, 2002 |  |      | 71 | 
|                                                                                                                                                                                                     
|Statements of Cash Flows for each of the years in
    the three-year period ended December 31, 2002, and the
    period from October 2, 1998 (inception) through
    December 31, 2002                |  |      | 72 | 
|                                                                                                                                                                                                     
|Notes to Financial Statements                                                                                                                                                                         |  |      | 73 | 

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##### Table of Contents



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, 2002 and 2001, 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, 2002, and the period
from October 2, 1998 (inception) to December 31,
2002. 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, 2002 and
2001, and the results of its operations and its cash flows for
each of the years in the three-year period ended
December 31, 2002, and the period from October 2, 1998
(inception) to December 31, 2002, in conformity with
accounting principles generally accepted in the United States of
America.



| |             
| | ------------
| | /s/ KPMG LLP

Seattle, Washington

January 30, 2003


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##### Table of Contents



LILLY ICOS LLC

(A Development Stage Company)


BALANCE SHEETS

|                                                              |                           |                        |        |         |         |   |        |         |         |  
|------------------------------------------------------------- | ------------------------- | ---------------------- | ------ | ------- | ------- | - | ------ | ------- | ------- | -
|                                                              |                           |                       
|                                                              |                           | December 31,          
|                                                              |                           |                       
|                                                              |                           | 2002                   |        | 2001   
|                                                              |                           |                        |        |        
|                                                              |                           |                       
|                                                              |                           | (In thousands)        
|ASSETS                                                       
|Current assets:                                               |                           |                        |        |         |         |   |        |        
|                                                              | Cash and cash equivalents |                        | $      | 1       |         |   | $      |        |        
|                                                              | Deposit                   |                        |        | 2,142   |         |   |        |        |        
|                                                              | Prepaid expenses          |                        |        | 7,192   |         |   |        |        |        
|                                                              |                           |                        |        |         |         |   |        |        
|                                                              |                           | Total current assets   |        |         | 9,335   |   |        |         |        |  
|Property and equipment, net                                   |                           |                        | 1,413  |         |         |   |       |        
|                                                              |                           |                        |        |         |         |   |        |        
|                                                              |                           | $                      | 10,748 |         |         | $ |       |        
|                                                              |                           |                        |        |         |         |   |        |        
|LIABILITIES AND MEMBERS
    DEFICIT                         
|Current liabilities  accrued expenses
    payable to members |                           | $                      | 51,922 |         |         | $ | 29,206 |        
|Members deficit:                                             |                           |                        |        |         |         |   |        |        
|                                                              | Eli Lilly and Company     |                        |        | (20,587 | )       |   |        | (14,603 | )      
|                                                              | ICOS Corporation          |                        |        | (20,587 | )       |   |        | (14,603 | )      
|                                                              |                           |                        |        |         |         |   |        |        
|                                                              |                           | Total members deficit |        |         | (41,174 | ) |        |         | (29,206 | )
|                                                              |                           |                        |        |         |         |   |        |        
|                                                              |                           | $                      | 10,748 |         |         | $ |       |        
|                                                              |                           |                        |        |         |         |   |        |        

See accompanying notes to financial statements.

68



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##### Table of Contents



LILLY ICOS LLC

(A Development Stage Company)


STATEMENTS OF OPERATIONS

|                    |                                      |                                                          |                          |              |        |         |          |             |        |         |          |   |        |         |          |   |         |         | 
|------------------- | ------------------------------------ | -------------------------------------------------------- | ------------------------ | ------------ | ------ | ------- | -------- | ----------- | ------ | ------- | -------- | - | ------ | ------- | -------- | - | ------- | ------- | 
|                    |                                      |                                                          |                          |              |        |         |          | Period from
|                    |                                      |                                                          |                          |              |        |         |          | October 2, 
|                    |                                      |                                                          |                          |              |        |         |          | 1998       
|                    |                                      |                                                          |                          | (Inception) 
|                    |                                      | Year Ended December 31,                                  |                          | Through     
|                    |                                      |                                                          |                          | December 31,
|                    |                                      | 2002                                                     |                          | 2001         |        | 2000    |          | 2002       
|                    |                                      |                                                          |                          |              |        |         |          |            
|                    |                                      |                                                         
|                    |                                      | (In thousands)                                          
|Operating expenses: |                                      |                                                          |                          |              |        |         |          |             |        |         |          |   |        |         |          |  
|                    | Research and development:            |                                                          |                          |              |        |         |          |             |        |         |          |   |        |         |          |   |        
|                    |                                      | Contributed technology license from ICOS
    Corporation |                          | $            |       |         |          | $           | 30,000 |         |          | $ | 40,000 |         |          | $ | 315,000 |        
|                    |                                      | Eli Lilly and Company                                    |                          |              | 51,819 |         |          |             | 30,338 |         |          |   | 67,864 |         |          |   | 192,770 |        
|                    |                                      | ICOS Corporation                                         |                          |              | 5,565  |         |          |             | 9,014  |         |          |   | 20,086 |         |          |   | 57,527  |        
|                    | Selling, general and administrative: |                                                          |                          |              |        |         |          |             |        |         |          |   |        |         |          |   |        
|                    |                                      | Eli Lilly and Company                                    |                          |              | 72,919 |         |          |             | 36,437 |         |          |   |       |         |          |   | 109,356 |        
|                    |                                      | ICOS Corporation                                         |                          |              | 1,035  |         |          |             | 843    |         |          |   | 183    |         |          |   | 2,449   |        
|                    |                                      |                                                          |                          |              |        |         |          |             |        |         |          |   |        |         |          |  
|                    |                                      |                                                          | Total operating expenses |              |        | 131,338 |          |             |        | 106,632 |          |   |        | 128,133 |          |   |         | 677,102 | 
|Interest income     |                                      |                                                          |                         |              |        |         | 196      |             |        |         | 663      |   |        |         | 2,102    |  
|                    |                                      |                                                          |                          |              |        |         |          |             |        |         |          |   |        |         |          |  
|Net loss            |                                      | $                                                        | (131,338                 | )            |        | $       | (106,436 | )           |        | $       | (127,470 | ) |        | $       | (675,000 | )
|                    |                                      |                                                          |                          |              |        |         |          |             |        |         |          |   |        |         |          |  

See accompanying notes to financial statements.

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##### Table of Contents



LILLY ICOS LLC

(A Development Stage Company)


STATEMENTS OF COMPREHENSIVE
OPERATIONS

|                          |                                          |                         |          |              |  |      |          |             |  |   |          |    |  |   |          |   | 
|------------------------- | ---------------------------------------- | ----------------------- | -------- | ------------ |  | ---- | -------- | ----------- |  | - | -------- | -- |  | - | -------- | - | 
|                          |                                          |                         |          |              |  |      |          | Period from
|                          |                                          |                         |          |              |  |      |          | October 2, 
|                          |                                          |                         |          |              |  |      |          | 1998       
|                          |                                          |                         |          | (Inception) 
|                          |                                          | Year Ended December 31, |          | Through     
|                          |                                          |                         |          | December 31,
|                          |                                          | 2002                    |          | 2001         |  | 2000 |          | 2002       
|                          |                                          |                         |          |              |  |      |          |            
|                          |                                          |                        
|                          |                                          | (In thousands)         
|Net loss                  |                                          | $                       | (131,338 | )            |  | $    | (106,436 | )           |  | $ | (127,470 | )  |  | $ | (675,000 | )
|Other comprehensive gain: |                                          |                         |          |              |  |      |          |             |  |   |          |    |  |   |          |  
|                          | Unrealized gain on investment securities |                         |          |             |  |      |          |            |  |   |          | 11 |  |   |          |  | 
|                          |                                          |                         |          |              |  |      |          |             |  |   |          |    |  |   |          |  
|Comprehensive loss        |                                          | $                       | (131,338 | )            |  | $    | (106,436 | )           |  | $ | (127,459 | )  |  | $ | (675,000 | )
|                          |                                          |                         |          |              |  |      |          |             |  |   |          |    |  |   |          |  

See accompanying notes to financial statements.

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LILLY ICOS LLC

(A Development Stage Company)


STATEMENTS OF MEMBERS EQUITY
(DEFICIT)

|                                            |                    |                       |         |               |  |               |         |             |   |        |         |           |  |   |         |         |  |   |     |   |  |   |          |         | 
|------------------------------------------- | ------------------ | --------------------- | ------- | ------------- |  | ------------- | ------- | ----------- | - | ------ | ------- | --------- |  | - | ------- | ------- |  | - | --- | - |  | - | -------- | ------- | 
|                                            |                    |                       |         |               |  | Accumulated   |         |            
|                                            |                    | Eli Lilly and Company |         |               |  | Other         |         | Total      
|                                            |                    |                       |         |               |  | Comprehensive |         | Members   
|                                            |                    |                       |         | Contributions |  |               |         | ICOS        |   | Income |         | Equity   
|                                            |                    | Equity                |         | Receivable    |  | Total         |         | Corporation |   | (Loss) |         | (Deficit)
|                                            |                    |                       |         |               |  |               |         |             |   |        |         |          
|                                            |                    |                      
|                                            |                    | (In thousands)       
|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  | )      
|Member contributions:                       |                    |                       |         |               |  |               |         |             |   |        |         |           |  |   |         |         |  |   |     |   |  |   |          |        
|                                            | Cash               |                       |         | 59,685        |  |               |         |            |   |        |         | 59,685    |  |   |         | 59,685  |  |   |     |  |  |   |          | 119,370 | 
|Net loss                                    |                    |                       | (65,669 | )             |  |               |        |             |   |        | (65,669 | )         |  |   | (65,669 | )       |  |   |    |   |  |   | (131,338 | )      
|                                            |                    |                       |         |               |  |               |         |             |   |        |         |           |  |   |         |         |  |   |     |   |  |   |          |        
|Balances at December 31, 2002               |                    | $                     | (20,587 | )             |  | $             |        |             |   | $      | (20,587 | )         |  | $ | (20,587 | )       |  | $ |    |   |  | $ | (41,174  | )      
|                                            |                    |                       |         |               |  |               |         |             |   |        |         |           |  |   |         |         |  |   |     |   |  |   |          |        

See accompanying notes to financial statements.

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LILLY ICOS LLC

(A Development Stage Company)


STATEMENTS OF CASH FLOWS

|                                                         |                                                                                 |                                             |                                     |                                                         |     |        |          |             |        |         |          |          |        |        |         |          |         |        |          |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------- | ----------------------------------- | ------------------------------------------------------- | --- | ------ | -------- | ----------- | ------ | ------- | -------- | -------- | ------ | ------ | ------- | -------- | ------- | ------ | -------- | -
|                                                         |                                                                                 |                                             |                                     |                                                         |     |        |          | Period from
|                                                         |                                                                                 |                                             |                                     |                                                         |     |        |          | October 2, 
|                                                         |                                                                                 |                                             |                                     |                                                         |     |        |          | 1998       
|                                                         |                                                                                 |                                             |                                     | (Inception)                                            
|                                                         |                                                                                 | Year Ended December 31,                     |                                     | Through                                                
|                                                         |                                                                                 |                                             |                                     | December 31,                                           
|                                                         |                                                                                 | 2002                                        |                                     | 2001                                                    |     | 2000   |          | 2002       
|                                                         |                                                                                 |                                             |                                     |                                                         |     |        |          |            
|                                                         |                                                                                 |                                            
|                                                         |                                                                                 | (In thousands)                             
|Cash flows from operating activities:                    |                                                                                 |                                             |                                     |                                                         |     |        |          |             |        |         |          |          |        |        |         |         
|                                                         | Net loss                                                                        |                                             | $                                   | (131,338                                                | )   |        | $        | (106,436    | )      |         | $        | (127,470 | )      |        | $       | (675,000 | )      
|                                                         | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                             |                                     |                                                         |     |        |          |             |        |         |          |          |        |        |         |          |        
|                                                         |                                                                                 | Contributed technology license              |                                     |                                                         |    |        |          |             | 30,000 |         |          |          | 40,000 |        |         |          | 315,000 |       
|                                                         |                                                                                 | Depreciation                                |                                     |                                                         | 232 |        |          |             |       |         |          |          |       |        |         |          | 232     |       
|                                                         |                                                                                 | Amortization of investment discounts        |                                     |                                                         |    |        |          |             |       |         |          |          | (153   | )      |         |          | (857    | )     
|                                                         |                                                                                 | Change in operating assets and liabilities: |                                     |                                                         |     |        |          |             |        |         |          |          |        |        |         |          |         |       
|                                                         |                                                                                 |                                             | Receivables and deposits            |                                                         |     | (2,142 | )        |             |        | 1,043   |          |          |        | (1,043 | )       |          |         | (2,142 | )       
|                                                         |                                                                                 |                                             | Prepaid expenses                    |                                                         |     | (7,192 | )        |             |        |        |          |          |        |       |         |          |         | (7,192 | )       
|                                                         |                                                                                 |                                             | Accrued expenses payable to members |                                                         |     | 22,716 |          |             |        | (26,206 | )        |          |        | 37,419 |         |          |         | 51,922 |         
|                                                         |                                                                                 |                                             |                                     |                                                         |     |        |          |             |        |         |          |          |        |        |         |         
|                                                         |                                                                                 |                                             |                                     | Net cash used in operating activities                   |     |        | (117,724 | )           |        |         | (101,599 | )        |        |        | (51,247 | )        |         |        | (318,037 | )
|                                                         |                                                                                 |                                             |                                     |                                                         |     |        |          |             |        |         |          |          |        |        |         |         
|Cash flows from investing activities:                    |                                                                                 |                                             |                                     |                                                         |     |        |          |             |        |         |          |          |        |        |         |         
|                                                         | Purchases of investment securities                                              |                                             |                                     |                                                        |     |        |          |            |        |         |          |         |        |        |         | (62,707  | )      
|                                                         | Maturities of investment securities                                             |                                             |                                     |                                                        |     |        |          |            |        |         |          | 13,701   |        |        |         | 63,564   |        
|                                                         | Acquisitions of property and equipment                                          |                                             |                                     | (1,645                                                  | )   |        |          |            |        |         |          |         |        |        |         | (1,645   | )      
|                                                         |                                                                                 |                                             |                                     |                                                         |     |        |          |             |        |         |          |          |        |        |         |         
|                                                         |                                                                                 |                                             |                                     | Net cash provided by (used in) investing
    activities |     |        | (1,645   | )           |        |         |         |          |        |        | 13,701  |          |         |        | (788     | )
|                                                         |                                                                                 |                                             |                                     |                                                         |     |        |          |             |        |         |          |          |        |        |         |         
|Cash flows from financing activities:                    |                                                                                 |                                             |                                     |                                                         |     |        |          |             |        |         |          |          |        |        |         |         
|                                                         | Member contributions                                                            |                                             |                                     | 119,370                                                 |     |        |          | 109,456     |        |         |          | 40,000   |        |        |         | 423,826  |        
|                                                         | Capital distributions                                                           |                                             |                                     |                                                        |     |        |          | (15,000     | )      |         |          |         |        |        |         | (105,000 | )      
|                                                         |                                                                                 |                                             |                                     |                                                         |     |        |          |             |        |         |          |          |        |        |         |         
|                                                         |                                                                                 |                                             |                                     | Net cash provided by financing activities               |     |        | 119,370  |             |        |         | 94,456   |          |        |        | 40,000  |          |         |        | 318,826  |  
|                                                         |                                                                                 |                                             |                                     |                                                         |     |        |          |             |        |         |          |          |        |        |         |         
|Net increase (decrease) in cash and cash
    equivalents |                                                                                 |                                             | 1                                   |                                                         |     |        | (7,143   | )           |        |         | 2,454    |          |        |        | 1       |         
|                                                         | Cash and cash equivalents at beginning of period                                |                                             |                                     |                                                        |     |        |          | 7,143       |        |         |          | 4,689    |        |        |         |         |        
|                                                         |                                                                                 |                                             |                                     |                                                         |     |        |          |             |        |         |          |          |        |        |         |         
|Cash and cash equivalents at end of period               |                                                                                 | $                                           | 1                                   |                                                         |     | $      |         |             |        | $       | 7,143    |          |        | $      | 1       |         
|                                                         |                                                                                 |                                             |                                     |                                                         |     |        |          |             |        |         |          |          |        |        |         |         

See accompanying notes to financial statements.

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LILLY ICOS LLC

(A Development Stage Company)


NOTES TO FINANCIAL STATEMENTS

December 31, 2002 and 2001

(Dollars in thousands, unless otherwise
noted)




|    |                                     
|--- | ------------------------------------
|(1) | Organization and Business Operations

Lilly ICOS LLC (the Company), a
50/50-owned limited liability company, was formed in October
1998 by Eli Lilly and Company (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 ownership interests. The
Company owns the rights to Cialis (tadalafil) as an oral
therapeutic agent for the treatment of erectile dysfunction and
is evaluating tadalafil for the treatment of diabetic
gastroparesis.

In November 2002, the Company received approval
from the European Commission to market Cialis, for the treatment
of erectile dysfunction, in all 15 member states of the
European Union. The Company began shipping Cialis in Europe in
January 2003, and Cialis is now available, by prescription, in
pharmacies across Europe.

The Company continues to develop Cialis as an
oral therapeutic agent for the treatment of erectile dysfunction
in the U.S., Canada, Mexico and other countries. In June 2001,
the Company submitted a New Drug Application (NDA)
to the U.S. Food and Drug Administration (FDA)
seeking marketing approval of Cialis for the treatment of
erectile dysfunction. In April 2002, the Company received an
approvable letter from the FDA. An
approvable letter indicates that the FDA is prepared
to approve an application upon the satisfaction of conditions
specified in the letter. Those conditions are the successful
completion of clinical pharmacology studies, labeling
discussions and successful resolution of matters related to
Lillys manufacturing facilities. U.S. regulatory
approval for Cialis is projected to occur in the second half of
2003, with product launch anticipated to occur shortly after
approval.

The Company expects to commercialize products
approved in North America and Europe using the services of both
ICOS and Lilly. Lilly and ICOS jointly manage the Company and,
together, will provide it with services and continued funding as
required for research, development, and commercialization. Lilly
is the sole manufacturer of Cialis, under contract with Lilly
ICOS.



|    |                                               
|--- | ----------------------------------------------
|(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) | 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 the tradeshow booth is determined
using the straight-line method over an estimated useful life of
3 years. Amortization of developed software is determined
using the straight-line method over an estimated useful life of
3 years.

73



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LILLY ICOS LLC


(A Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS  (Continued)



|    |                                   
|--- | ----------------------------------
|(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 pharmaceutical products for
human therapeutic use.



|    |                       
|--- | ----------------------
|(f) | Concentrations of Risk

The Company depends exclusively on Lilly for the
manufacture and distribution of Cialis and certain sales
processing functions. If Lilly were unable to provide these
services, or did not provide these services on a timely basis,
the Company may be unable to meet market demand for its products
and could be materially impacted.



|    |                    
|--- | -------------------
|(3) | Equity Transactions

ICOS contributed to the Company an exclusive
license for the PDE5 technology in October 1998, and 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 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 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 charged to
development expense in 1998, and $40 million was charged to
development expense 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 Cialis, and $30 million in 2001, following the filing
of the NDA with the 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 (the
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 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 to be funded
by additional capital contributions from Lilly. Subsequent to
depletion of the Lilly contribution of $180 million, in the
third quarter of 2000, ICOS and 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

74



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LILLY ICOS LLC


(A Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS  (Continued)

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 Lilly (the License
Agreement), under which the Company granted to Lilly an
exclusive right and license to the PDE5 technology in order to
develop, manufacture, market and sell PDE5 inhibitor products
outside of North America and Europe (the Lilly
territory). Under the License Agreement, Lilly will pay to
the Company a royalty equal to 20% of the net sales of PDE5
inhibitor products that are sold by Lilly, or any of its
affiliates or sublicensees, in the Lilly territory.



|    |                   
|--- | ------------------
|(5) | Royalty Obligation

Pursuant to a license agreement with a third
party, the Company is obligated to pay a 5% royalty based on the
net sales of its PDE5 inhibitor products in North America and
Europe. Lilly is obligated to pay the royalty based on sales in
the Lilly territory.



|    |                                               
|--- | ----------------------------------------------
|(6) | Research and Development Service
    Agreement

In October 1998, the Company entered into a
Research and Development Service Agreement (the R&D
Agreement) with Lilly and ICOS. Under the terms of the
R&D Agreement, to the extent requested by the Company, Lilly
and ICOS will perform research and development activities on
PDE5 inhibitor products. The Company reimburses Lilly and ICOS a
per-hour amount, calculated on the basis of actual hours
incurred by Lilly and ICOS, plus certain development and
administrative expenses. The Company can contract with other
parties to provide research and development services.



|    |                                          
|--- | -----------------------------------------
|(7) | Marketing and Sales Service
    Agreement

In October 1998, the Company entered into a
Marketing and Sales Service Agreement (the Marketing
Agreement) with Lilly and ICOS to jointly promote the
Companys future products. Under the terms of the Marketing
Agreement, the Company reimburses Lilly and ICOS for certain
marketing and sales expenses. The Company may also contract with
other parties to provide marketing and sales services.



|    |                        
|--- | -----------------------
|(8) | Manufacturing Agreement

In March 2002, the Company entered into a
Manufacturing Agreement (the Manufacturing
Agreement) with Lilly to manufacture Cialis. Under the
terms of the Manufacturing Agreement, the Company will purchase
Cialis exclusively from Lilly and will reimburse Lilly for a
variety of services including, but not limited to, tablet
production, packaging, storage, distribution, sales order
processing and other manufacturing services.



|    |        
|--- | -------
|(9) | Deposit

The deposit of $2,142 at December 31, 2002,
represents amounts paid to a third party for future marketing
services or to be refunded to the Company.

75



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##### Table of Contents



LILLY ICOS LLC


(A Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS  (Continued)



|     |                 
|---- | ----------------
|(10) | Prepaid Expenses

|                         |  |              |       |      |  |   |   | 
|------------------------ |  | ------------ | ----- | ---- |  | - | - | 
|                         |  |             
|                         |  | December 31,
|                         |  |             
|                         |  | 2002         |       | 2001
|                         |  |              |       |     
|Advertising              |  | $            | 5,162 |      |  | $ |  | 
|Meetings and conferences |  |              | 1,185 |      |  |   |  | 
|Promotional items        |  |              | 845   |      |  |   |  | 
|                         |  |              |       |      |  |   |   | 
|                         |  | $            | 7,192 |      |  | $ |  | 
|                         |  |              |       |      |  |   |   | 



|     |                            
|---- | ---------------------------
|(11) | Property and Equipment, Net

|                                          |  |              |       |      |  |   |   | 
|----------------------------------------- |  | ------------ | ----- | ---- |  | - | - | 
|                                          |  |             
|                                          |  | December 31,
|                                          |  |             
|                                          |  | 2002         |       | 2001
|                                          |  |              |       |     
|Trade show booth                          |  | $            | 1,045 |      |  | $ |  | 
|Software                                  |  |              | 600   |      |  |   |  | 
|                                          |  |              |       |      |  |   |   | 
|Total cost                                |  |              | 1,645 |      |  |   |  | 
|Accumulated depreciation and amortization |  |              | (232  | )    |  |   |  | 
|                                          |  |              |       |      |  |   |   | 
|                                          |  | $            | 1,413 |      |  | $ |  | 
|                                          |  |              |       |      |  |   |   | 



|     |                  
|---- | -----------------
|(12) | Legal Proceedings

On October 22, 2002, Pfizer Inc., Pfizer
Limited, and Pfizer Ireland Pharmaceuticals filed a patent
infringement lawsuit against ICOS, Lilly ICOS and Lilly in the
United States District Court for the District of Delaware. The
complaint alleges that the intended and imminent use, offering
for sale, selling, manufacture, or importing into the United
States upon FDA approval of Cialis for the treatment of erectile
dysfunction by ICOS, Lilly ICOS and Lilly will constitute
infringement of plaintiffs U.S. Patent
No. 6,469,012, which issued on October 22, 2002. The
plaintiffs seek a judgment declaring that the defendants
using, selling, offering for sale, making or importing of Cialis
for the treatment of erectile dysfunction will infringe this
patent. The plaintiffs also seek a permanent injunction,
attorneys fees, costs and expenses. On January 6,
2003, the Company filed an answer denying the central
allegations of plaintiffs complaint and setting forth
various affirmative defenses. Litigation is inherently
unpredictable and the eventual outcome in a particular case is
impossible to determine in advance. The Company believes that
Pfizers suit lacks merit and intends to vigorously pursue
its various defenses. If Pfizer were to prevail, however, the
Company might be subject to substantial damages, prohibited from
marketing Cialis for the treatment of erectile dysfunction in
the United States, or required to enter into a licensing
agreement to market Cialis in the United States. Any such
adverse result could have a material adverse effect on the
Companys business, financial condition, results of
operations and cash flows.

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SUNCOS CORPORATION

(A Development Stage Corporation)


TABLE OF CONTENTS

|                                                                                                                                                                                                                                       |  |      |    | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                                                                                                                       |  | Page
|                                                                                                                                                                                                                                       |  |     
|Independent Auditors Report                                                                                                                                                                                                           |  |      | 78 | 
|                                                                                                                                                                                                                                      
|Balance Sheets as of December 31, 2002 and
    2001                                                                                                                                                                                    |  |      | 79 | 
|                                                                                                                                                                                                                                      
|Statements of Operations for each of the years in
    the three-year period ended December 31, 2002, and the
    period from February 6, 1997 (inception) through
    December 31, 2002                                                |  |      | 80 | 
|                                                                                                                                                                                                                                      
|Statements of Stockholders Equity (Deficit)
    and Comprehensive Loss for each of the years in the three-year
    period ended December 31, 2002, and the period from
    February 6, 1997 (inception) through December 31,
    2002 |  |      | 81 | 
|                                                                                                                                                                                                                                      
|Statements of Cash Flows for each of the years in
    the three-year period ended December 31, 2002, and the
    period from February 6, 1997 (inception) through
    December 31, 2002                                                |  |      | 82 | 
|                                                                                                                                                                                                                                      
|Notes to Financial Statements                                                                                                                                                                                                          |  |      | 83 | 

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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, 2002 and 2001, and the related statements of
operations, stockholders equity (deficit) and
comprehensive loss, and cash flows for each of the years in the
three-year period ended December 31, 2002, and the period
from February 6, 1997 (inception) through
December 31, 2002. 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.

As discussed in Note 1 to the financial
statements, the stockholders have decided to discontinue the
development of Pafase® and there are no current plans for
further development activities by Suncos Corporation.

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, 2002 and
2001, and the results of its operations and its cash flows for
each of the years in the three-year period ended
December 31, 2002, and the period from February 6,
1997 (inception) through December 31, 2002, in conformity
with accounting principles generally accepted in the United
States of America.



| |              
| | -------------
| | /s/  KPMG LLP

Seattle, Washington

January 30, 2003


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SUNCOS CORPORATION

(A Development Stage Corporation)


BALANCE SHEETS

|                                                                   |                                                                                                                                                             |                                      |       |          |        |   |       |         |     | 
|------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ----- | -------- | ------ | - | ----- | ------- | --- | 
|                                                                   |                                                                                                                                                             |                                     
|                                                                   |                                                                                                                                                             | December 31,                        
|                                                                   |                                                                                                                                                             |                                     
|                                                                   |                                                                                                                                                             | 2002                                 |       | 2001    
|                                                                   |                                                                                                                                                             |                                      |       |         
|                                                                   |                                                                                                                                                             |                                     
|                                                                   |                                                                                                                                                             | (In thousands, except               
|                                                                   |                                                                                                                                                             | share data)                         
|ASSETS                                                            
|Current assets  cash and cash
    equivalents                     |                                                                                                                                                             | $                                    | 25    |          |        | $ | 4,363 |        
|                                                                   |                                                                                                                                                             |                                      |       |          |        |   |       |        
|                                                                  
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)                
|Current liabilities  accrued expenses
    payable to stockholders |                                                                                                                                                             | $                                    | 3,600 |          |        | $ | 3,834 |        
|Stockholders equity (deficit):                                    |                                                                                                                                                             |                                      |       |          |        |   |       |        
|                                                                   | Common stock, $.0001 par value.
    18,576 shares and 13,000 shares, respectively,
    authorized, issued and outstanding at December 31, 2002 and
    2001 |                                      |       |         |        |   |       |        |    
|                                                                   | Additional paid-in capital                                                                                                                                  |                                      |       | 155,762  |        |   |       | 100,000 |    
|                                                                   | Deficit accumulated during the development stage                                                                                                            |                                      |       | (159,337 | )      |   |       | (99,471 | )  
|                                                                   |                                                                                                                                                             |                                      |       |          |        |   |       |        
|                                                                   |                                                                                                                                                             | Total stockholders equity (deficit) |       |          | (3,575 | ) |       |         | 529 | 
|                                                                   |                                                                                                                                                             |                                      |       |          |        |   |       |        
|                                                                   |                                                                                                                                                             | $                                    | 25    |          |        | $ | 4,363 |        
|                                                                   |                                                                                                                                                             |                                      |       |          |        |   |       |        

See accompanying notes to financial statements.

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SUNCOS CORPORATION

(A Development Stage Corporation)


STATEMENTS OF OPERATIONS

|                    |                             |                                  |                          |              |        |        |         |             |        |        |         |   |        |        |          |   |         |         | 
|------------------- | --------------------------- | -------------------------------- | ------------------------ | ------------ | ------ | ------ | ------- | ----------- | ------ | ------ | ------- | - | ------ | ------ | -------- | - | ------- | ------- | 
|                    |                             |                                  |                          |              |        |        |         | Period from
|                    |                             |                                  |                          |              |        |        |         | February 6,
|                    |                             |                                  |                          |              |        |        |         | 1997       
|                    |                             |                                  |                          | (Inception) 
|                    |                             | Year Ended December 31,          |                          | Through     
|                    |                             |                                  |                          | December 31,
|                    |                             | 2002                             |                          | 2001         |        | 2000   |         | 2002       
|                    |                             |                                  |                          |              |        |        |         |            
|                    |                             |                                 
|                    |                             | (In thousands)                  
|Operating expenses: |                             |                                  |                          |              |        |        |         |             |        |        |         |   |        |        |          |  
|                    | Research and development:   |                                  |                          |              |        |        |         |             |        |        |         |   |        |        |          |   |        
|                    |                             | Daiichi Suntory Pharma Co., Ltd. |                          | $            | 59     |        |         | $           | 131    |        |         | $ | 459    |        |          | $ | 5,299   |        
|                    |                             | ICOS Corporation                 |                          |              | 59,113 |        |         |             | 30,090 |        |         |   | 14,612 |        |          |   | 153,689 |        
|                    | General and administrative: |                                  |                          |              |        |        |         |             |        |        |         |   |        |        |          |   |        
|                    |                             | Daiichi Suntory Pharma Co., Ltd. |                          |              | 1      |        |         |             | 4      |        |         |   | 6      |        |          |   | 81      |        
|                    |                             | ICOS Corporation                 |                          |              | 743    |        |         |             | 314    |        |         |   | 595    |        |          |   | 2,987   |        
|                    |                             |                                  |                          |              |        |        |         |             |        |        |         |   |        |        |          |  
|                    |                             |                                  | Total operating expenses |              |        | 59,916 |         |             |        | 30,539 |         |   |        | 15,672 |          |   |         | 162,056 | 
|Interest income     |                             |                                  | 50                       |              |        |        | 140     |             |        |        | 166     |   |        |        | 2,719    |  
|                    |                             |                                  |                          |              |        |        |         |             |        |        |         |   |        |        |          |  
|Net loss            |                             | $                                | (59,866                  | )            |        | $      | (30,399 | )           |        | $      | (15,506 | ) |        | $      | (159,337 | )
|                    |                             |                                  |                          |              |        |        |         |             |        |        |         |   |        |        |          |  

See accompanying notes to financial statements.

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SUNCOS CORPORATION

(A Development Stage Corporation)


STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT) AND COMPREHENSIVE LOSS

|                                                                                                             |                                          |                                   |        |            |  |               |   |              |  |               |         |           |  |   |    |    |   |   |          |         |   |   |         |         |  
|------------------------------------------------------------------------------------------------------------ | ---------------------------------------- | --------------------------------- | ------ | ---------- |  | ------------- | - | ------------ |  | ------------- | ------- | --------- |  | - | -- | -- | - | - | -------- | ------- | - | - | ------- | ------- | -
|                                                                                                             |                                          |                                   |        |            |  |               |   |              |  | Deficit       |         |          
|                                                                                                             |                                          |                                   |        |            |  | Accumulated   |   | Accumulated  |  | Total        
|                                                                                                             |                                          | Common Stock                      |        | Additional |  | Other         |   | During the   |  | Stockholders
|                                                                                                             |                                          |                                   |        | Paid-In    |  | Comprehensive |   | Development  |  | Equity       
|                                                                                                             |                                          | Shares                            |        | Amount     |  | Capital       |   | Income(Loss) |  | Stage         |         | (Deficit)
|                                                                                                             |                                          |                                   |        |            |  |               |   |              |  |               |         |          
|                                                                                                             |                                          |                                  
|                                                                                                             |                                          | (In thousands, except share data)
|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     |        
|Issuance of 5,576 shares of common stock for
    cash                                                        |                                          |                                   | 5,576  |            |  |               |  |              |  |               | 55,762  |           |  |   |   |    |   |   |         |         |   |   | 55,762  |        
|Net loss                                                                                                     |                                          |                                   |       |            |  |               |  |              |  |               |        |           |  |   |   |    |   |   | (59,866  | )       |   |   | (59,866 | )      
|                                                                                                             |                                          |                                   |        |            |  |               |   |              |  |               |         |           |  |   |    |    |   |   |          |         |   |   |         |        
|Balances at December 31, 2002                                                                                |                                          |                                   | 18,576 |            |  | $             |  |              |  | $             | 155,762 |           |  | $ |   |    |   | $ | (159,337 | )       |   | $ | (3,575  | )      
|                                                                                                             |                                          |                                   |        |            |  |               |   |              |  |               |         |           |  |   |    |    |   |   |          |         |   |   |         |        

See accompanying notes to financial statements.

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SUNCOS CORPORATION

(A Development Stage Corporation)


STATEMENTS OF CASH FLOWS

|                                                                                   |                                                                                 |                                             |                                          |                                           |   |      |         |             |   |       |         |         |   |      |         |          |        |       |          |  
|---------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------- | ---------------------------------------- | ----------------------------------------- | - | ---- | ------- | ----------- | - | ----- | ------- | ------- | - | ---- | ------- | -------- | ------ | ----- | -------- | -
|                                                                                   |                                                                                 |                                             |                                          |                                           |   |      |         | Period from
|                                                                                   |                                                                                 |                                             |                                          |                                           |   |      |         | February 6,
|                                                                                   |                                                                                 |                                             |                                          |                                           |   |      |         | 1997       
|                                                                                   |                                                                                 |                                             |                                          | (Inception)                              
|                                                                                   |                                                                                 | Year Ended December 31,                     |                                          | Through                                  
|                                                                                   |                                                                                 |                                             |                                          | December 31,                             
|                                                                                   |                                                                                 | 2002                                        |                                          | 2001                                      |   | 2000 |         | 2002       
|                                                                                   |                                                                                 |                                             |                                          |                                           |   |      |         |            
|                                                                                   |                                                                                 |                                            
|                                                                                   |                                                                                 | (In thousands)                             
|Cash flows from operating activities:                                              |                                                                                 |                                             |                                          |                                           |   |      |         |             |   |       |         |         |   |      |         |         
|                                                                                   | Net loss                                                                        |                                             | $                                        | (59,866                                   | ) |      | $       | (30,399     | ) |       | $       | (15,506 | ) |      | $       | (159,337 | )     
|                                                                                   | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                             |                                          |                                           |   |      |         |             |   |       |         |         |   |      |         |          |       
|                                                                                   |                                                                                 | Amortization of investment discounts        |                                          |                                           |  |      |         |             |  |       |         |         |  |      |         |          | (1,113 | )    
|                                                                                   |                                                                                 | Change in operating assets and liabilities: |                                          |                                           |   |      |         |             |   |       |         |         |   |      |         |          |        |      
|                                                                                   |                                                                                 |                                             | Accrued expenses payable to stockholders |                                           |   | (234 | )       |             |   | 2,251 |         |         |   | (347 | )       |          |        | 3,600 |         
|                                                                                   |                                                                                 |                                             |                                          |                                           |   |      |         |             |   |       |         |         |   |      |         |         
|                                                                                   |                                                                                 |                                             |                                          | Net cash used in operating activities     |   |      | (60,100 | )           |   |       | (28,148 | )       |   |      | (15,853 | )        |        |       | (156,850 | )
|                                                                                   |                                                                                 |                                             |                                          |                                           |   |      |         |             |   |       |         |         |   |      |         |         
|Cash flows from investing activities:                                              |                                                                                 |                                             |                                          |                                           |   |      |         |             |   |       |         |         |   |      |         |         
|                                                                                   | Purchases of investment securities                                              |                                             |                                          |                                          |   |      |         |            |   |       |         |        |   |      |         | (68,527  | )     
|                                                                                   | Maturities of investment securities                                             |                                             |                                          |                                          |   |      |         |            |   |       |         |        |   |      |         | 69,640   |       
|                                                                                   |                                                                                 |                                             |                                          |                                           |   |      |         |             |   |       |         |         |   |      |         |         
|                                                                                   |                                                                                 |                                             |                                          | Net cash provided by investing activities |   |      |        |             |   |       |        |         |   |      |        |          |        |       | 1,113    |  
|                                                                                   |                                                                                 |                                             |                                          |                                           |   |      |         |             |   |       |         |         |   |      |         |         
|Cash provided by financing activities 
    proceeds from issuance of common stock |                                                                                 |                                             | 55,762                                   |                                           |   |      | 30,000  |             |   |       | 10,000  |         |   |      | 155,762 |         
|                                                                                   |                                                                                 |                                             |                                          |                                           |   |      |         |             |   |       |         |         |   |      |         |         
|Net increase (decrease) in cash and cash
    equivalents                           |                                                                                 |                                             | (4,338                                   | )                                         |   |      | 1,852   |             |   |       | (5,853  | )       |   |      | 25      |         
|                                                                                   | Cash and cash equivalents at beginning of period                                |                                             |                                          | 4,363                                     |   |      |         | 2,511       |   |       |         | 8,364   |   |      |         |         |       
|                                                                                   |                                                                                 |                                             |                                          |                                           |   |      |         |             |   |       |         |         |   |      |         |         
|Cash and cash equivalents at end of period                                         |                                                                                 | $                                           | 25                                       |                                           |   | $    | 4,363   |             |   | $     | 2,511   |         |   | $    | 25      |         
|                                                                                   |                                                                                 |                                             |                                          |                                           |   |      |         |             |   |       |         |         |   |      |         |         

See accompanying notes to financial statements.

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SUNCOS CORPORATION

(A Development Stage Corporation)


NOTES TO FINANCIAL STATEMENTS

December 31, 2002 and 2001

(Dollars in thousands, except share data or as
otherwise noted)


(1) Organization and Business
Operations

Suncos Corporation (the Company) is a
50/50-owned development stage corporation that was formed in
February 1997 by ICOS Corporation (ICOS) and Suntory
Limited of Japan (Suntory) to develop and
commercialize Pafase® products for worldwide human
therapeutic use. In December 2002, Suntory transferred its
interests and obligations in Suncos to Daiichi Suntory Pharma
Co., Ltd. (Daiichi Suntory Pharma). Suncos is
jointly managed by ICOS and Daiichi Suntory Pharma. In February
1997, ICOS made an initial capital contribution to the Company
of an exclusive license for Pafase 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.

The Company 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. The Company retained the rights to develop and
commercialize Pafase in the rest of the world. ICOS and Suntory
provided the Company with research and development services in
support of the Pafase development program.

In December 2002, the Pafase development program
was terminated, after an interim analysis did not demonstrate
clinical benefit in a Phase 3 clinical study for severe sepsis.
There are no current plans for further development activities by
Suncos.

(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,
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

83



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##### Table of Contents



SUNCOS CORPORATION


(A Development Stage Corporation)


NOTES TO FINANCIAL STATEMENTS 
(Continued)

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 pharmaceutical products for
human therapeutic use.

(3) Termination of Pafase Development
Program

Upon completion of a plan, in December 2002, to
discontinue the Pafase development program, the Company accrued
$3.3 million in close-out expenses, consisting primarily of
expenses associated with the termination of clinical studies and
manufacturing activities. These activities are expected to be
completed in the first half of 2003.

(4) Development and Supply
Agreement

The Company has a Development and Supply
Agreement (the Agreement) with ICOS and Daiichi
Suntory Pharma. Under the terms of the Agreement, ICOS and
Daiichi Suntory Pharma (and its predecessor) conducted
development work with respect to the development of the Pafase
technology. The Company reimbursed ICOS and Daiichi Suntory
Pharma for certain actual expenses, plus a 5% margin. Accrued
expenses payable to stockholders at December 31, 2002 and
2001, primarily represent amounts payable to ICOS for
development work.

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 Daiichi
Suntory Pharma, whereby both companies have agreed to make
general management support available in connection with the
daily operation of the Company and provide marketing research
and administrative services to the Company. The Company
reimburses ICOS and Daiichi Suntory Pharma for these services
based on negotiated reimbursement rates.

(6) Income Taxes

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

Deferred tax assets at December 31, 2002 and
2001 consist of the following:

|                                                |  |      |         |      |  |   |         |  
|----------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                                |  | 2002 |         | 2001
|                                                |  |      |         |     
|Tax benefit of net operating loss carryforwards |  | $    | 54,626  |      |  | $ | 34,815  |  
|Pafase close-out expenses                       |  |      | 1,142   |      |  |   |        |  
|                                                |  |      |         |      |  |   |         |  
|Gross deferred tax assets                       |  |      | 55,768  |      |  |   | 34,815  |  
|Less valuation allowance                        |  |      | (55,768 | )    |  |   | (34,815 | )
|                                                |  |      |         |      |  |   |         |  
|Net deferred tax assets                         |  | $    |        |      |  | $ |        |  
|                                                |  |      |         |      |  |   |         |  

The increase in the valuation allowance was
$20,953, $10,640 and $5,962 in 2002, 2001 and 2000, respectively.

84



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SUNCOS CORPORATION


(A Development Stage Corporation)


NOTES TO FINANCIAL STATEMENTS 
(Continued)

At December 31, 2002, the Company has net
operating loss carryforwards of $156,073, which expire from 2013
to 2021, available to offset future taxable income.

(7) Future Funding

ICOS and Daiichi Suntory Pharma have agreed to
share equally in the costs of the Pafase program.

85



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INDEX TO EXHIBITS

| |       |  |  |                                                                                                                                                                                                                                                       |  |  |   | 
| | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | - | 
| |       |  |  | Note                                                                                                                                                                                                                                                 
| |       |  |  |                                                                                                                                                                                                                                                      
| | 3.1   |  |  | Restated Certificate of Incorporation of ICOS
    Corporation                                                                                                                                                                                         |  |  | A | 
| | 3.2   |  |  | Restated Bylaws of ICOS Corporation                                                                                                                                                                                                                   |  |  | N | 
| | 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)                                                                                                                                                              |  |  | D | 
| | 10.2  |  |  | ICOS Corporation 1991 Stock Option Plan for
    Non-employee Directors (Amended and Restated as of
    January 8, 1997)                                                                                                                               |  |  | D | 
| | 10.3  |  |  | ICOS Corporation 1999 Stock Option Plan                                                                                                                                                                                                               |  |  | I | 
| | 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                                                                                                                                                               |  |  | J | 
| | 10.6  |  |  | Rights Agreement dated as of August 9, 2002,
    between ICOS Corporation and Mellon Investor Services, LLC, as
    Rights Agent                                                                                                                      |  |  | P | 
| | 10.7  |  |  | Industrial Real Estate Lease dated
    February 6, 1992 between WRC Properties, Inc. and ICOS
    Corporation                                                                                                                                         |  |  | B | 
| | 10.8  |  |  | First Amendment dated August 21, 1992 to
    Industrial Real Estate Lease Agreement between WRC Properties,
    Inc. and ICOS Corporation                                                                                                             |  |  | Q | 
| | 10.9  |  |  | Industrial Real Estate Lease Renewal and
    Amendment Agreement dated August 5, 1997 between WRC
    Properties, Inc. and ICOS Corporation                                                                                                           |  |  | F | 
| | 10.10 |  |  | Third Amendment dated April 15, 2002 to
    Industrial Real Estate Lease Agreement dated February 6,
    1992 between Teachers Insurance & Annuity Association of
    America, Inc., as successors to WRC Properties, Inc., and ICOS
    Corporation  |  |  | Q | 
| | 10.11 |  |  | Real Estate Purchase and Sale Agreement dated
    October 30, 1992 between Canyon Park Business Center
    Limited Partnership and ICOS Corporation                                                                                                   |  |  | B | 
| | 10.12 |  |  | Industrial Real Estate Lease dated
    December 20, 1996 between WRC Properties, Inc. and ICOS
    Corporation                                                                                                                                        |  |  | F | 
| | 10.13 |  |  | First Amendment dated August 5, 1997 to
    Industrial Real Estate Lease Agreement between WRC Properties,
    Inc. and ICOS Corporation                                                                                                              |  |  | Q | 
| | 10.14 |  |  | 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                          |  |  | H | 
| | 10.15 |  |  | Third Amendment dated April 15, 2002 to
    Industrial Real Estate Lease Agreement dated December 20,
    1996 between Teachers Insurance & Annuity Association of
    America, Inc., as successors to WRC Properties, Inc., and ICOS
    Corporation |  |  | Q | 
| | 10.16 |  |  | Industrial Real Estate Lease Agreement dated
    May 20, 1997 between Benaroya Capital Company, LLC and ICOS
    Corporation                                                                                                                          |  |  | F | 
| | 10.17 |  |  | First Amendment dated February 18, 1998 to
    Industrial Real Estate Lease Agreement dated May 20, 1997
    between Benaroya Capital Company, LLC and ICOS Corporation                                                                               |  |  | Q | 
| | 10.18 |  |  | Second Amendment dated August 13, 2001 to
    Industrial Real Estate Lease Agreement dated May 20, 1997
    between Benaroya Capital Company, LLC and ICOS Corporation                                                                                |  |  | Q | 
| | 10.19 |  |  | Industrial Real Estate Lease Agreement dated
    September 6, 2000 between Benaroya Capital Company, LLC and
    ICOS Corporation                                                                                                                     |  |  | L | 
| | 10.20 |  |  | Industrial Real Estate Lease Agreement dated
    January 7, 1999 between CarrAmerica Realty Corporation and
    ICOS Corporation                                                                                                                      |  |  | H | 
| | 10.21 |  |  | First Amendment dated April 11, 2001 to
    Industrial Real Estate Lease Agreement dated January 7,
    1999 between CarrAmerica Realty Corporation and ICOS Corporation                                                                              |  |  | O | 

86



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| |       |  |  |                                                                                                                                                                                                                                                      |  |  |    | 
| | ----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
| |       |  |  | Note                                                                                                                                                                                                                                                
| |       |  |  |                                                                                                                                                                                                                                                     
| | 10.22 |  |  | Industrial Real Estate Lease Agreement dated
    June 4, 2001, between Benaroya Capital Company, LLC and
    ICOS Corporation                                                                                                                        |  |  | Q  | 
| | 10.23 |  |  | Industrial Real Estate Lease Agreement dated
    November 1, 2002, between Bellevue Trade Center, LLC and
    ICOS Corporation                                                                                                                       |  |  | Q  | 
| | 10.24 |  |  | Shareholders Agreement, entered into
    December 18, 1996, among ICOS Corporation, Suntory Limited
    and Suncos Corporation                                                                                                                       |  |  | D* | 
| | 10.25 |  |  | rPAF-AH License Agreement, dated February 6,
    1997, between ICOS Corporation and Suncos Corporation                                                                                                                                               |  |  | D* | 
| | 10.26 |  |  | Development and Supply Agreement, dated
    February 6, 1997, among ICOS Corporation, Suntory Limited
    and Suncos Corporation                                                                                                                     |  |  | D* | 
| | 10.27 |  |  | ICOS Services Agreement, dated February 6,
    1997, between Suncos Corporation and ICOS Corporation                                                                                                                                                 |  |  | D* | 
| | 10.28 |  |  | ICOS License Agreement, dated February 6,
    1997, between Suncos Corporation and ICOS Corporation                                                                                                                                                  |  |  | D* | 
| | 10.29 |  |  | 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.                                               |  |  | E* | 
| | 10.30 |  |  | 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.                                                                                      |  |  | E* | 
| | 10.31 |  |  | Product Development Agreement, dated as of
    June 5, 1997, by and between ICOS Corporation and ICOS
    Clinical Partners, L.P.                                                                                                                    |  |  | E* | 
| | 10.32 |  |  | 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                                                     |  |  | G* | 
| | 10.33 |  |  | Lilly License Agreement, dated September 30,
    1998, between Lilly ICOS LLC and Eli Lilly and Company
    (Exhibit A to the LLC Agreement)                                                                                                         |  |  | G* | 
| | 10.34 |  |  | PDE5 License Agreement, dated September 30,
    1998, between ICOS Corporation and Lilly ICOS LLC
    (Exhibit B to the LLC Agreement)                                                                                                               |  |  | G* | 
| | 10.35 |  |  | 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)                                                                              |  |  | G* | 
| | 10.36 |  |  | 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)                                                                    |  |  | G* | 
| | 10.37 |  |  | 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 |  |  | K* | 
| | 10.38 |  |  | Endothelin License Agreement dated June 6,
    2000, between Texas Biotechnology Corporation and
    ICOSTexas Biotechnology L.P. (Exhibit A to the
    ICOS-TBC Agreement)                                                                         |  |  | K* | 
| | 10.39 |  |  | 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)                                           |  |  | K* | 
| | 10.40 |  |  | Formation and Performance Agreement, dated
    June 6, 2000, by and between ICOS Corporation and Texas
    Biotechnology Corporation                                                                                                                 |  |  | K* | 
| | 10.41 |  |  | Development and Marketing Collaboration
    Agreement, dated July 11, 2001, between Biogen, Inc. and
    ICOS Corporation                                                                                                                            |  |  | M* | 
| | 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  | 

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| |      |  |  |                                                                                                                                                    |  |  |   | 
| | ---- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | - | 
| |      |  |  | Note                                                                                                                                              
| |      |  |  |                                                                                                                                                   
| | 99.1 |  |  | Certification of Paul N. Clark Pursuant to 18
    U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002    |  |  | Q | 
| | 99.2 |  |  | Certification of Michael A. Stein Pursuant to 18
    U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002 |  |  | Q | 



---

|     |  |                                                                                                                                                            
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|Note |  |                                                                                                                                                            
|     |  |                                                                                                                                                            
|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-K Annual Report on March 31, 1997 and
    incorporated herein by reference.                               
|E    |  | Filed as an exhibit to the Companys
    Form 8-K Current Report on August 26, 1997 and
    incorporated herein by reference.                              
|F    |  | Filed as an exhibit to the Companys
    Form 10-Q Quarterly Report on November 17, 1997 and
    incorporated herein by reference.                         
|G    |  | Filed as an exhibit to the Companys
    Form 10-Q Quarterly Report on November 13, 1998 and
    incorporated herein by reference.                         
|H    |  | Filed as an exhibit to the Companys
    Form 10-K Annual Report on March 31, 1999 and
    incorporated herein by reference.                               
|I    |  | Filed as an exhibit to the Companys
    definitive Proxy Statement dated March 30, 1999 and
    incorporated herein by reference.                         
|J    |  | Filed as an exhibit to the Companys
    Form 10-Q Quarterly Report on August 13, 1999 and
    incorporated herein by reference.                           
|K    |  | Filed as an exhibit to the Companys
    Form 10-Q Quarterly Report on August 14, 2000 and
    incorporated herein by reference.                           
|L    |  | Filed as an exhibit to the Companys
    Form 10-K Annual Report on March 29, 2001 and
    incorporated herein by reference.                               
|M    |  | Filed as an exhibit to the Companys
    Form 10-Q Quarterly Report on August 14, 2001 and
    incorporated herein by reference.                           
|N    |  | Filed as an exhibit to the Companys
    Form 10-Q Quarterly Report on November 14, 2001 and
    incorporated herein by reference.                         
|O    |  | Filed as an exhibit to the Companys
    Form 10-K Annual Report on March 29, 2002 and
    incorporated herein by reference.                               
|P    |  | Filed as an exhibit to the Companys
    Form 8-K Current Report on August 9, 2002 and
    incorporated herein by reference.                               
|Q    |  | Filed with this document.                                                                                                                                  
|*    |  | Confidential treatment has been granted with
    respect to portions of this exhibit.                                                                      

88



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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 5th day of March, 2003.



| |                 
| | ----------------
| | ICOS CORPORATION
| | (Registrant)    



| |     |                  
| | --- | -----------------
| | By: | /s/ PAUL N. CLARK

| |                                          
| | -----------------------------------------
| |                                          
| | Paul N. Clark                            
| | Chairman of the Board of Directors,      
| | Chief Executive Officer and
    President
| | (Principal Executive Officer)            



| |     |                     
| | --- | --------------------
| | By: | /s/ MICHAEL A. STEIN

| |                                                 
| | ------------------------------------------------
| |                                                 
| | Michael A. Stein                                
| | Vice President and Chief Financial
    Officer  
| | (Principal Financial and Accounting
    Officer)

89



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##### Table of Contents



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. CLARKPaul N. Clark                 |  | Chairman of the Board of Directors, Chief
    Executive Officer and President (Principal Executive Officer) |  |      | March 5, 2003 | 
|                                              
|/s/ GARY L. WILCOXGary L. Wilcox               |  | Director and Executive Vice President, Operations                                                           |  |      | March 5, 2003 | 
|                                              
|/s/ FRANK T. CARYFrank T. Cary                 |  | Director                                                                                                    |  |      | March 5, 2003 | 
|                                              
|/s/ JAMES L. FERGUSONJames L. Ferguson         |  | Director                                                                                                    |  |      | March 5, 2003 | 
|                                              
|/s/ WILLIAM H. GATES, IIIWilliam H. Gates, III |  | Director                                                                                                    |  |      | March 5, 2003 | 
|                                              
|/s/ DAVID V. MILLIGANDavid V. Milligan         |  | Director                                                                                                    |  |      | March 5, 2003 | 
|                                              
|/s/ ROBERT W. PANGIARobert W. Pangia           |  | Director                                                                                                    |  |      | March 5, 2003 | 
|                                              
|/s/ WALTER B. WRISTONWalter B. Wriston         |  | Director                                                                                                    |  |      | March 5, 2003 | 

90



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CERTIFICATIONS

I, Paul N. Clark, certify that:



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



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



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



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



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



|                    | 
|------------------- | 
|Date: March 5, 2003 | 



|    |                   | 
|--- | ----------------- | 
|By: | /s/ PAUL N. CLARK | 

|                                          | 
|----------------------------------------- | 
|                                          | 
|Paul N. Clark                             | 
|Chairman of the Board of Directors,       | 
|Chief Executive Officer and
    President | 

91



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##### Table of Contents



CERTIFICATIONS

I, Michael A. Stein, certify that:



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



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



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



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



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



|                    | 
|------------------- | 
|Date: March 5, 2003 | 



|    |                      | 
|--- | -------------------- | 
|By: | /s/ MICHAEL A. STEIN | 

|                                               | 
|---------------------------------------------- | 
|                                               | 
|Michael A. Stein                               | 
|Vice President and Chief Financial
    Officer | 

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