<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

     (Mark One)

[x]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934

                  For the Fiscal Year Ended December 31, 1996

                                       or

[_]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

                         Commission File Number: 0-19171


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

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

                            22021 - 20th Avenue S.E.
                           Bothell, Washington, 98021
                                 (206) 485-1900
 (Address, including zip code, and telephone number, including area code,
                        of principal executive offices)

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.01 par value

       Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.

                                    Yes X   No
                                       ---    ---
       Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]

     State the aggregate market value of voting stock held by non-affiliates of
the registrant as of March 10, 1997.

                                 $350,392,322

                Indicate the number of shares outstanding of each of the
registrant's classes of Common Stock as of March 10, 1997:

          Title of Class                                  Number of Shares
          --------------                                  ----------------
 Common Stock, $.01 par value                                  39,480,825
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of the Registrant's definitive Proxy Statement for the annual
     meeting of stockholders to be held on May 7, 1997 relating to "Election of
     Directors," "Continuing Directors (until 1998)," "Continuing Directors
     (until 1999)," "Other Executive Officers," "Compliance with Section 16(a)
     of the Securities Exchange Act of 1934," "Compensation of Directors,"
     "Executive Compensation," "1996 Option Grants," "1996 Options Exercised,"
     "Report of the Compensation Committee on Executive Compensation," "Stock
     Price Performance Graph," "Employment Contracts, Termination of Employment
     and Change of Control Arrangements," "Security Ownership of Certain
     Beneficial Owners and Management," and "Certain Relationships and Related
     Transactions" are incorporated by reference in Part III of this Form 10-K.

2.   Portions of Item 8 from the Registrant's Registration Statement
     (Registration No. 333-08485) effective July 19, 1996 are incorporated
     by reference in Part IV of this Form 10-K.

3.   Portions of Item 16 filed with the Registrant's Registration Statement
     (Registration No. 333-3312) effective May 7, 1996 are incorporated by
     reference in Part IV of this Form 10-K.

4.   Portions of Item 14 from the Registrant's Form 10-K Annual Report
     filed on March 29, 1996 are incorporated by reference in Part IV of
     this Form 10-K.

5.   Portions of Item 6 from the Registrant's Form 10-Q Quarterly Report
     filed on May 12, 1995 are incorporated by reference in Part IV of this
     Form 10-K.

6.   Portions of Item 6 from the Registrant's Form 10-Q Quarterly Report
     filed on November 2, 1993 are incorporated by reference in Part IV of
     this Form 10-K.

7.   Portions of Item 14 from the Registrant's Form 10-K Annual Report
     filed on March 29, 1993 are incorporated by reference in Part IV of
     this Form 10-K.

8.   Portions of Item 16 from the Registrant's Registration Statement
     (Registration No. 33-43540) filed pursuant to the Securities Act of
     1933, as amended, and effective December 4, 1991, are incorporated by
     reference in Part IV of this Form 10-K.

9.   Portions of Item 16 from the Registrant's Registration Statement
     (Registration No. 33-40022) filed pursuant to the Securities Act of
     1933, as amended, and effective June 6, 1991, are incorporated by
     reference in Part IV of this Form 10-K.

                                       2
<PAGE>

                                ICOS CORPORATION
                                ----------------

                                TABLE OF CONTENTS
                                -----------------

<TABLE>
<S>     <C>

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 Financial Data
      Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
      Item 8. Financial Statements and Supplementary Data
      Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

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
      Item 13.     Certain Relationships and Related Transactions

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

                                       3
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

OVERVIEW
--------
ICOS' mission is to improve the quality of life and health for people world-wide
by leading in the discovery, development and commercialization of novel
therapeutics by focusing on molecular targets in inflammatory and other serious
diseases.

The Company's strategy is to identify therapeutic targets through an
understanding of inflammation at the molecular level. ICOS scientists are
developing pharmaceutical products which address important cellular and
molecular mechanisms in three separate, yet interrelated areas of the
inflammatory process: directed cell movement, the inhibition of pro-inflammatory
mediators and intracellular signal transduction. Each of these mechanisms may
provide broad opportunities in the treatment of chronic diseases that have
inflammatory components, such as multiple sclerosis ("MS"), and in the treatment
of acute inflammatory conditions, such as those associated with acute
respiratory distress syndrome ("ARDS"), hemorrhagic shock, myocardial infarction
("MI") and ischemic stroke. In addition, ICOS' programs have yielded additional
approaches that may be useful in treating certain cardiovascular diseases and
cancer. ICOS believes that its approach will allow it to develop novel
therapeutics that are more selective in their activities than existing drugs.

When used in this discussion, the words "believes," "intends," "anticipates,"
"plans to," "expects" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. See "Important Factors Regarding Forward-Looking Statements." Readers
are cautioned not to place undue reliance on such forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revisions to such forward-looking statements
that may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.

DESCRIPTION OF PROGRAMS

         DEVELOPMENT PIPELINE - OVERVIEW

The clinical targets that are the subject of ICOS' discoveries include
inflammatory and other diseases whose pathology is a result of the dysfunction
of the normal inflammatory mechanisms. The Company has discovered important
molecules and mechanisms underlying directed cell movement, the inhibition of
pro-inflammatory mediators and intracellular signal transduction. The chart
below summarizes the programs with compounds currently in clinical development.
<TABLE>
<CAPTION>

                                      ICOS Clinical Development Projects

                                                  (Table 1)
-------------------------- -------------------------- --------------------------------- --------------------------
Program                    Product Candidate          Indication                        Status (1)
-------------------------- -------------------------- --------------------------------- --------------------------
<S>                        <C>                      <C>                                 <C>
Cell Adhesion              Hu23F2G                    Multiple sclerosis, acute         Phase 2 clinical trial
                                                      exacerbation
                                                      Hemorrhagic shock                 Phase 2 clinical trial
                                                      Myocardial infarction             Phase 2 clinical trial

                           ICM3                       Severe Psoriasis                  Phase 1 clinical trial

-------------------------- -------------------------- --------------------------------- --------------------------
Antagonists of
Proinflammatory Mediators  rPAF-AH                    ARDS                              Phase 1 clinical trial
                                                                                        (2)

-------------------------- -------------------------- --------------------------------- --------------------------
Signal Transduction        IC351                      Male erectile dysfunction         Phase 1 clinical trial
                                                                                        (2)

-------------------------- -------------------------- --------------------------------- --------------------------
</TABLE>
(1)  Status as of March 31, 1997
     Phase 1 clinical trial: safety and pharmacology, dose determining drug
     regimen
     Phase 2 clinical trial: determination of dose levels and potential efficacy
     of drug


(2)  In healthy volunteers

                                       4
<PAGE>

CELL ADHESION PROGRAMS
----------------------
Cell adhesion molecules play a critical role in a variety of immune functions,
including cell migration or trafficking. For inflammation to occur, leukocytes
must move (or transmigrate) from the bloodstream into the tissue. During this
process they interact with other cells that promote the activation of additional
leukocytes, causing them to move through the blood vessel wall and into the
tissue. The interaction between certain cell adhesion molecules on the surface
of both the leukocyte and the endothelium facilitates these contacts. To date, a
number of cell adhesion molecule families, such as integrins, have been
identified.

Integrins are a large family of cell adhesion molecules that, as a class, are
expressed throughout the body. Leukointegrins comprise an integrin family that
is expressed only on leukocytes. The interactions between the leukointegrins and
their primary ligands on the endothelium and other leukocytes, called ICAMs,
mediate a variety of immune functions, not only by promoting leukocyte
trafficking, but also by promoting antigen presentation and effecting functions
such as cytotoxicity.


Hu23F2G

         BACKGROUND

The migration of circulating leukocytes into extravascular tissues in the course
of inflammation involves a complex series of events. A critical step involves
the firm attachment of circulating leukocytes to the endothelial wall. The
CD11/CD18 cell adhesion molecules found on leukocytes mediate this adhesive
interaction. It is believed that by intervening in the adhesion process, much of
the inflammation-associated damage can be prevented. Monoclonal antibodies
directed to CD11/CD18 adhesion molecules have been shown to protect against
leukocyte-mediated tissue injury by blocking adherence in a variety of disease
models.

Hu23F2G is a recombinant humanized monoclonal antibody developed by ICOS to
block CD11/CD18-mediated cell adhesion in humans. Hu23F2G has been shown in
Phase 1 clinical trials to bind to CD11/CD18 cell adhesion molecules on the
surface of leukocytes and to block subsequent movement into the surrounding
tissue. To date, Hu23F2G has been administered to over 75 patients with MS,
hemorrhagic shock and MI to gather safety, efficacy and pharmacological data.
The inhibitory activity of Hu23F2G on human neutrophil (a type of leukocyte)
transmigration, in vitro and in vivo, supports further development of the
program. ICOS is currently conducting clinical development of Hu23F2G in the
indications described below.

         CLINICAL APPLICATION -- MULTIPLE SCLEROSIS

MS is a chronic disease characterized by recurrent episodes of neurologic
dysfunction due to lesions that form in the white matter of the central nervous
system. Although the root cause of MS is unknown, data from the published
literature suggest that immunologic or infectious factors lead to a state of
chronic central nervous system inflammation. The manifestations of the disease
vary among MS patients -- in some the disease is chronic and the deterioration
is progressive, while in others disease episodes may resolve with little or no
neurologic disability. Most MS patients undergo repeated acute exacerbations
every 12 to 18 months in which inflammation "flares" and the clinical symptoms
worsen for a few days or weeks before subsiding.

Physiologically, MS is characterized by destruction of the myelin sheath
(demyelination) surrounding the nerve tracts in the central nervous system. This
destruction leads to a variety of diverse neurologic deficits. It is believed
that the demyelination process is associated with an inappropriate inflammatory
response and subsequent migration of blood-borne leukocytes into the central
nervous system where few leukocytes are normally found. Once in the central
nervous system, these leukocytes are believed to damage the myelin sheath
surrounding nerve cells.

MS affects approximately 250,000 individuals in the United States. Based on the
frequency of exacerbation, ICOS expects 120,000 exacerbations per year are
potentially treatable with Hu23F2G. Current treatment for acute exacerbation of
MS consists of systemic administration of corticosteroids, usually initiated as
intravenous therapy for the first few days of the exacerbation, followed by a
course of oral steroid therapy. This therapy is effective in shortening the
exacerbation in some patients, but does not appear to alter the subsequent
course of the disease. In July 1993, the U.S. Food and Drug Administration (the
"FDA") approved the use of a interferon-beta in relapsing remitting MS to reduce
the frequency of acute

                                       5
<PAGE>

attacks. In 1996 the FDA also approved the use of a second form of interferon
(interferon-beta-1a) for the treatment of relapsing forms of MS. Despite the
advance represented by the approval of betainterferon, ICOS believes there
remains a significant need for therapy to treat acute exacerbations of MS.

ICOS believes that Hu23F2G may reduce the severity and length of acute
exacerbation of MS by interfering with the ability of leukocytes to bind to the
vascular endothelium in the brain and spinal cord, and thus limit their mobility
into these tissues and allow the inflammation to resolve sooner and the
neurologic damage to be reduced. Due to improved efficacy and an anticipated
reduction in frequency of administration, the Company believes that treatment of
the acute exacerbation with Hu23F2G may provide superior treatment outcomes to
those provided by corticosteroid treatment and other treatment methods.

ICOS began a Phase 2 clinical trial of Hu23F2G in MS patients in January 1997.
The results of the Phase 2 clinical trials of Hu23F2G will provide essential
pharmacological efficacy, functional and safety data to support the continued
development of Hu23F2G.

         Clinical Application -- Hemorrhagic Shock

Each year, approximately 200,000 Americans suffer major trauma, leading to
shock. Approximately 125,000 of these victims are at risk for the development of
hemorrhagic shock. A major cause of morbidity and mortality in those who survive
the initial injury is multiple organ failure ("MOF"), for which currently there
is no specific treatment. The intensive care necessary for the support of MOF
patients is extremely expensive.

Based on in vitro and in vivo data, it has been hypothesized that MOF is the
result of neutrophil-mediated tissue injury. Resuscitation of the trauma patient
by administering intravenous fluids and blood products leads to the
re-establishment of circulation in the affected tissues. Prior to reflow the
blood vessels become highly adhesive. Restoring oxygen and leukocytes, in
particular neutrophils, to the now hyperadhesive vasculature environment results
in activation and adhesion of neutrophils to the endothelium. Once attached to
the endothelium, activated neutrophils release toxins, such as free radicals and
proteases, that can damage the endothelium and the surrounding tissue, leading
to edema, hemorrhage and thrombosis that can often result in organ dysfunction
and failure.

Since the adhesion of neutrophils to endothelium is inhibited by Hu23F2G, ICOS
believes that treatment of trauma-induced hemorrhagic shock patients with
Hu23F2G may prevent the development of MOF and improve overall mortality rates.
If Hu23F2G is demonstrated to be effective in this setting, it might be adopted
as a standard therapy for hemorrhagic shock, given the poor outcome and high
cost associated with current therapy.

In April 1996, ICOS initiated a Phase 2 clinical trial of Hu23F2G in patients
with trauma-induced hemorrhagic shock to evaluate the compound's safety and
pharmacology. This Phase 2 clinical trial is currently underway at multiple
sites. As in all clinical trials for hemorrhagic shock, the rate of enrollment
in the Phase 2 clinical trial has been affected by the complexities of obtaining
informed consent on behalf of hemorrhagic shock patients. New regulations
regarding informed consent are expected to increase the rate of enrollment;
however, there can be no assurance that such an increase in the rate of
enrollment will occur.

         CLINICAL APPLICATION -- MYOCARDIAL INFARCTION

Each year, approximately 1.5 million MIs occur in the United States, about 30%
of which are fatal. During a MI, a coronary artery becomes occluded and blood
flow to a region of the heart is blocked. This blockage results in injury and
death of heart tissue in the affected region. A significant portion of the
tissue injury and death is thought to be caused by neutrophil-mediated
inflammatory damage. Current treatment of MI is unable to protect at-risk tissue
from this neutrophil-mediated damage or death.

A common and serious complication of MI is the failure of the heart to pump
blood adequately. Generally, the larger the amount of tissue damage, the less
able the heart is to pump blood, resulting in congestive heart failure, which is
the major cause of in-hospital mortality and disability following MI.

Preclinical studies have provided evidence that Hu23F2G inhibits neutrophil
functions shown to be important for neutrophil damage in models of MI. ICOS
believes that treatment of patients with Hu23F2G during an MI may limit the
degree of

                                       6
<PAGE>

inflammatory tissue damage and protect significant amounts of heart tissue. In
turn, this tissue preservation should help maintain the pumping capacity of the
heart, thereby reducing mortality and disability.

Based on preclinical data in MI models and the results of the Phase 1 clinical
trials of Hu23F2G in MS patients, ICOS initiated a Phase 2 clinical trial of
Hu23F2G for the treatment of MI in February 1997 at multiple clinical sites.

         OTHER POTENTIAL CLINICAL APPLICATIONS FOR Hu23F2G

While the focus of the clinical testing of Hu23F2G to date has been the
indications described above. ICOS believes that Hu23F2G may have utility in the
treatment of other indications, which involve the migration of circulating
leukocytes as part of the inflammatory mechanism including ischemic stroke, head
trauma, acute peripheral arterial occlusion and solid organ transplant
preservation. Depending on the results of current research and preclinical
development testing, Hu23F2G may progress to initiating clinical trials for
treatment of these medical indications in the future.


ICM3

         BACKGROUND

T cell stimulation by antigen presenting cells ("APCs") has been shown to be an
important early step in the development of antigen-specific inflammatory
responses. Once stimulated by APCs, T cells orchestrate the cellular events that
lead to inflammation. ICAMs are cell surface proteins known to mediate
interaction between T cells and APCs. Known ICAMs include ICAM-1, ICAM-2 and
ICAM-3. In comparison to the other ICAMs, the expression pattern of ICAM-3 has
been shown by ICOS scientists to be unique. Whereas ICAM-1 and ICAM-2 are
primarily found on the surfaces of endothelial cells and activated leukocytes,
ICAM-3 expression is normally restricted to leukocytes themselves. Because
ICAM-3 is expressed at high levels independent of the state of cell activation,
ICAM-3 is believed to be involved in the earliest stages of T cell activation
and is therefore an attractive target for early intervention to improve the
outcome in T cell-mediated inflammatory conditions.

A proprietary series of anti-ICAM-3 antibodies developed by ICOS has been shown
to inhibit T cell interaction with APCs and T cell activation. One antibody,
known as ICM3, is a recombinant humanized monoclonal antibody that has been
shown by ICOS scientists to block the function of ICAM-3. ICM3 has been shown by
ICOS to be a potent inhibitor of T cell activation in both in vitro and clinical
models. The first two disease conditions for which ICM3 has been identified as a
potential product candidate are psoriasis and solid organ transplant rejection,
both of which are T cell-mediated inflammatory responses. ICM3 also may have
utility in a number of other T cell-mediated inflammatory diseases.

         CLINICAL APPLICATION -- PSORIASIS

Psoriasis is a common inflammatory disorder affecting approximately five million
Americans. Psoriasis is characterized by abnormal proliferation of the epidermal
cells of the skin in association with inflammation. Activated T cells have been
shown to mediate these abnormalities. Direct interaction between T cells and
APC's (dendritic cells) is a key event that leads to T cell activation which
mediate psoriasis. ICAM3 is expressed at high levels on both T cells and
dendritic cells and has been shown to be important in their interaction.

Although most psoriasis patients are adequately treated with topical therapy,
about 20% have a moderate or severe form of the disease that does not respond,
thereby requiring systemic therapy. Existing forms of systemic therapy include
phototherapy, retinoids and cyclosporin, all of which have significant side
effects. There is, therefore, a need for effective and safe new systemic
treatments.

ICOS believes that ICM3 treatment may effectively diminish the T cell
inflammatory component of psoriasis and lead to clinical remission of the
disease. It is anticipated that treatment with ICM3 would cause fewer toxic side
effects than current therapies, and thus would be an advance over current
treatments. In early 1997 ICOS initiated Phase 1 clinical trials for the
treatment of psoriasis.

                                       7
<PAGE>

                OTHER POTENTIAL CLINICAL APPLICATIONS FOR ICM3

Approximately 20,000 solid organ transplantations are performed each year in the
United States. The most common procedures involve transplantation and grafting
of the donor kidney, liver, heart or lung into the patient. Patients undergoing
these transplants require life-long immunosuppressive drugs to prevent graft
rejection. Despite such treatment, graft rejection remains a major problem and
is the limiting factor in the successful outcome of transplantation.
Furthermore, all immunosuppressive agents currently in use cause significant
undesirable side effects.

Rejection of solid organs is mediated by T cells that mount an immune response
against the "foreign" graft. This response has been shown by ICOS scientists in
preclinical models to be inhibited by ICM3. ICOS intends to initiate a Phase 1
clinical trial of ICM3 for use in connection with solid organ transplantation
during 1997. ICOS is also studying the potential of ICM3 for use in treating
inflammatory bowel disease.


ANTAGONISTS OF PROINFLAMMATORY MEDIATORS PROGRAMS
-------------------------------------------------


RECOMBINANT PLATELET-ACTIVATING FACTOR ACETYLHYDROLASE (rPAF-AH)

         BACKGROUND

Platelet-activating factor ("PAF") is a potent proinflammatory mediator with
diverse biological effects and is implicated in a number of debilitating
inflammatory conditions, including acute pancreatitis, ARDS, necrotizing
enterocolitis ("NEC") and asthma. It is produced naturally by a variety of human
cells, including endothelial cells, leukocytes, platelets and mast cells. PAF
affects a variety of cells that are involved in the inflammatory process,
including leukocytes, platelets and vascular endothelial cells, and acts by
binding to specific receptors, thereby increasing the inflammatory response.

In acute inflammation, potentially important effects of PAF include: (i)
activation of neutrophils, resulting in chemotaxis, aggregation, production of
free radicals and degranulation; (ii) increased adherence to and transmigration
of neutrophils across endothelial cells; and (iii) alteration of endothelial
barrier function, which results in increased vascular permeability. In certain
disease conditions, PAF activity is increased which may result in inflammation
that contributes to local or systemic tissue injury.

Platelet-activating factor acetylhydrolase ("PAF-AH") is a naturally occurring
enzyme that hydrolyzes PAF to a biologically inactive form, thereby limiting its
pro-inflammatory effects. The inhibitory activity of rPAF-AH on PAF-induced
inflammation has been demonstrated in both in vitro and in vivo preclinical
studies. ICOS is developing rPAF-AH, the recombinant form of PAF-AH, as an agent
for the treatment of diseases characterized by disregulatory PAF activity.

In February 1997, the Company formed a joint venture with Suntory Limited of
Japan ("Suntory"). The corporation formed by ICOS and Suntory, called Suncos,
will develop and commercialize rPAF-AH for use worldwide for all medical
indications. See "Collaborations".

         CLINICAL APPLICATION -- ACUTE RESPIRATORY DISTRESS SYNDROME

There are approximately 650,000 persons at risk for developing ARDS each year in
the United States as a complication of several common diseases and conditions,
including sepsis, trauma, massive blood transfusion, acute pancreatitis and
aspiration of gastric contents. Approximately 150,000 develop ARDS, for which
the mortality rate is approximately 40% to 50%. Current therapy for ARDS is only
supportive.

Although the cause of ARDS is not known, it is characterized by
acute lung inflammation. PAF has been shown to have pronounced effects on the
lung. In preclinical studies, PAF administration has been shown to cause lung
damage that resembles ARDS. Increased levels of PAF have also been found in the
lung fluid of humans who have been diagnosed with ARDS, suggesting that PAF may
contribute to lung inflammation.

The inhibitory activity of rPAF-AH on PAF-induced lung inflammation has been
demonstrated by ICOS in in vivo preclinical studies. The data obtained from
these studies indicate that rPAF-AH may be effective in patients at risk for

                                       8
<PAGE>

ARDS or in improving the outcome in patients who have already been diagnosed
with ARDS by inhibiting the ability of PAF to contribute to lung inflammation.

ICOS has conducted a Phase 1 clinical trial of rPAF-AH necessary to initiate
Phase 2 clinical trials of rPAF-AH for the treatment of several indications.
ICOS, as part of its efforts under the joint venture agreement, intends to
initiate a Phase 2 clinical trial in 1997 for the treatment of patients at risk
for ARDS.

         OTHER POTENTIAL CLINICAL APPLICATIONS FOR rPAF-AH

Approximately 15 million people in the United States suffer from asthma.
Although there are a number of effective drugs for asthma, the disease still
causes considerable morbidity and mortality. Each year, approximately 300,000
people are hospitalized with acute asthma. Asthma is characterized by a
reversible narrowing of the airways and chronic airway inflammation. In
preclinical studies, PAF has been shown to cause bronchioconstriction of the
airways similar to that observed in asthma patients. ICOS believes that rPAF-AH
may be useful in the treatment of acute asthma attacks by rapidly inhibiting the
detrimental effects of PAF, thereby reducing inflammation that contributes to
persistent airway narrowing. Additional Phase 2 clinical trials may also be
initiated during 1997 to evaluate the potential of rPAF-AH for the treatment of
asthma.

Each year, approximately 42,500 people in the United States suffer from
acute pancreatitis. Currently, there is no specific therapy available to treat
this disease. PAF has been implicated as a mediator of acute pancreatitis. In
animal models of pancreatitis, the amount of PAF present in the pancreas has
been shown to be at increased levels compared to healthy tissue. ICOS believes
that rPAF-AH may be useful in resolving acute pancreatitis and preventing the
subsequent complications by inactivating the ability of PAF to cause
inflammatory damage to the pancreas, as well as to other organs. In preclinical
models, rPAF-AH has been demonstrated to reduce the severity of pancreatitis.
Additional Phase 2 clinical trials may also be initiated during 1997 to evaluate
the potential of rPAF-AH for the treatment of acute pancreatitis.

The primary focus of preclinical studies and clinical testing of rPAF-AH by ICOS
to date has been the indications described above. ICOS believes that rPAF-AH may
have utility in the treatment of other indications that might involve the
effects of PAF, including NEC, IBD, ischemic stroke, head trauma, solid organ
transplantation rejection and type 1 diabetes.

SIGNAL TRANSDUCTION PROGRAMS
----------------------------

Research over the past 15 years has led to a better understanding of how cells
interact to coordinate the growth and maintenance of tissues in the human body.
The key to this interaction is intracellular signal transduction -- the
transmission of a signal from the exterior to the interior of a cell -- which
results in the activation or suppression of specific genes or metabolic
pathways. An integral part of this process is the interaction of ligands,
receptors and intracellular signal transduction molecules also known as second
messengers.

Ligands are molecules that specifically react to form complexes with their
receptors. In some cases, the ligands are released by one cell to communicate
with a target cell by binding to specific receptors on that target cell. The
binding of a ligand and a receptor at the cell surface triggers a cascade of
events that results in an intracellular signal or production of a second
messenger molecule such as cGMP. Regulation of the concentration of second
messenger molecules is a critical step of the signal transduction process as
receptors transmit, amplify and receive extracellular signals and thereby
control cellular processes.

IC351, PDE4 INHIBITORS AND OTHER PDE ISOFORMS

Physiologically, the concentrations of two second messenger molecules, cAMP and
cGMP in cells, influence a wide range of cellular functions, including cardiac
and smooth muscle contractility, the aggregation of platelets, the breakdown of
energy sources such as glycogen and lipids, the activation or inhibition of
cells in the immune and nervous systems and the release of histamine and other
substances associated with inflammation. The intracellular concentration of cAMP
and cGMP in the cell is generally controlled by the relative activity of two
types of enzymes; cyclases, which produce these second messengers, and
phosphodiesterases or PDEs, which degrade these second messengers by converting
active second messengers into their respective inactive forms. ICOS scientists
believe that the selective modulation of PDE activity by pharmaceutical
intervention may produce significant therapeutic effects.

                                       9
<PAGE>

There are at least 15 human genes which encode more than 20 different PDEs that
can be categorized into seven distinct PDE types. The Company has cloned and
expressed a majority of these PDEs, each of which has been shown to target
particular signal transduction pathways. These diverse proteins are not,
however, uniformly expressed and distributed throughout the body, but rather are
found in differing concentrations in different tissues. This tissue-selective
expression may provide opportunities for specific intervention and development
of selective therapeutics that inhibit a single type of PDE enzymes.

In 1991 the Company entered into a collaboration with Glaxo Wellcome to identify
and develop pharmaceutical products that may have a therapeutic effect by
modulating PDE activity. Such agents may be useful in a variety of inflammatory
diseases and cardiovascular disorders. From 1991 to early 1997, the
collaboration successfully identified and developed compounds that inhibit PDE5.
The first of these compounds, now called IC351, is in Phase 1 clinical trials to
evaluate its safety and pharmacological profile. During the collaboration, PDE4
inhibitors were also identified and tested in preclinical studies. Such
compounds may have utility treating inflammatory diseases. In early 1997 ICOS
and Glaxo Wellcome changed the terms of their agreement, allowing both ICOS and
Glaxo Wellcome the right to continue research and development of compounds that
inhibit PDE's. Under the revised terms, ICOS retains all commercial rights in
the compounds arising from the collaboration as PDE inhibitors, including
potential treatments for cardiovascular diseases and male erectile dysfunction,
in exchange for future royalties payable to Glaxo Wellcome on sales of such
compounds.

The Company is planning to continue clinical trials IC351, for the treatment of
male erectile dysfunction. Further, the Company is evaluating the use of IC351
for the treatment of angina and congestive heart failure. Compounds targeting
PDE4 inhibitors are being evaluated in preclinical models of inflammatory
diseases. The Company is also continuing research on other PDE isoforms for
potential use in treating various metabolic diseases.

RESEARCH PROGRAMS
-----------------

The Company has established a proprietary position and has several ongoing
research programs in the areas of: (i) novel cell adhesion molecules such as
ICAM-5 and Alpha d; (ii) additional members of the PDE enzyme family; (iii)
novel chemokines; (iv) novel cell-cycle checkpoint mediators; and (v) anchoring
proteins that regulate important signal transduction enzymes in a cell-type
specific manner. The Company has established a capacity to identify and produce
antibody- and enzyme-based therapeutics based on these programs. Also, in order
to exploit its discoveries more fully, the Company has initiated activities
supporting the discovery and development of small molecule-based therapeutic
agents.

SMALL MOLECULE DISCOVERY PROGRAM
--------------------------------

In addition to protein-based therapeutics such as antibodies and enzymes, the
Company is also working to identify and develop synthetic or small
molecule-based therapeutics based on the Company's knowledge of the mechanisms
of inflammation and its proprietary identification of molecules and receptors
involved in the inflammation process. To this end, the Company has developed a
proprietary in-house, high-throughput small molecule screening program. Through
its collaborations and independent compound acquisitions, ICOS has assembled an
extensive library of chemicals, consisting of synthetic organic molecules. To
date, this library has been used successfully to identify potential drug
candidates for a number of molecular targets within the Company's research and
development programs.

CLINICAL PRODUCTION FACILITY
----------------------------

During 1996 ICOS completed construction of a 21,000 square foot production
facility to produce protein-based products. To date, the Company has
successfully manufactured clinical materials to support its previous and current
clinical trials. This facility is capable of utilizing both microbial and
mammalian-based production processes and was designed to meet FDA requirements
for the production of marketable products. The facility is suited for the
production of purified recombinant protein bulk product. As such, the Company
anticipates that vialing and other finishing steps will be completed under
contract with other companies. See "Important Factors Regarding Forward-Looking
Statements."

COLLABORATIONS
--------------

The Company has entered into arrangements with other parties to access
technology and facilitate and fund the development and marketing of certain of
its products.

                                       10
<PAGE>

In 1991, the Company entered into a collaboration agreement with Glaxo Wellcome
(formerly Glaxo Group Ltd. and Glaxo, Inc.) to identify and develop
pharmaceutical products that may have a therapeutic impact on PDE activity and
be useful in a variety of inflammatory diseases and cardiovascular disorders.
From 1991 to early 1997, the collaboration successfully identified and developed
compounds that selectively inhibit PDE5. The first of these compounds, now
called IC351, is in Phase 1 clinical trials to evaluate its safety and
pharmacological profile. During the collaboration, compounds of potential
applications toward PDE4 inhibition for use in inflammatory diseases were also
identified and tested in preclinical studies. In early 1997 ICOS and Glaxo
Wellcome changed the terms of their agreement, allowing both ICOS and Glaxo
Wellcome the right to continue research and development of compounds that
inhibit PDE's. Under the revised terms, ICOS retains all commercial rights in
the compounds arising from the collaboration as PDE inhibitors, including
potential treatments for cardiovascular diseases and male erectile dysfunction
in exchange for future royalties payable to Glaxo Wellcome on sales of such
compounds. Glaxo Wellcome is free to pursue research and development of PDE
inhibitors independent of ICOS. ICOS plans to continue the clinical development
of IC351 for male erectile dysfunction independently and to commence clinical
trials for IC351 for the treatment of male erectile dysfunction.

In April 1995, the Company formed a collaboration with Abbott Laboratories that
seeks to discover small molecule drugs that modulate the intracellular signaling
connections of certain ICAMs and integrins. Included in this collaboration are
small molecule drugs that might interact with the intracellular portion of the
following leukointegrins: CD11a/CD18, CD11b/CD18, CD11c/CD18 and alpha
chain-containing integrins. Also included are small molecule compounds that bind
to the intracellular portions of ICAM-1, ICAM-2 and ICAM-3. Drugs that interact
with ICAM-5 and Alpha d/CD18 are specifically excluded from the collaboration as
are small molecule drugs that target the extracellular domains of any of the
aforementioned ICAMs or integrins. Also excluded are other antibody- or
protein-based therapeutics for use against these targets. Under the
collaboration, the Company will have exclusive U.S. rights for all products for
the treatment of cancer, while Abbott Laboratories will have exclusive rights
outside the United States for all products for the treatment of cancer and
exclusive worldwide rights for all other products. The Company will receive
research funding and milestone and royalty payments for products, other than
cancer treatment products, developed by Abbott Laboratories as a result of the
collaboration. Each party will be responsible for the development, registration
and commercialization of its products in its respective territory. In addition,
the collaboration provided the Company with a library of chemical compounds for
use in its own discovery programs.

In February 1997, the Company formed a joint venture with Suntory. The
corporation formed by ICOS and Suntory for the joint venture, called Suncos,
will develop and commercialize rPAF-AH for use worldwide for all medical
indications. Under the terms of the arrangement, the joint venture was
established with a $30 million cash contribution by Suntory to Suncos and ICOS
licensed, on a worldwide basis, all rights for rPAF-AH to Suncos. In exchange,
both ICOS and Suntory received 50 percent ownership in Suncos. Suntory has
rights and obligations to participate in the development and commercialization
of rPAF-AH in Japan and ICOS has similar rights and obligations with respect to
the United States. Suncos will be managed jointly by Suntory and ICOS. Suntory
and ICOS will each pay royalties to Suncos on sales of rPAF-AH products in its
respective territory.

From time to time, the Company enters into research collaborations with various
institutions and scientists to expand ICOS' access to new scientific
developments and discoveries in certain areas. ICOS has contracted with several
academic and institutional collaborators to conduct certain research and
development activities relating to the products discussed herein. The Company
has also entered into certain license agreements with respect to different
technologies in addition to the agreements noted above. ICOS' agreements with
these organizations generally provide that the Company 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.

RESEARCH, PRODUCT DEVELOPMENT AND COMMERCIALIZATION STRATEGIES
--------------------------------------------------------------

ICOS' research and product development efforts comprise three basic stages prior
to commercialization. The initial stage, Research, includes early-stage
discoveries through the identification of preclinical targets. During Research,
the Company tests candidate molecules in relevant preclinical models of disease.
The Preclinical stage begins when the proof of principle has been validated and
a specific preclinical target is selected and studies begin focusing on in vitro
studies for toxicity and efficacy necessary for an Investigational New Drug
("IND") application filing. During the Preclinical Stage, the research and
development project personnel work to establish a production process that is
feasible not only for early clinical trials, but also is capable of scale-up to
commercial levels. After review of the IND application by the FDA, Phase 1
clinical trials are commenced to determine a candidate product's safety and
pharmacological profile. Phase 1 safety and pharmacology

                                       11
<PAGE>

clinical trials lead to Phase 2 clinical trials designed to establish dose and
potential efficacy. A drug candidate that shows efficacy in a Phase 2 clinical
trial will enter Phase 3 clinical trials, where its efficacy will be verified
through rigorous testing on a large number of human patients. Once Phase 3
clinical trials are successfully completed, clinical data is compiled and a
Product License Application ("PLA") or New Drug Application ("NDA") is submitted
to the FDA. Product launch and commercialization are dependent on approval of
the PLA or NDA by the FDA. See "Government Regulation."

ICOS's product development strategy emphasizes the early acquisition of Phase 2
clinical data to determine a particular product candidate's utility in a
specific disease indication. Phase 1 clinical trials are designed to support the
initiation of multiple Phase 2 clinical trials for distinct indications. If
satisfactory Phase 1 results are achieved with a particular product candidate,
the Company may initiate several Phase 2 clinical trials to increase the
likelihood of identifying clinically successful programs as early as possible.
Such a strategy may permit clinical trials to be conducted in a parallel fashion
and, more significantly, allows for the early identification of indications
whose pathology is affected by the study drug.

The Company intends to select specific indications for potential products that
merit study in Phase 3 clinical trials with a view to full commercialization
based on data generated from relevant preceding clinical work and ICOS' analysis
of the best utilization of its resources. The Company does not expect to conduct
Phase 3 clinical trials on all the potential indications for its products.

The Company plans to develop the capabilities necessary to bring the promising
products of its research and development activities into the marketplace. At
this time, the Company is currently proceeding independently in its efforts
toward the development of all its candidate products except rPAF-AH, which will
be developed by the Company's joint venture with Suntory, and certain compounds
discovered or developed under the Company's collaborative agreement with Abbott
Laboratories. If the Company determines that it is strategically advantageous to
enter into a collaboration with another firm, the Company's preference is to
enter into collaborations with companies where ICOS has the opportunity to share
equally in research and product development and co-promote and share profits
from any products arising from the collaboration. The Company may, however,
choose to license its technology when it feels it is in the Company's best
interests. There can be no assurance that additional joint venture or
collaborative arrangements will be available on terms acceptable to the Company,
if at all. The Company also intends to pursue product opportunities
independently that address niche pharmaceutical markets in which a small
organization can compete effectively. See "Collaborations."

COMPETITION
-----------

Competition in the pharmaceutical industry is intense and characterized by rapid
technological development. The Company and Suncos, the Company's joint venture
with Suntory, will compete with pharmaceutical companies and biotechnology firms
in the United States, Japan, Europe and elsewhere. Many biotechnology companies
have focused their development efforts in the human therapeutics area, including
inflammatory and other diseases targeted by the Company, and many major
pharmaceutical companies have developed or acquired internal biotechnology
capabilities or have made commercial arrangements with other biotechnology
companies or research institutions.

A number of biotechnology and pharmaceutical companies have developed or are
developing new anti-inflammatory and cardiovascular products that may compete
directly with ICOS's products. Certain of such competitors' products are
commercially available or have entered clinical trials. There can be no
assurance that research and discoveries by others will not render the Company's
programs or products uneconomical or result in therapies superior to any therapy
developed by the Company or that any of its products will be preferred to any
existing or newly developed technologies.

The Company expects to encounter significant competition for the products it
plans to develop. Companies that complete clinical trials, obtain required
regulatory approvals and commence commercial sales of their products before
their competitors may achieve a significant competitive advantage. A number of
biotechnology and pharmaceutical companies are developing anti-inflammatory
products aimed at the same indications as those ICOS has targeted. Some of these
have entered clinical trials or are commercially available. Several have been in
business longer than ICOS, have greater financial resources and have more
experience in obtaining and negotiating with corporate partners.

Significant levels of biotechnology research occur in universities and other
nonprofit research institutions. These entities have become increasingly active
in seeking patent protection and licensing revenues for their research results.
They also compete with ICOS in recruiting skilled scientific talent.

                                       12
<PAGE>

The Company believes that its competitive success will be based on the ability
to create and maintain scientifically advanced technology, develop
cost-effective proprietary products, attract and retain talented and skilled
personnel, obtain patent or other protection for its products, obtain required
regulatory approvals and manufacture and successfully market its products,
either alone or through outside parties. Many of the Company's competitors have
substantially greater financial, marketing and human resources and experience
than ICOS. See "Important Factors Regarding Forward-Looking Statements."

GOVERNMENTAL REGULATION
-----------------------

Regulation by governmental authorities in the United States, Europe, Japan, and
other foreign countries is a significant factor in the manufacture and marketing
of the Company's potential products and in its ongoing research and product
development activities. Virtually all the Company's products and those of
Suncos, its joint venture with Suntory, will require regulatory approval by
governmental agencies prior to commercialization. In particular, 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 such testing and obtaining such
approvals is uncertain. Any delay in testing may delay product development. In
addition, delays or rejections may be encountered based on changes in FDA or
foreign regulatory policy during the period of product development and testing.
Various federal statutes and regulations also regulate the manufacturing,
safety, labeling, storage, record-keeping and marketing of such products. The
lengthy process of obtaining regulatory approvals and ensuring compliance with
appropriate federal statutes and regulations requires the expenditure of
substantial resources. Any delay or failure by ICOS to obtain regulatory
approval could adversely affect the commercialization of products being
developed by the Company, its ability to receive product or royalty revenue and
its liquidity and capital resources.

Preclinical studies are generally conducted in the laboratory to evaluate the
potential efficacy and the safety of a therapeutic product. The results of these
studies are submitted to the FDA as part of an IND application, which must be
reviewed by FDA personnel before clinical testing can begin. Once the FDA is
satisfied with the submission, the clinical trial process can commence.
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,
trials are conducted with groups of patients afflicted by a specific target
disease to determine preliminary efficacy, dosage tolerance and optimal dosages,
and to gather additional safety data. In Phase 3, large-scale, multicenter
comparative 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, the clinical trial sponsor or the
investigator may suspend clinical trials at any time if it believes that
clinical subjects are being exposed to an unacceptable health risk.

The results of preclinical and clinical testing are presently required to be
submitted to the FDA in the form of an NDA for small molecule products or a PLA
accompanied by an Establishment License Application ("ELA") for biological
products. In responding to an NDA, PLA or ELA, 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. There can be no assurance that approvals will be granted on a timely
basis, if at all. The failure to obtain timely permission for clinical testing
or timely approval for product marketing would materially affect the Company.
Product approvals may subsequently be withdrawn if compliance with regulatory
standards is not maintained or if problems occur after the product reaches the
market. The FDA may require testing and surveillance programs to monitor the
effect of a new product and may prevent or limit future marketing of the product
based on the results of these postmarketing programs.

Some of the Company's potential products 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 diseases where fewer than 200,000 persons annually in the United
States would be likely to receive the treatment. 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 a seven-year exclusive marketing
period in the United States for that product claim. A drug that is considered by
the FDA to be different than a particular orphan drug is not barred from sale in
the United States during such seven-year exclusive marketing period. Legislation
has previously been introduced in Congress to limit the marketing exclusivity
provided for certain orphan drugs. Although Congress has not passed such
legislation to date, there remains a possibility that future legislation will
limit the incentives currently afforded to the developers of orphan drugs.

The Company's policy is to conduct its research activities in compliance with
the National Institute of Health Guidelines for Research Involving Recombinant
DNA Molecules. The Company is also subject to various federal, state and local
laws,

                                       13
<PAGE>

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 Company's work.
The extent and character of governmental regulation that might result from
future legislation or administrative action cannot be accurately predicted. See
"Important Factors Regarding Forward-Looking Statements."

PATENTS AND TRADE SECRETS
-------------------------

Because of the length of time and expense associated with bringing new products
through development and the governmental approval process to the marketplace,
the pharmaceutical industry has traditionally placed considerable importance on
obtaining and maintaining patent and trade secret protection for significant new
technologies, products and processes. This is equally true for emerging
biotechnology companies and, as such, the Company has applied, and is applying,
for patents for its products and certain aspects of its technologies. To date,
the Company has filed over 100 U.S. patent applications on its own behalf or on
behalf of its exclusive licensors. The United States Patent and Trademark Office
(the "USPTO") has issued either a patent or a notice of allowance as to 34 of
these applications.

The enforceability of patents issued to biotechnology and pharmaceutical firms
is highly uncertain. Federal court decisions indicating legal considerations
surrounding the validity of patents in the field are in transition, and there
can be no assurance that the historical legal standards surrounding questions of
validity will continue to be applied or that current defenses as to issued
patents in the field will, in fact, be considered substantial in the future. In
addition, there can be no assurance as to the degree and range of protection any
patents will afford, whether patents will issue or the extent in which the
Company will be successful in not infringing patents granted to others. If
certain patents issued to others are upheld or if certain patent applications
filed by others issue and are upheld, the Company may be required to obtain
certain licenses from others in order to develop and commercialize certain
potential products incorporating the Company's technology. ICOS has entered into
nonexclusive license agreements, and anticipates entering into additional
license agreements in the future, with third parties for technologies which may
be useful or necessary for the manufacture of the Partnership's Products. [The
Company believes that such additional licenses will be available on commercially
reasonable terms. The Company has initiated discussions with commercial entities
which hold United States patents which may be needed for some of the Company's
activities.] There can be no assurance that such licenses, if required, will be
available on acceptable terms, if at all.

While ICOS pursues patent protection for products and processes where
appropriate, it also relies on trade secrets, know-how and continuing
technological advancement to develop and maintain its competitive position. The
Company's policy is to have each employee enter into an agreement that contains
provisions prohibiting the disclosure of confidential information to anyone
outside the Company. Research and development contracts and relationships
between the Company and its scientific consultants provide access to aspects of
the Company's know-how that is protected generally under confidentiality
agreements with the parties involved. There can be no assurance, however, that
these confidentiality agreements will be honored or that the Company can
effectively protect its rights to its unpatented trade secrets. Moreover, there
can be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets. See "Important Factors Regarding Forward-Looking
Statements."

HUMAN RESOURCES
---------------

As of December 31, 1996, ICOS employed 212 individuals. Approximately 196 ICOS
employees are engaged in research or development activities and 16 in general
and administrative positions.

IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
------------------------------------------------------

The following important factors, among others, could cause actual results to
differ materially from those contained in forward-looking statements made in
this report and presented elsewhere by management from time to time.

                                       14
<PAGE>

Early Stage of Development; Lack of Commercial Products; No Assurance of
------------------------------------------------------------------------
Successful Product Development. The Company has not yet completed the
------------------------------
development of any products and does not expect to have any products
commercially available for several years, if at all. The Company's potential
products will require significant additional development, preclinical and
clinical testing, regulatory approval and additional investment prior to
commercialization. There can be no assurance that further research and
development will be successful or will result in therapeutic products that will
qualify for approval by regulatory authorities in order for commercial sales to
begin.

Uncertainty Associated with Clinical Testing. Results of initial preclinical and
--------------------------------------------
clinical testing of products under development by the Company are not
necessarily predictive of results that will be obtained from subsequent or more
extensive preclinical and clinical testing. There can be no assurance that
clinical studies of Company products under development will be completed or will
demonstrate the products' safety and efficacy. The failure to adequately
demonstrate safety and efficacy could significantly delay or prevent regulatory
approval of a product. There can be no assurance that unacceptable toxicities or
side effects will not occur at any time in the course of human clinical trials
or commercial use of the Company's products. The appearance of any such
unacceptable toxicities or side effects could cause the Company to interrupt,
limit, delay or abort the development of any of its products or, if previously
approved, necessitate their withdrawal from the market. Furthermore, there can
be no assurance that disease resistance or other physiological factors will not
limit the efficacy of the Company's products. Delays in patient enrollment in
the Company's current clinical trials or future clinical trials may result in
increased costs, program delays or both, which could have a material adverse
effect on the Company.

Continuing Operating Losses. The Company has not generated revenues from the
---------------------------
commercialization of any products. The Company anticipates that its operating
expenses and capital expenditures will increase significantly in 1997 and
subsequent years and expects to incur increasing operating losses at least until
sales of its potential products commence. The development of the Company's
products will require the commitment of substantial resources to conduct the
time-consuming research, preclinical development and clinical trials necessary
to bring such products to market and to establish production and marketing
capabilities. There can be no assurance that the Company will generate
significant revenues or achieve profitability.

Additional Financing Requirements and Access to Capital. Substantial additional
-------------------------------------------------------
funding will be required for the Company's operations. The Company may seek
additional funding through public or private financings, including equity
financings, and through other arrangements, including collaborative
arrangements. Adequate funds may not be available when needed or on terms
acceptable to the Company. If adequate funds are not available, the Company may
be required to delay, scale back or eliminate expenditures for certain of its
programs or to license third parties to commercialize products or technologies
that the Company would otherwise seek to develop or commercialize itself.

Dependence on Others. Under the Company's collaborative agreements with Abbott
--------------------
Laboratories, certain development efforts, regulatory compliance, manufacturing
and marketing activities may be performed primarily by Abbott Laboratories.
Similarly under the Company's joint venture with Suntory, certain development
and manufacturing activities and regulatory and marketing activities related to
product sales in Japan may be performed by Suntory. The Company may enter into
similar agreements with other collaborators in the future. Continued
collaborator participation will depend not only on the achievement of research
objectives by the Company and its collaborators, which cannot be assured, but
also on each collaborator's own financial, competitive, marketing and strategic
considerations, which are outside the Company's control. Such strategic
considerations may include the relative advantages of alternative products being
marketed or developed by others, including relevant patent and proprietary
positions. There can be no assurance that the interest and motivations of the
Company's collaborators are, or will remain, consistent with those of the
Company or that such collaborators will successfully perform their development,
regulatory compliance, manufacturing or marketing functions and that such
current or future collaborations will continue. Furthermore, there can be no
assurance that the Company will be able to negotiate additional acceptable
collaborative arrangements in the future or that any such arrangements would be
successful.

Uncertain Availability of Third-Party Reimbursement and Product Pricing. The
-----------------------------------------------------------------------
Company's ability to commercialize products successfully will depend
substantially on reimbursement of the costs of such products and related
treatments at acceptable levels from government authorities, private health
insurers and other organizations, such as health maintenance organizations
("HMOs"). There can be no assurance that reimbursement in the United States or
foreign countries will be available for any products the Company may develop or,
if available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's products, thereby
adversely affecting its business.

                                       15
<PAGE>

Third-party payors are increasingly challenging the prices charged for medical
products and services. Also, the trend toward managed healthcare in the United
States and the concurrent growth of organizations, such as HMOs, which can
control or significantly influence the purchase of healthcare services and
products, as well as legislative proposals to reform healthcare or reduce
government insurance programs, may result in lower prices for therapeutic
products. The cost-containment measures that healthcare providers are
instituting, including practice protocols and guidelines and clinical pathways,
and the effect of any healthcare reform, could materially adversely affect the
Company's ability to sell products if successfully developed and approved.
Moreover, the Company is unable to predict what additional legislation or
regulation, if any, relating to the healthcare industry or third-party coverage
and reimbursement may be enacted in the future or what effect such legislation
or regulation would have on the Company's business.

Limited Manufacturing Capabilities; No Marketing or Sales Capability. ICOS
--------------------------------------------------------------------
currently anticipates the need to hire additional personnel skilled in the
manufacturing, clinical testing and regulatory compliance processes. There can
be no assurance that ICOS will be able to acquire such resources or establish
relationships with others to supplement its resources. ICOS may not have
sufficient manufacturing capacity to manufacture its potential products in
commercial quantities. Moreover, ICOS' manufacturing capacity may be inadequate
to complete all clinical trials contemplated by the Company. Although ICOS
expects to develop such capacity by expanding its current facilities, building
new facilities or contracting with others for manufacturing services, there can
be no assurance that such capacity will be developed or be available on a timely
basis. The Company does not have facilities for the manufacture of small
molecule products. Should the Company decide to market certain of its potential
products through a direct sales force in certain markets, if and when regulatory
approval is obtained, the Company would be required to either hire a sales force
with expertise or contract with a third party to provide a sales force. There
can be no assurance that the Company will be able to establish such a sales
force or be successful in establishing other channels for distributing its
potential products.

Uncertainty Relating to Patents and Proprietary Rights. The Company's ability to
------------------------------------------------------
compete effectively with others is materially dependent on the proprietary
nature of the Company's patents and technologies. The Company has applied and
will continue to apply for patents for its products and certain aspects of its
technology, products and processes. The enforceability of certain patents issued
to biotechnology firms is highly uncertain. Federal court decisions indicating
legal considerations surrounding the validity of biotechnology patents are in
transition, and there can be no assurance that the historical legal standards
surrounding questions of patent validity will continue to be applied or that
current defenses as to issued patents will, in fact, be considered substantial
in the future. In addition, there can be no assurance as to the degree and range
of the protection any patents will afford, whether patents will issue, or the
extent to which the Company will be successful in not infringing on any patents
granted to others. ICOS has entered into nonexclusive license agreements, and
anticipates entering into additional license agreements in the future, with
third parties for technologies which may be useful or necessary for the
manufacture of the Partnership's Products. [The Company believes that such
additional licenses will be available on commercially reasonable terms. The
Company has initiated discussions with commercial entities which hold United
States patents which may be needed for some of the Company's activities.] There
can be no assurance that any licenses required under any patents or proprietary
rights will be made available on terms acceptable to the Company, if at all. If
the Company does not obtain required licenses, it could encounter delays in
product development while it attempts to design around the patents, or it could
find that the development, manufacture or sale of products requiring such
licenses could be foreclosed. In addition, the Company could incur substantial
costs in defending any patent litigation brought against it or in asserting its
patent rights, including those licensed to it by third parties, in a suit
against another party. Additionally, there can be no assurance that the
Company's confidentiality agreements will adequately protect its trade secrets,
know-how or other proprietary information.

Technological Change and Competition. The Company is involved in an intensely
------------------------------------
competitive field. There are many companies and institutions, both public and
private, including pharmaceutical companies, chemical companies, specialized
biotechnology companies and research and academic institutions, that are engaged
in developing synthetic pharmaceuticals and biotechnological products for human
therapeutic applications, including the applications targeted by the Company. A
number of competitors are conducting research and development in the areas of
cell-trafficking, mediators of inflammation and intracellular signal
transduction, and research by others specifically addresses areas of technology
targeted by the Company. Many of these companies have substantially more
capital, research and development, regulatory, manufacturing, marketing, human
and other resources and experience than the Company and may succeed in
developing products that are more effective or less costly than any that may be
developed by the Company and may also be more successful than the Company in
production or marketing. In addition, other recently developed technologies are,
or may in the future be, the basis for competitive products. There can be no
assurance that competitors will not succeed in developing technologies and
products that are more effective than any being developed by the Company or that
would render the Company's technology and products obsolete or noncompetitive.

                                       16
<PAGE>

Volatility of Stock Price. Market prices for securities of biotechnology
-------------------------
companies have been highly volatile. The Company believes that several factors
could have a significant effect on the future price of the Company's Common
Stock, including, without limitation, future announcements by the Company or
others regarding progress in product development, results and progress of
preclinical studies and clinical trials, progress of existing and future
collaborations, evidence of the safety or efficacy of products, anticipated and
actual financing events, scientific discoveries, technological innovations,
commercial products, patents or propriety rights or regulatory actions,
litigation, fluctuations in the Company's results of operations and changes in
general market conditions for biotechnology stocks.

Government Regulation. The FDA and comparable agencies in foreign countries
---------------------
impose substantial requirements on biotechnology and pharmaceutical companies
during development of potential products. These requirements include lengthy and
detailed laboratory and clinical testing procedures, sampling activities and
other costly and time-consuming procedures surrounding the development and
testing of proposed products. Governmental regulation also affects the
manufacture and marketing of pharmaceutical products. Any future FDA or other
governmental approval of products developed by the Company may entail
limitations on the indicated uses for which such products may be marketed. The
effect of governmental regulation may be to delay marketing new products for a
considerable period of time, to impose costly requirements on the Company's
activities or to provide a competitive advantage to other companies that compete
with the Company. There can be no assurance that FDA or other regulatory review
or approval for any product or proposed product will be granted on a timely
basis, if at all. A delay in obtaining or failure to obtain such approvals could
adversely affect the Company's liquidity and capital resources.

Potential Product Liability. The Company faces an inherent business risk of
---------------------------
exposure to product liability claims in the event that the use of its technology
or products is alleged to have resulted in adverse effects. Such risk exists in
human clinical trials. There can be no assurance that the Company can avoid
significant product liability exposure. A product liability claim could
materially adversely affect the business, financial condition or future
prospects of the Company. Although the Company has in place product liability
insurance relevant to its current level of clinical trials, there can be no
assurance that the Company will be able to maintain such coverage in the future
on acceptable terms or that such insurance will provide adequate coverage
against potential liabilities. There can be no assurance that adequate insurance
coverage will be available at acceptable costs, if at all.

Hazardous Materials; Environmental Matters. The Company's research and
------------------------------------------
development activities involve the controlled use of hazardous materials,
chemicals, viruses and radioactive compounds. The Company is subject to federal,
state and local laws and regulations governing the use, manufacture, storage,
handling and disposal of such materials and certain waste products. Although the
Company believes that it complies with standards prescribed by such laws, the
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result. The Company's operations, business or
assets may be materially adversely affected by current or future environmental
laws or regulations.

Key Personnel. The Company is highly dependent on its staff and management team.
-------------
The loss of any of these individuals could adversely affect the Company. The
Company is also highly dependent on its ability to attract and retain qualified
scientific, technical and key management personnel. There is intense competition
for qualified personnel in the areas of the Company's activities and there can
be no assurance that the Company will be able to continue to attract and retain
qualified personnel necessary for the development of its business.

                                       17
<PAGE>

ITEM 2.  PROPERTIES

ICOS leases 118,000 square feet of space in three buildings located in Bothell,
Washington, a suburb of Seattle. The Company's leases expire in July and
September 1997, February 1999, and February 2002, with options to renew for
additional five-year periods and an option to purchase one building. The
Company's principal administrative offices, research laboratories, and clinical
production facility occupy approximately 105,000 square feet. In December 1992,
the Company purchased approximately seven acres of undeveloped land adjacent to
its leased facilities. This purchase gives the Company the flexibility to expand
in its current geographic location. Over the next several years, the Company
plans to lease or acquire additional facilities to accommodate the activities
and personnel as necessary to further development and ultimately bring its
products to market.

ITEM 3.  LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

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 its fiscal year ended December 31, 1996.

                                       18
<PAGE>

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

ICOS Common Stock trades on the Nasdaq Stock Market under the symbol ICOS. As of
December 31, 1996, there were 2,389 holders of record of Common Stock. The
Company has never paid any cash dividends and does not anticipate paying any
cash dividends in the foreseeable future. The Company intends to retain future
earnings and capital for use in its business. The following table sets forth,
for the periods indicated, the high and low sale prices for the Common Stock as
reported by the Nasdaq Stock Market.
<TABLE>
<CAPTION>


                      1995                                        High              Low
                      ----                                        ----              ---

                      <S>                                        <C>              <C>
                      First Quarter                              $  5             $ 3 3/8
                      Second Quarter                                6 1/2           3 7/8
                      Third Quarter                                 8 1/8           5 5/8
                      Fourth Quarter                                7 5/8           5 1/4

                      1996
                      ----

                      First Quarter                                10 3/8           6 1/2
                      Second Quarter                                9 3/4           7 5/8
                      Third Quarter                                 9 1/4           6 1/2
                      Fourth Quarter                                9               7

                      1997
                      ----

                      First Quarter
                      (through March 10, 1997)                     9 1/4            7 1/2

</TABLE>

                                       19
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

The information set forth below should be read in conjunction with Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the Consolidated Financial Statements and Notes thereto included
in this Form 10-K.
<TABLE>
<CAPTION>

                                 Period from
                                September 21,
                                    1989
                               (incorporation)
                                   through
                                December 31,                              Year Ended December 31,
                                                 ---------------------------------------------------------------------------------
                                    1996              1996            1995             1994             1993             1992
                                -------------    -------------    -------------    -------------    -------------    -------------
<S>                                 <C>          <C>              <C>              <C>              <C>               <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
   Collaborative research and
        development                 $ 522,053    $   2,000,000    $   1,500,000    $          --    $          --    $   2,000,000
   Research grant                   1,451,409               --               --               --               --           90,076
                                -------------    -------------    -------------    -------------    -------------    -------------
     Total revenue                  2,000,000        1,500,000           90,076        2,522,053
                                -------------    -------------    -------------    -------------    -------------    -------------
Operating expenses:
   Research and development       115,703,021       30,011,417       24,039,185       21,272,072       18,116,077       11,913,090
   General and administrative      17,952,861        2,554,872        2,482,306        2,834,984        2,872,820        2,945,712
                                -------------    -------------    -------------    -------------    -------------    -------------
     Total operating expenses     133,655,882       32,566,289       26,521,491       24,107,056       20,988,897       14,858,802
                                -------------    -------------    -------------    -------------    -------------    -------------
     Operating loss              (126,704,473)     (30,566,289)     (25,021,491)     (24,107,056)     (20,898,821)     (12,336,749)
                                -------------    -------------    -------------    -------------    -------------    -------------
Other income (expense):
   Investment income               17,288,477        2,070,397        1,768,725        1,497,542        3,133,990        4,217,827
   Interest expense                  (887,899)            (364)         (52,061)        (124,667)        (164,627)        (186,364)
   Other, net                        (106,345)             692          (63,763)         (14,019)          (8,472)          (6,842)
                                -------------    -------------    -------------    -------------    -------------    -------------
                                   16,294,233        2,070,725        1,652,901        1,358,856        2,960,891        4,024,621
                                -------------    -------------    -------------    -------------    -------------    -------------

    Net loss                    $(110,410,240)   $ (28,495,564)   $ (23,368,590)   $ (22,748,200)   $ (17,937,930)   $  (8,312,128)
                                =============    =============    =============    =============    =============    =============


   Net loss per common share                     $        (.77)   $        (.73)   $        (.88)   $        (.71)   $        (.34)
                                                 =============    =============    =============    =============    =============



   Weighted average common shares
   outstanding                                      36,804,986       32,194,018       25,945,660       25,401,426       24,198,483
</TABLE>
<TABLE>
<CAPTION>

                                                                               December 31,
                                                     -------------------------------------------------------------------
   BALANCE SHEET DATA:                                  1996          1995          1994          1993          1992
                                                     -----------   -----------   -----------   -----------   -----------
<S>                                                  <C>           <C>           <C>           <C>           <C>
Cash and cash equivalents, investment securities
    and interest receivable                          $41,820,232   $21,376,428   $44,484,696   $44,401,520   $63,917,918

Other current assets                                     692,721       732,530       711,338       709,471       698,421
Restricted investment securities                       1,800,000     2,400,000     2,900,000
Net property and equipment                            15,626,906    15,385,728    11,309,297    11,352,746     9,965,089
Other non-current assets                                  65,318       240,844       229,232         6,557        13,711
                                                     -----------   -----------   -----------   -----------   -----------
      Total assets                                   $58,205,177   $37,735,530   $58,534,563   $58,870,294   $77,495,139
                                                     ===========   ===========   ===========   ===========   ===========


Current liabilities
                                                     $ 2,937,896   $ 4,443,172   $ 3,440,725   $ 2,290,702   $ 2,784,137
Obligations under capital lease, excluding current
installments                                                  --        73,894       984,495     1,682,135            --
Stockholders' equity                                  55,267,281    33,292,358    55,019,944    55,595,097    73,028,867
                                                     -----------   -----------   -----------   -----------   -----------
     Total liabilities and stockholders' equity      $58,205,177   $37,735,530   $58,534,563   $58,870,294   $77,495,139
                                                     ===========   ===========   ===========   ===========   ===========
</TABLE>

                                       20
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS
---------------------

OVERVIEW

The Company has discovered important mechanisms underlying directed cell
movement, inhibition of proinflammatory mediators, and intracellular signal
transduction that may provide broad opportunities in the treatment of
inflammatory diseases and other serious conditions.

During 1990 and 1991, the Company concentrated its efforts on corporate
organization, recruiting key scientific and administrative staff, establishing
its research and development activities, and developing the fundamental science
surrounding inflammatory disease, as well as identifying potential product
areas. The Company raised $30,762,901 through private sales of Common Stock and
$32,769,144 from its initial public offering of Common Stock during this period.
In addition, the Company initiated a collaborative agreement with Glaxo
Wellcome.

During 1992 and 1993, the Company identified a number of novel molecules and
completed preclinical testing and evaluation on Hu23F2G, a potential product
candidate for treating acute exacerbations of MS. The Company also established
clinical, regulatory, and process development functions during this period and,
in December 1993, filed an Investigational New Drug ("IND") application with the
FDA for approval to commence clinical trials of Hu23F2G. In addition, the
Company expanded its efforts in preclinical studies on a new class of cellular
adhesion molecules in an effort to fully characterize these molecules as
potential therapeutic candidates. In April 1992, the Company completed a
secondary public offering of Common Stock that provided total net proceeds of
$25,219,564.

During 1994, the Company initiated a Phase 1 clinical trial of Hu23F2G in
patients with chronic progressive MS. In addition, PDE5, a compound targeting
cardiovascular diseases that was developed as part of the collaboration with
Glaxo Wellcome, entered exploratory development in early 1994. A number of other
compounds based on molecules discovered by Company scientists were in
preclinical development as potential product candidates during 1994. The Company
also filed several new patent applications based on results of its research
efforts. In November 1994, the Company completed a Rights Offering of 6,425,000
shares of Common Stock to existing stockholders that provided total net proceeds
of $22,733,986.

During 1995, the Company conducted a Phase 1 clinical trial of Hu23F2G in
patients with chronic progressive MS. A Phase 1 clinical study of PDE5 inhibitor
was initiated as part of its collaboration with Glaxo Wellcome. In addition, the
Company established a research and development collaboration with Abbott
Laboratories in an area of cell adhesion/signal transduction.

During 1996, the Company continued its Phase 1 evaluation of Hu23F2G for the
treatment of MS, which resulted in the commencement of a Phase 2 clinical trial
of Hu23F2G for acute exacerbations of MS in 1997. In 1996, the Company also
began Phase 2 clinical trials of Hu23F2G for the treatment of hemorrhagic shock,
as well as the commencement of Phase 1 clinical trials of rPAF-AH in healthy
volunteers in anticipation of commencing Phase 2 clinical trials of rPAF-AH for
the treatment of ARDS during 1997. Additionally, the Company completed
preclinical development of ICM3 to allow for the commencement of Phase 1
clinical trials of ICM3 in 1997. In 1996, the Company raised a total of
$49,106,015 from a public offering of 6,900,000 shares of Common Stock.

                                       21
<PAGE>

The Company had an accumulated deficit of $110,410,240 during the development
stage as of December 31, 1996. The Company's results of operations may vary
significantly from quarter to quarter and will depend, among other factors, on
the timing of certain expenses, payments received on certain research
collaborations, and the progress of the Company's research and development
efforts. The Company expects increased expenditures over the next several
quarters as it expands the clinical studies being conducted on the product
candidates Hu23F2G and rPAF-AH. Some of these costs relating to clinical trials
of rPAF-AH will be reimbursed by Suncos Corporation, the joint venture
established by the Company and Suntory Limited of Japan to fund the development
of rPAF-AH. In addition, the Company will take over development of all compounds
resulting from the Company's collaboration with Glaxo Wellcome and anticipates
initiating clinical trials of the compounds for potential use in treating a
number of medical indications, including MED. In addition, the Company will
continue clinical trials of ICM3, its product candidate for the potential
treatment of psoriasis and other medical indications. The Company anticipates
expanding preclinical research and development activities for additional
potential products and commencing clinical studies on those deemed most
promising.

YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995

Revenue resulted entirely from the Company's research and development agreement
with Abbott Laboratories, which was initiated in April 1995, and totaled
$2,000,000 in 1996 compared with $1,500,000 in 1995.

Total operating expenses in 1996 increased 23% to $32,566,289 from $26,521,491
in 1995. Research and development expense increased 25% to $30,011,417 in 1996
from $24,039,185 in 1995, primarily due to costs related to proceeding with
clinical trials and other product development efforts. Research and development
costs represented 92% of total operating costs in 1996. General and
administrative expenses increased 3% to $2,554,872 in 1996 from $2,482,306 in
1995.

Investment income in 1996 was $2,070,397 versus $1,768,725 in 1995. The increase
was primarily due to higher average cash balances as a result of the Company's
equity offering in May 1996.

The Company's net loss increased 22% to $28,495,564 in 1996 compared to a net
loss of $23,368,590 for 1995.

Year Ended December 31, 1995 Compared With Year Ended December 31, 1994

Revenue in 1995 was $1,500,000 and resulted entirely from the Company's research
and development agreement with Abbott Laboratories. There was no revenue in
1994.

Total operating expenses increased 10% to $26,521,491 in 1995 from $24,107,056
in 1994. Research and development expenses increased 13% to $24,039,185 in 1995
from $21,272,072 in 1994, primarily due to costs related to clinical trials for
Hu23F2G, progression of other potential products toward clinical trials and
other product development efforts. Research and development costs represented
91% of total operating costs in 1995. General and administrative expenses
decreased 12% to $2,482,306 in 1995 from $2,834,984 in 1994 as a result of cost
reduction efforts and certain personnel changes.

Investment income in 1995 increased 18% to $1,768,725 from $1,497,542 in 1994.
The increase is attributable to higher returns on the Company's invested cash
and cash equivalents in 1995 and the recognition of a loss on the sale of an
investment security in 1994.

The Company's net loss increased 3% to $23,368,590 in 1995 compared to a net
loss of $22,748,200 for 1994.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

The Company has financed its operations since inception through private and
public sales of Common Stock, investment income, revenue from research
collaborations and grants, and a capital lease. Through December 31, 1996, the
Company had raised $30,762,901 in net proceeds from private sales of Common
Stock, a total of $107,094,723 in net proceeds from three public offerings of
Common Stock, $22,733,986 in net proceeds from a Rights Offering of Common Stock
to existing stockholders, and $4,875,059 from the exercise of stock options and
warrants. It had earned $17,288,477 in investment income and $6,951,409 in
research-related revenue.

                                       22
<PAGE>

At December 31, 1996, the Company had $41,820,232 in cash and cash equivalents,
investment securities and interest receivable. Through December 31, 1996, the
Company had invested a total of $27,314,438 in production facilities, laboratory
and computer equipment, furniture and leasehold improvements. In addition, the
Company has invested $2,309,979 in land for future facilities expansion. The
Company anticipates that its operating expenses will increase in 1997 and
subsequent years as it adds the personnel and facilities associated with
advancing several potential products through development and clinical trials.
Foreseeable incremental costs may include, but are not limited to, those
associated with the Company's own product development, preclinical and clinical
studies, patent filings and administrative activities. In addition, the Company
may incur costs under its joint venture agreement with Suntory Limited of Japan
related to its obligations to develop rPAF-AH. Under provisions of the
development agreement, the Company will be reimbursed for certain of these
costs. However, there can be no assurance that all such costs will be reimbursed
by Suncos Corporation.

The Company expects to continue to negotiate collaborations with other parties
where the work complements that at the Company. These relationships may involve
commitments by the Company to fund some or all of certain research programs over
a defined period. Although corporate collaborations have provided revenue to the
Company in the past, there can be no assurance that similar sources of funds
will be available to the Company in the future. The Company plans to hire the
additional personnel necessary to continue its discovery research, as well as
continue development of its current portfolio of product candidates, and to
continue to modify its existing facilities in the future to complete a
production facility and add additional laboratory and office space. Further
expenditures will be required for additional laboratory, developmental, and
office facilities to accommodate the activities and personnel associated with
discovering new and novel disease mechanisms and developing current and
potential products with a view toward expanding the number of clinical trials in
the future. All these activities will require substantial financial resources.
There can be no assurance that the Company will have sufficient resources to
fund the cost of such activities or that it will be able to obtain additional
resources on acceptable terms or in time to fund any necessary or desirable
expenditures.

The Company anticipates that its existing capital resources should be sufficient
to fund its cash requirements for the next twelve months. However, the amounts
and timing of expenditures will depend on the progress of ongoing research and
development, the rate at which operating losses are incurred, the execution of
development and licensing agreements with potential corporate partners, the
Company's development of products, the FDA regulatory process, and other
factors, many of which are beyond the Company's control. The Company's existing
capital resources will not be sufficient to fund the Company's operation through
commercialization of its first product. The Company will need to raise
substantial additional funds for its programs. It is currently evaluating
several financing alternatives, some of which may involve the sale of additional
stock, commencement of additional corporate partnerships and other methods of
raising operating capital from public, private and corporate sources. The
Company anticipates completion of one or more of these financing events during
1997.

When used in this discussion, the words "believes," "intends," "anticipates,"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. See "Important Factors
Regarding Forward-Looking Statements." Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

                                       23
<PAGE>

Item 8.  Financial Statements and Supplementary Data

                          INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

         Financial Statements                                                            Page in Form 10-K
         --------------------                                                            -----------------

<S>                                                                                                    <C>
         Independent Auditors' Report..................................................................25

         Balance Sheets at December 31, 1996 and 1995..................................................26

         Statements of Operations for the years ended
         December 31, 1996, 1995, and 1994 and the period from
         September 21, 1989 (incorporation) through December 31, 1996..................................27

         Statements of Stockholders' Equity for the years ended December 31,
         1996, 1995, 1994, 1993, 1992, 1991, 1990
         and 1989 (incorporation)...................................................................28-29

         Statements of Cash Flows for the Years Ended December 31, 1996, 1995,
         and 1994 and the period from
         September 21, 1989 (incorporation) through December 31, 1996..................................30

         Notes to Financial Statements..............................................................31-37
</TABLE>

All financial statement schedules have been omitted since the information is not
required or because the information required is included in the financial
statements or the notes thereto.

                                       24
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
ICOS Corporation:


We have audited the accompanying balance sheets of ICOS Corporation (a
development stage company) as of December 31, 1996, and 1995 and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996, and the period from
September 21, 1989 (incorporation) through December 31, 1996. 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 generally accepted auditing
standards. 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 ICOS Corporation as of December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1996, and the period
from September 21, 1989 (incorporation) through December 31, 1996 in conformity
with generally accepted accounting principles.

/s/ KPMG Peat Marwick LLP

Seattle, Washington
January 24, 1997, except for Note 8 which is as of February 6, 1997

                                       25
<PAGE>

                                ICOS CORPORATION
                          (A Development Stage Company)
                                 BALANCE SHEETS


<TABLE>
<CAPTION>

                                                                                     December 31,
                                                                          ------------------------------------
                                                                                1996               1995
                                                                          -----------------   ----------------
<S>                                                                             <C>           <C>
                                     ASSETS
Current assets:
   Cash and cash equivalents                                                    $ 2,159,008   $ 4,256,366
   Investment securities available for sale, at market value [Note 3]            39,511,820    17,013,514
   Interest receivable                                                              149,404       106,548
   Nontrade receivables                                                              92,969        98,396
   Prepaid expenses                                                                 599,752       634,134
                                                                                -----------   -----------
       Total current assets                                                      42,512,953    22,108,958
                                                                                -----------   -----------
Property and equipment, at cost:
   Land                                                                           2,309,979     2,309,979
   Leasehold improvements                                                        13,659,272     7,082,065
   Furniture and equipment                                                       13,631,566     9,534,792
   Assets acquired under capital lease obligations [Note 4]                              --       570,530
                                                                                -----------   -----------
                                                                                 29,600,817    19,497,366
   Less accumulated depreciation and amortization                                13,997,511    10,478,040
                                                                                -----------   -----------
                                                                                 15,603,306     9,019,326
   Construction in progress                                                          23,600     6,366,402
                                                                                -----------   -----------
       Net property and equipment                                                15,626,906    15,385,728
                                                                                -----------   -----------
Other assets                                                                         65,318       240,844
                                                                                -----------   -----------
                                                                                $58,205,177   $37,735,530
                                                                                ===========   ===========
                                         LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                                             $ 1,183,623   $ 1,598,973
   Accrued payroll and benefits                                                     649,562       664,094
   Other accrued expenses                                                         1,104,711     1,635,472
   Deferred research and development revenue [Note 8]                                    --       500,000
   Current installments of obligations under capital lease [Note 4]                      --        44,633
                                                                                -----------   -----------
       Total current liabilities                                                  2,937,896     4,443,172
                                                                                -----------   -----------
Stockholders' equity: [Notes 6 and 7]
   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 39,417,753 at December 31, 1996 and 32,233,608 at December
       31, 1995                                                                     394,177       322,336
   Additional paid-in capital                                                   165,273,054   115,163,010
   Restricted stock                                                                      --      (208,125)
   Net unrealized gain (loss) on investment securities available for sale            10,290       (70,187)
   Deficit accumulated during the development stage                            (110,410,240)  (81,914,676)
                                                                                -----------   -----------
       Total stockholders' equity                                                55,267,281    33,292,358
Commitments [Notes 4, 7, and 8]
                                                                                -----------   -----------
                                                                                $58,205,177   $37,735,530
                                                                                ===========   ===========
</TABLE>


                See accompanying notes to financial statements.

                                       26
<PAGE>

                                ICOS CORPORATION
                          (A Development Stage Company)
                            STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                       Period from
                                                      September 21,
                                                          1989
                                                     (incorporation)
                                                         through
                                                      December 31,                Year Ended December 31,
                                                                       -----------------------------------------------
                                                          1996              1996              1995            1994
                                                      -------------    -------------    -------------    -------------
<S>                                                   <C>              <C>              <C>              <C>
Revenue:

    Collaborative research and development [Note 8]   $   5,500,000    $   2,000,000    $   1,500,000    $          --
    Research grants                                       1,451,409               --               --               --
                                                      -------------    -------------    -------------    -------------

      Total revenue                                       6,951,409        2,000,000        1,500,000               --
                                                      -------------    -------------    -------------    -------------

Operating expenses [Note 4]:

    Research and development [Note 8]                   115,703,021       30,011,417       24,039,185       21,272,072
    General and administrative                           17,952,861        2,554,872        2,482,306        2,834,984
                                                      -------------    -------------    -------------    -------------
      Total operating expenses                          133,655,882       32,566,289       26,521,491       24,107,056
                                                      -------------    -------------    -------------    -------------

      Operating loss                                   (126,704,473)     (30,566,289)     (25,021,491)     (24,107,056)
                                                      -------------    -------------    -------------    -------------

Other income (expense):
    Investment income [Note 3]                           17,288,477        2,070,397        1,768,725        1,497,542
    Interest expense                                       (887,899)            (364)         (52,061)        (124,667)
    Other, net                                             (106,345)             692          (63,763)         (14,019)
                                                      -------------    -------------    -------------    -------------

                                                         16,294,233        2,070,725        1,652,901        1,358,856
                                                      -------------    -------------    -------------    -------------

      Net loss                                        $(110,410,240)   $ (28,495,564)   $ (23,368,590)   $ (22,748,200)
                                                      =============    =============    =============    =============



Net loss per common share                                              $        (.77)   $       (.73)    $        (.88)
                                                                       =============    =============    =============

Weighted average common shares outstanding                                36,804,986       32,194,018       25,945,660
                                                                       =============    =============    =============
</TABLE>

                See accompanying notes to financial statements.

                                       27
<PAGE>

                                ICOS CORPORATION
                          (A Development Stage Company)
                       STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>





                                                                     Common                Additional            Restricted

                                                                      Stock                 paid-in                Stock

                                                            Shares           Amount         capital      Shares           Amount

<S>                                                         <C>            <C>            <C>           <C>            <C>

Issuance of Common Stock at $.02 per share                   5,515,000    $     55,150    $     55,150  $         --   $         --
 Net loss for the period from inception through
 December 31, 1989                                                  --              --              --            --             --
                                                          ------------    ------------    ------------  ------------   ------------

Balances at December 31, 1989                                5,515,000          55,150          55,150            --             --

 Issuance of Common Stock at $.02 per share                    455,000           4,550           4,550            --             --

 Issuance of Common Stock at $3.00 per share, net
   of issuance costs of $2,513,166                          10,752,222         107,522      29,635,979            --             --

 Issuance of Common Stock in payment of note to
 stockholders at $3.00 per share                               300,000           3,000         897,000            --             --

 Repurchase of Common Stock at $.02 per share                  (60,000)           (600)           (600)           --             --

 Net loss for the year ended December 31, 1990                      --              --              --            --             --
                                                          ------------    ------------    ------------  ------------   ------------
Balances at December 31, 1990                               16,962,222         169,622      30,592,079            --             --

 Issuance of Common Stock at $8.00 per share, net
   of issuance costs  of $3,230,856                          4,500,000          45,000      32,724,144            --             --

 Repurchase of Common Stock at $.02 per share                  (74,000)           (740)           (740)           --             --

 Common Stock issued to Cold Spring Harbor Laboratories
   pursuant to a collaboration agreement, at fair
   market value of $18.50 per share                            135,000           1,350       2,496,150       (75,000)    (1,387,500)



 Vesting of restricted Common Stock                                 --              --           3,750            --         69,375


 Issuance of Common Stock from exercise of options at

   $3.00 per share                                              18,885             189          56,466            --             --



 Issuance of Common Stock from exercise of warrants at

   $3.00 per share                                              86,772             868         259,448            --             --


 Compensation related to options granted                            --          12,599              --            --

                                                                                                                                 --

 Net loss for the year ended December 31, 1991

                                                                    --              --              --            --

                                                          ------------    ------------    ------------  ------------   ------------

Balances at December 31, 1991                               21,628,879         216,289      66,140,146       (71,250)    (1,318,125)

 Issuance of Common Stock at $9.00 per share, net of

   issuance costs of $1,780,436                              3,000,000          30,000      25,189,564            --             --



 Retirement of Common Stock at $8.00 per share                (299,561)         (2,996)     (2,394,226)           --             --



 Vesting of restricted Common Stock                                 --              --              --        15,000        277,500


 Issuance of Common Stock from exercise of options at

   $3.00 per share                                             800,012           8,000       2,392,035            --             --


</TABLE>

<TABLE>
<S>                                                          <C>               <C>             <C>         <C>            <C>
 Issuance of Common Stock from exercise of warrants at
   $3.00 per share                                             106,800           1,068         319,333            --             --


 Compensation related to options granted                            --              --          30,235            --             --


 Net loss for the year ended December 31, 1992

                                                                    --              --              --            --             --

                                                          ------------    ------------    ------------  ------------   ------------

 Balances at December 31, 1992                              25,236,130         252,361      91,677,087       (56,250)    (1,040,625)
</TABLE>

<TABLE>
<CAPTION>
                                                                 Net
                                                             unrealized        Deficit
                                                              gain (loss)   accumulated
                                                            on securities   during the          Total
                                                               available     development    stockholders'
                                                               for sale        stage            equity

<S>                                                          <C>               <C>             <C>
Issuance of Common Stock at $.02 per share                 $         --              --    $    110,300

 Net loss for the period from inception through

 December 31, 1989                                                   --        (359,952)       (359,952)

                                                           ------------    ------------    ------------

Balances at December 31, 1989                                        --        (359,952)       (249,652)




 Issuance of Common Stock at $.02 per share                          --              --           9,100




 Issuance of Common Stock at $3.00 per share, net

   of issuance costs of $2,513,166                                   --              --      29,743,501




 Issuance of Common Stock in payment of note to
 stockholders at $3.00 per share                                     --              --         900,000




 Repurchase of Common Stock at $.02 per share                        --              --          (1,200)



 Net loss for the year ended December 31, 1990                       --      (2,775,090)     (2,775,090)
                                                           ------------    ------------    ------------
Balances at December 31, 1990                                        --      (3,135,042)     27,626,659


 Issuance of Common Stock at $8.00 per share, net
   of issuance costs  of $3,230,856                                  --              --      32,769,144


 Repurchase of Common Stock at $.02 per share                        --              --          (1,480)


 Common Stock issued to Cold Spring Harbor Laboratories
   pursuant to a collaboration agreement, at fair
   market value of $18.50 per share                                  --              --       1,110,000


 Vesting of restricted Common Stock                                  --              --          69,375


 Issuance of Common Stock from exercise of options at
   $3.00 per share                                                   --              --          56,655


 Issuance of Common Stock from exercise of warrants at
   $3.00 per share                                                   --              --         260,316


 Compensation related to options granted                             --              --          12,599


 Net loss for the year ended December 31, 1991                       --      (6,412,786)     (6,412,786)
                                                           ------------    ------------    ------------
Balances at December 31, 1991                                        --      (9,547,828)     55,490,482
 Issuance of Common Stock at $9.00 per share, net of
   issuance costs of $1,780,436                                      --              --      25,219,564


 Retirement of Common Stock at $8.00 per share                       --              --      (2,397,222)


 Vesting of restricted Common Stock                                  --              --         277,500


 Issuance of Common Stock from exercise of options at
   $3.00 per share                                                   --              --       2,400,035


 Issuance of Common Stock from exercise of warrants at
   $3.00 per share                                                   --              --         320,401


 Compensation related to options granted                             --              --          30,235


 Net loss for the year ended December 31, 1992
                                                                     --      (8,312,128)     (8,312,128)
                                                           ------------    ------------    ------------
 Balances at December 31, 1992                                       --     (17,859,956)     73,028,867
</TABLE>

                                       28
<PAGE>

<TABLE>
<S>                                                        <C>                 <C>            <C>             <C>
  Repurchase of Common Stock at $.02 per share                   (12,500)            (125)            (215)              --
  Vesting of restricted Common Stock                                  --               --               --           15,000
  Issuance of Common Stock from exercise of options
   at prices ranging from $3.00 to $8.00 per share                 4,998               50           17,765               --
  Issuance of Common Stock from exercise of
   warrants at $3.00 per share                                    59,650              596          178,354               --
  Issuance of Common Stock from exercise of
   warrants in exchange for Common Stock at prices
   ranging from share $5.25 to $6.10 per                         326,838            3,269           (3,269)              --
  Compensation related to options granted                             --               --           30,235               --
  Net loss for the year ended December 31, 1993                       --               --               --               --
                                                           -------------    -------------    -------------    -------------
Balances at December 31, 1993                                 25,615,116          256,151       91,899,957          (41,250)

  Issuance of Common Stock at $3.625 per share, net
   of issuance costs of $500,072                               6,425,000           64,250       22,726,303               --
  Vesting of restricted Common Stock                                  --               --               --           15,000
  Issuance of Common Stock from exercise of options
   at prices ranging from $3.00 to $8.00 per share                12,998              130           43,549               --
  Compensation related to options granted                             --               --           30,235               --
  Net unrealized loss on investment securities
   available for sale                                                 --               --               --               --
  Net loss for the year ended December 31, 1994
                                                                      --               --               --               --
                                                           -------------    -------------    -------------    -------------
Balances at December 31, 1994                                 32,053,114          320,531      114,700,044          (26,250)
  Issuance costs related to sale of common stock in 1994              --               --          (56,567)              --
  Vesting of restricted Common Stock                                  --               --               --           15,000
  Issuance of Common Stock from exercise of options
   at prices ranging from $4.00 to $7.625 per share              166,019            1,660          504,145               --
  Issuance of Common Stock from exercise of
   warrants at $3.00 per share                                     5,250               53           15,480               --
  Issuance of Common Stock from exercise of warrants in
   exchange for Common Stock at prices ranging from
   $4.95 to $5.13 per share                                        9,225               92              (92)              --
  Net unrealized gain on investment securities
   available for sale                                                 --               --               --               --
  Net loss for the year ended December 31, 1995                       --               --               --               --
                                                           -------------    -------------    -------------    -------------
 Balances at December 31, 1995                                32,233,608          322,336      115,163,010          (11,250)
  Issuance of Common Stock at $7.625 per share, net
   of issuance costs of $3,506,485                             6,900,000           69,000       49,037,015               --
  Vesting of restricted Common Stock                                  --               --               --           11,250
  Issuance of Common Stock from exercise of options
   at prices ranging from $3.00 to $8.00 per share               284,145            2,841        1,073,029               --
  Net unrealized gain on investment securities
   available for sale                                                 --               --               --               --
  Net loss for the year ended December 31, 1996                       --               --               --               --
                                                           -------------    -------------    -------------    -------------
 Balances at December 31, 1996                             $  39,417,753    $     394,177    $ 165,273,054               --
                                                           =============    =============    =============    =============
</TABLE>
<TABLE>
<S>                                                        <C>                 <C>            <C>             <C>

  Repurchase of Common Stock at $.02 per share                        --               --               --             (340)
  Vesting of restricted Common Stock                             277,500               --               --          277,500
  Issuance of Common Stock from exercise of options
   at prices ranging from $3.00 to $8.00 per share                    --               --               --           17,815
  Issuance of Common Stock from exercise of
   warrants at $3.00 per share                                        --               --               --          178,950
  Issuance of Common Stock from exercise of
   warrants in exchange for Common Stock at prices
   ranging from share $5.25 to $6.10 per                              --               --               --               --
  Compensation related to options granted                             --               --               --           30,235
  Net loss for the year ended December 31, 1993                       --               --      (17,937,930)     (17,937,930)
                                                           -------------    -------------    -------------    -------------
Balances at December 31, 1993                                   (763,125)              --      (35,797,886)      55,595,097
  Issuance of Common Stock at $3.625 per share, net
   of issuance costs of $500,072                                      --               --               --       22,790,553
  Vesting of restricted Common Stock                             277,500               --               --          277,500
  Issuance of Common Stock from exercise of options
   at prices ranging from $3.00 to $8.00 per share                    --               --               --           43,679
  Compensation related to options granted                             --               --               --           30,235
  Net unrealized loss on investment securities
   available for sale                                                 --         (968,920)              --         (968,920)
  Net loss for the year ended December 31, 1994
                                                                      --               --      (22,748,200)     (22,748,200)
                                                             -----------    -------------    -------------    -------------
Balances at December 31, 1994                                   (485,625)        (968,920)     (58,546,086)      55,019,944
  Issuance costs related to sale of common stock in 1994              --               --               --          (56,567)
  Vesting of restricted Common Stock                             277,500               --               --          277,500
  Issuance of Common Stock from exercise of options
   at prices ranging from $4.00 to $7.625 per share                   --               --               --          505,805
  Issuance of Common Stock from exercise of
   warrants at $3.00 per share                                        --               --               --           15,533
  Issuance of Common Stock from exercise of warrants in
   exchange for Common Stock at prices ranging from
   $4.95 to $5.13 per share                                           --               --               --               --
  Net unrealized gain on investment securities
   available for sale                                                 --          898,733               --          898,733
  Net loss for the year ended December 31, 1995                       --               --      (23,368,590)     (23,368,590)
                                                             -----------    -------------    -------------    -------------
 Balances at December 31, 1995                                  (208,125)         (70,187)     (81,914,676)      33,292,358
  Issuance of Common Stock at $7.625 per share, net
   of issuance costs of $3,506,485                                    --               --               --       49,106,015
  Vesting of restricted Common Stock                             208,125               --               --          208,125
  Issuance of Common Stock from exercise of options
   at prices ranging from $3.00 to $8.00 per share                    --               --               --        1,075,870
  Net unrealized gain on investment securities
   available for sale                                                 --           80,477               --           80,477
  Net loss for the year ended December 31, 1996                       --      (28,495,564)     (28,495,564)
                                                             -----------    -------------    -------------    -------------
 Balances at December 31, 1996                                        --    $      10,290    $(110,410,240)   $  55,267,281
                                                             ===========    =============    =============    =============


</TABLE>


                See accompanying notes to financial statements.

                                       29
<PAGE>

                                ICOS CORPORATION
                          (A Development Stage Company)
                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                             Period from
                                                            September 21,
                                                                 1989
                                                            (incorporation)
                                                               through
                                                             December 31,               Years Ended December 31,
                                                                             -----------------------------------------------
                                                                 1996             1996             1995             1994
                                                             -------------    -------------    -------------    -------------
<S>                                                          <C>              <C>              <C>              <C>
Cash flows from operating activities:
    Net loss                                                 $(110,410,240)   $ (28,495,564)   $ (23,368,590)   $ (22,748,200)
                                                             -------------    -------------    -------------    -------------
    Adjustments to reconcile net loss to net cash used in
       operating activities:
       Depreciation and amortization                            13,997,511        3,519,471        3,120,248        2,774,634
       Amortization of deferred rent                              (475,000)              --               --               --
       Amortization of investment premiums/discounts               682,696         (381,171)         130,705               --
       (Gain) loss on sale of investment securities             (1,372,906)          19,417           14,108          205,866
       Amortization of restricted stock                          1,387,500          208,125          277,500          277,500
       Compensation related to stock options granted               103,304               --               --           30,235
       Common Stock issued in payment of research and
       development costs                                         1,110,000               --               --               --
       Changes in operating assets and liabilities:
         Deferred research and development revenue                      --         (500,000)         500,000               --
         Interest receivable                                      (149,404)         (42,856)          56,455          327,548
         Nontrade receivables                                      (92,969)           5,427           (7,686)          47,649
         Prepaid expenses                                         (599,752)          34,382          (13,506)         (49,516)
         Other assets                                                   --               --               --            6,557
         Accounts payable                                        1,183,623          354,650          228,216          325,359
         Accrued payroll, benefits and other accrued             1,754,273         (545,293)         378,010          617,233
         expenses
                                                             -------------    -------------    -------------    -------------
            Net cash used in operating activities              (92,881,364)     (25,823,412)     (18,684,540)     (18,185,135)
                                                             -------------    -------------    -------------    -------------
Cash flows from investing activities:
    Purchases of investment securities                        (410,669,590)     (50,883,841)     (15,532,891)     (25,868,830)
    Maturities of investment securities                         92,907,775               --
                                                                                                  14,000,000        7,788,862
    Sales of investment securities                             278,950,496       14,827,766       12,862,663       47,208,665
    Acquisitions of  property and equipment                    (26,035,216)      (4,530,649)      (6,426,679)      (2,731,185)
    (Increase) decrease in other assets                            (65,318)         175,526          (11,612)
                                                             -------------    -------------    -------------    -------------
            Net cash (used in) provided by investing
            activities                                         (64,911,853)     (26,411,198)      (1,319,657)      18,379,418
                                                             -------------    -------------    -------------    -------------
Cash flows from financing activities:
    Proceeds from issuance of Common Stock                     159,691,609       49,106,015          (56,567)      22,790,552
    Proceeds from exercise of options and warrants               2,477,927        1,075,870          521,338           43,679
    Principal payments on obligations under capital lease       (3,589,201)         (44,633)        (947,673)        (703,170)
    Proceeds from note payable to stockholders                     900,000               --               --               --
    Deferred rent payment received                                 475,000               --               --               --
    Common Stock retired                                            (3,110)              --               --               --
                                                             -------------    -------------    -------------    -------------
            Net cash provided by (used in) financing
            activities                                         159,952,225       50,137,252         (482,902)      22,131,061
                                                             -------------    -------------    -------------    -------------
            Net increase (decrease) in cash and cash
            equivalents                                          2,159,008       (2,097,358)     (20,487,099)      22,325,344
Cash and cash equivalents at beginning of period                        --        4,256,366       24,743,465        2,418,121
                                                             -------------    -------------    -------------    -------------
Cash and cash equivalents at end of period
                                                             $   2,159,008    $   2,159,008    $   4,256,366    $  24,743,465
                                                             =============    =============    =============    =============
Supplemental disclosure of cash flow information:
    Cash paid for interest
                                                             $     959,466    $         364    $      52,061    $     124,667
Supplemental disclosure of noncash financing and investing
 activities:
    Assets acquired under capital lease obligations              3,589,201               --               --               --
    Acquisition of property and equipment financed
    through accounts payable                                            --               --          770,000               --
    Exercise of stock options funded by retirement of
    previously issued Common Stock                               2,397,132               --               --               --
    Common Stock issued in payment of note payable
       to stockholders                                             900,000               --               --               --
                                                             =============    =============    =============    =============
</TABLE>

See accompanying notes to financial statements.

                                       30
<PAGE>

                                ICOS CORPORATION
                          (A Development Stage Company)

                          Notes to Financial Statements
                           December 31, 1996 and 1995


       (1)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

            (a)  BASIS OF PRESENTATION

                On September 21, 1989, ICOS Corporation (the "Company") was
                incorporated to develop new medications and therapeutics for the
                treatment of diseases. The Company began research and
                development activities in September 1990.

            (b)  USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

                The preparation of financial statements in conformity with
                generally accepted accounting principles requires management to
                make estimates and assumptions that affect the reported amounts
                of assets and liabilities and 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.

            (c)  CASH AND CASH EQUIVALENTS

                All highly liquid short-term investments purchased with a
                maturity of three months or less are considered to be cash
                equivalents.

            (d)  INVESTMENT SECURITIES

                The Company's investment securities are classified as
                available-for-sale and carried at market value, with unrealized
                gains and losses excluded from the statement of operations and
                reported in a separate component of stockholders' equity. Gross
                realized gains and losses on the sales of investment securities
                are determined on the specific identification method and
                included in investment income.

            (e)  PROPERTY AND EQUIPMENT

                Depreciation of furniture and equipment is provided on the
                straight-line method over the assets' useful lives (three to
                seven years).

                Assets acquired under capital lease obligations are stated at
                the lower of the present value of minimum lease payments
                discounted at the interest rate implicit in the lease at the
                beginning of the lease term or the fair market value at the
                inception of the lease. Assets acquired under capital lease
                obligations are depreciated over the assets' useful lives or the
                lease term, if shorter (generally three to five years).

            (f)  RESEARCH AND DEVELOPMENT COSTS

                Research and development costs are charged to expense as
                incurred.

            (g)  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.
                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.

                                       31
<PAGE>

            (h)  NET LOSS PER COMMON SHARE

                Net loss per common share is based on the weighted average
                number of common shares outstanding during the period. Net loss
                per common share does not include the effect of common share
                equivalents as their impact is antidilutive.

            (i)  STOCK BASED COMPENSATION

                Prior to January 1, 1996, the Company accounted for its stock
                option plans in accordance with the provisions of Accounting
                Principles Board ("APB") Opinion No. 25, Accounting for Stock
                Issued to Employees, and related interpretations. As such,
                compensation expense is recorded on the date of grant only if
                the current market price of the underlying stock exceeded the
                exercise price. On January 1, 1996, the Company adopted
                Statement of Financial Accounting Standards ("SFAS") No. 123,
                Accounting for Stock-Based Compensation, which permits entities
                to recognize as expense over the vesting period the fair value
                of all stock-based awards on the date of grant. Alternatively,
                SFAS No. 123 also allows entities to continue to apply the
                provisions of APB Opinion No. 25 and provide pro forma net
                income and pro forma earnings per share disclosures for employee
                stock option grants made in 1995 and future years as if the
                fair-value-based method defined in SFAS No. 123 had been
                applied. The Company has elected to continue to apply the
                provisions of APB Opinion No. 25 and provide the pro forma
                disclosure provisions of SFAS No. 123.

       (2)   FINANCING

            The Company anticipates that its existing capital resources should
            be sufficient to fund its cash requirements for the next twelve
            months. The Company's existing capital resources will not be
            sufficient to fund the Company's operation through commercialization
            of its first product. The Company will need to raise substantial
            additional funds for its programs. The Company is currently
            evaluating several financing alternatives, some of which may involve
            the sale of additional stock, commencement of additional corporate
            partnerships, and other methods of raising capital from public,
            private and corporate sources. The Company anticipates completion of
            one or more of these financing events in 1997.


       (3)   INVESTMENT SECURITIES

            The following table summarizes the Company's investment securities
at December 31, 1996 and 1995:
<TABLE>
<CAPTION>

                                           Gross       Gross
                                        unrealized   unrealized
                         Market value     gains        losses     Amortized cost
                         ------------     -----        ------     --------------
<S>                      <C>           <C>           <C>           <C>
December 31, 1996:

U.S. Treasury Notes      $ 8,456,440   $     3,714   $    12,351   $ 8,465,077

Corporate debt
securities                24,227,275         7,806            --    24,219,469

U.S. government
agency mortgage-backed
securities                 6,828,105        11,121            --     6,816,984
                         -----------   -----------   -----------   -----------
Total                    $39,511,820   $    22,641   $    12,351   $39,501,530
                         ===========   ===========   ===========   ===========

</TABLE>

                                       32
<PAGE>

<TABLE>
<CAPTION>
                  December 31, 1995:
                  <S>                            <C>               <C>                 <C>             <C>
                  Corporate debt
                  securities                     $17,013,514       $ 1,945             $72,132         $17,083,701
                                                 -----------       -------             -------         -----------

                  Total                          $17,013,514       $ 1,945             $72,132         $17,083,701
                                                 ===========       =======             =======         ===========
</TABLE>


                Amortized cost and estimated market value of debt securities at
December 31, 1996, by contractual maturity, are shown below:
<TABLE>
<CAPTION>

Maturing within                  Market value       Amortized cost
---------------                  ------------       --------------
<S>                               <C>                  <C>
1 year                            $30,021,728          $30,018,981
5 years                             5,653,150            5,649,436
10 years                                    -                    -
more than 10 years                  3,836,942            3,833,113
</TABLE>

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

                Investment income includes interest of $2,089,814, $1,782,833,
                and $1,703,408 earned on investments for 1996, 1995, and 1994,
                respectively; and capital losses of $19,417, $14,108, and
                $205,866 for 1996, 1995, and 1994, respectively.


       (4)   Leases

            At December 31, 1996, the Company had no assets acquired under
            capital lease. At December 31, 1995, the cost of the assets acquired
            under capital lease was $570,530, and related accumulated
            amortization was $468,505.

            The Company leases office and laboratory space under noncancellable
            operating leases which expire in 1997 and 1999. These leases include
            options to either extend the terms for two additional five-year
            periods, or to purchase the properties at the end of the lease
            terms.

            Total rent expense was $1,311,062, $1,349,184, and $1,219,249 for
            1996, 1995 and 1994, respectively, and $6,560,758 for the period
            from September 21, 1989 (incorporation) through December 31, 1996.

            Future minimum lease payments under noncancellable operating leases,
            excluding provision for annual increases tied to the consumer price
            index are as follows:
<TABLE>
<CAPTION>

                  <S>                                                                    <C>
                  1997                                                                   $ 948,673
                  1998                                                                     276,000
                  1999                                                                      27,978
                                                                                           -------
                  Total minimum lease payments                                          $1,252,651
                                                                                        ==========
</TABLE>

            In January 1997, the Company entered into a lease agreement to lease
            15,985 additional square feet. Annual lease payments are
            approximately $200,000. The lease expires in 2002 and includes the
            option to extend the terms for an additional four-year period.

                                       33
<PAGE>

       (5)   Federal Income Taxes

            Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>


                                                              December 31, 1996          December 31, 1995
                                                              -----------------          -----------------

                  <S>                                          <C>                            <C>
                  Depreciation                                 $   2,032,000                $  1,489,000
                  Research agreement expensed for book               306,000                     554,000
                  Other                                              700,000                     425,000
                  Net operating loss carryforwards                36,114,000                  26,579,000
                  Research and experimentation tax credits         3,213,000                   2,598,000
                                                               -------------                 -----------
                  Deferred tax asset                              42,365,000                  31,645,000
                  Deferred tax valuation allowance               (42,365,000)                (31,645,000)
                                                                ------------                 -----------

                  Total                                         $          0                 $         0
                                                                ============                 ===========

</TABLE>


            The increases in the valuation allowance for deferred tax assets of
            $10,720,000, $7,915,000, and $8,958,000 in 1996, 1995, and 1994,
            respectively, are primarily attributable to increases in net
            operating loss carryforwards that could not be utilized. At December
            31, 1996, the Company has net operating tax loss carryforwards
            available to offset future taxable income as follows:


                     Year of expiration
                     ------------------


                       2005        $    1,027,000
                       2006             5,671,000
                       2007            12,367,000
                       2008            17,003,000
                       2009            21,507,000
                       2010            21,039,000
                       2011            27,603,000
                                     ------------
                                     $106,217,000
                                     ============

             At December 31, 1996, the Company also had available approximately
             $3,213,000 in research and experimentation tax credits to offset
             future tax liabilities. These credits expire from 2006 to 2011.

             Under provisions of the Internal Revenue Code, utilization of the
             Company's net operating loss carryforwards may be subject to
             limitation if it should be determined that a greater than 50%
             ownership change were to occur in the future.


       (6)   PREFERRED STOCK

            The Company has the authority to issue up to 2,000,000 shares of
            Preferred Stock in one or more series. The Company's Board of
            Directors has the authority to fix the powers, designations,
            preferences, and relative participating, optional, or other rights
            thereof, including dividend rights, conversion rights, voting
            rights, redemption terms, liquidation preferences, and the number of
            shares constituting any series, without any further vote or action
            by the Company's stockholders. The issuance of Preferred Stock in
            certain circumstances may have the effect of delaying or preventing
            a change in control of the Company. Such issuance with voting and
            conversion rights may adversely affect the voting power of the
            Common Stock holders. The Company has no shares of Preferred Stock
            outstanding. In the future, the Company may issue Preferred Stock as
            part of its overall financing strategy.

                                       34
<PAGE>

       (7)   COMMON STOCK TRANSACTIONS

            (a)  INCREASE IN AUTHORIZED SHARES OF COMMON STOCK

                On May 8, 1996, the stockholders of the Company approved an
                amendment to Article 4 of the Company's Restated Certificate of
                Incorporation to increase the number of authorized shares of
                Common Stock from 50,000,000 shares to 100,000,000 shares.

            (b)  PUBLIC OFFERING

                In May 1996, the Company completed a public offering of
                6,900,000 shares of Common Stock at $7.625 per share, with the
                Company receiving net proceeds of $49,106,015. The net proceeds
                from this offering are being used for continued research and
                product development, funding of preclinical testing and clinical
                trials, expansion of the Company's facilities and general
                corporate purposes.

            (c)  STOCK WARRANTS

                In connection with private sales of Common Stock in June 1990,
                the Company granted stock warrants to the sales agent to
                purchase 985,000 shares of Common Stock at $3.00 per share for a
                five-year term. All of these warrants had been exercised as of
                December 31, 1995.

             (d)  STOCK OPTION PLANS

                At December 31, 1996, the Company has two stock option plans,
                which are discussed below. The Company applies APB Opinion No.
                25 in accounting for its plans and, no compensation cost has
                been recognized related to its stock options. Had the Company
                determined compensation cost based on the fair value at the
                grant date for its stock options under SFAS No. 123, the
                Company's net loss would have been increased to the pro forma
                amounts indicated below:
<TABLE>
<CAPTION>

                                                         1996             1995
                                                    ---------------- --------------

<S>                                                 <C>              <C>
Net loss                              As reported   $   28,495,564   $   23,368,590
                                      Pro forma         30,481,080       24,592,444

Net loss per share                    As reported   $         0.77   $         0.73
                                      Pro forma               0.83             0.76
</TABLE>

                Pro forma net loss and net loss per share reflect only options
                granted in 1996 and 1995. Therefore, the full impact of
                calculating compensation cost for stock options under SFAS No.
                123 is not reflected in the pro forma net loss and net loss per
                share amounts presented above because compensation cost is
                reflected over the options' vesting period and compensation cost
                for options granted prior to January 1, 1995 is not considered.

                The per share weighted-average fair value of stock options
                granted during 1996 and 1995 was $4.06 and $2.83 on the date of
                grant using the Black Scholes option-pricing model with the
                following weighted-average assumptions: 1996 - expected dividend
                yield 0.0%, risk-free interest rate of 6.3%, expected volatility
                of 40%, and an expected life of 7.4 years; 1995 - expected
                dividend yield 0.0%, risk-free interest rate of 7.5%, expected
                volatility of 55%, and an expected life of 7.1 years.


                EMPLOYEE STOCK OPTION PLAN

                The Company has an incentive and nonqualified stock option plan
                (the "Employee Plan"), under which 8,500,000 shares of Common
                Stock have been reserved for grants to various executive,
                scientific, and administrative personnel of the Company. All
                incentive stock options are granted with an exercise price not
                less than 100% of the fair market value of the Common Stock on

                                       35
<PAGE>

                the grant date. Nonqualified stock options are generally granted
                with an exercise price equal to 100% of the fair market value of
                the Common Stock on the grant date; however, in no case are they
                granted with an exercise price of less than 85% 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 date of
                grant and have a term of ten years from the date of grant.

                A summary of stock options under the Employee Plan follows:
<TABLE>
<CAPTION>

                                                             Incentive stock options       Nonqualified stock options
                                                                      outstanding                 outstanding
                                                    -----------------------------------------------------------------------------
                                                                  Weighted-average                      Weighted-average
                                                    Number         exercise price           Number      exercise price
                                                    of shares         per share            of shares      per share
                                                    -----------------------------------------------------------------------------
                <S>                                <C>                  <C>               <C>                 <C>
                Balance at December 31, 1993       1,539,631            $7.68               655,314          $6.18
                Options granted in 1994              916,000             5.71               132,750           6.00
                Cancellations in 1994               (136,861)            8.17               (86,663)          7.15
                Options exercised in 1994            (12,998)            3.36                     -             -
                                                    --------                              ---------

                Balance at December 31, 1994       2,305,772             6.90               701,401           6.02
                Options granted in 1995              768,115             4.29               102,389           4.00
                Cancellations in 1995               (157,007)            8.51              (135,248)          8.35
                Options exercised in 1995           (166,019)            3.05                     -             -
                                                   ----------                             ---------

                Balance at December 31, 1995       2,750,861             6.30               668,542           6.26
                Options granted in 1996              773,683             7.72               120,705           7.46
                Cancellations in 1996                (48,594)            6.75                     -             -
                Options exercised in 1996           (117,477)            4.88              (166,668)          3.00
                                                  -----------                              ---------

                Balance at December 31, 1996       3,358,473             6.68               622,579           6.31
                                                   =========                                =======
</TABLE>
                At December 31, 1996, 3,231,891 shares remained reserved and
                available for grant under the Employee Plan.

                DIRECTOR STOCK OPTION PLAN

                The Company has a Stock Option Plan for Nonemployee Directors
                (the "Director Plan") under which 950,000 shares of Common Stock
                have been reserved for issuance to directors who are not
                employees of the Company. The Director Plan provides for an
                initial grant and automatic annual grants thereafter to each
                nonemployee director of a number of nonqualified stock options
                determined by dividing $100,000 (increased by $10,000 each year
                starting in 1993) by the market price of the Common Stock on the
                grant date. The exercise price of the options will be the
                closing market price of the Common Stock on the grant date.
                Initial options granted under the Director Plan become
                exercisable 50% after the director has served for one year from
                the date of initial election to the Board and 100% after two
                years. Automatic annual grants are fully vested on the date of
                grant. The options have a term of ten years but cannot be
                exercised later than two years after termination of service as a
                director.

                During 1996, 1995, and 1994, respectively, options to purchase
                142,224, 217,980, and 144,000 shares at weighted average
                exercise prices of $7.875, $4.77, and $5.00 per share,
                respectively, were granted under the Director Plan. At December
                31, 1996, options to purchase 708,984 shares were outstanding.
                No options have been exercised or canceled under this plan.

                                       36
<PAGE>

                The following table summarizes information about stock options
outstanding under the Employee Plan and Director Plan at December 31, 1996:
<TABLE>
<CAPTION>

                                         Options Outstanding                            Options Exercisable
                        ------------------------------------------------------    --------------------------------
                                          Weighted-average
                                              remaining     Weighted-average                      Weighted-average
  Range of exercise           Number      contractual life    exercise price          Number      exercise price
        prices             outstanding                                              exercisable
  -------------------    -----------------------------------------------------    --------------------------------
<S>                       <C>                  <C>             <C>                   <C>            <C>
  $3.000-$4.625           1,050,499            7.65            $ 4.1186              618,375        $ 4.1983
   4.750-6.000            1,429,539            6.97              5.7018            1,061,303          5.6798
   6.125-7.500              957,192            7.49              7.1604              612,735          7.1702
   7.625-12.500             954,999            8.23              8.1250              486,786          8.2558
  12.750-19.750             297,807            5.08             13.7789              297,807         13.7789
-------------------    ----------------- ----------------- -----------------    ---------------- ---------------
   3.000-19.750           4,690,036            7.37              6.6250            3,077,006          6.8276
</TABLE>

            (e)  OTHER STOCK OPTIONs

                Outside of the Employee Plan and Director Plan, the Company also
                has stock options outstanding, which were granted to one
                investor in June 1990, to purchase 50,000 shares of Common Stock
                at $3.00 per share. The options have terms and conditions
                substantially identical to those granted under the Employee
                Plan.

       (8)   SCIENTIFIC COLLABORATION AGREEMENTS

            In October 1991, the Company entered into a collaboration agreement
            with Glaxo Wellcome (formerly Glaxo Group Ltd. and Glaxo, Inc.), an
            international pharmaceutical group based in the United Kingdom. The
            agreement provided for three phases of collaboration, including
            research, development, and commercialization of potential products.
            Pursuant to the agreement, Glaxo Wellcome paid the Company $2
            million to reimburse the Company for certain research costs during
            1992. In early 1997, the terms of this collaboration agreement were
            changed. Under the new terms, the Company and Glaxo Wellcome both
            have the right to continue research and development of compounds
            that inhibit PDE's. Under the new terms, the Company retains all
            commercial rights in the compounds arising from the collaboration as
            PDE inhibitors in exchange for future royalties payble to Glaxo
            Wellcome on sales of such compounds. Under the modified terms, Glaxo
            Wellcome is free to pursue research and development of PDE
            inhibitors independently of the Company.

            In April 1995, the Company entered into a collaborative agreement
            with Abbott Laboratories, a worldwide manufacturer of health care
            products. The collaboration focuses on the development of small
            molecules that modulate, by an intracellular interaction, the
            activity of certain cell adhesion molecules. Under the agreement,
            the Company will have exclusive rights in the United States for all
            products for the treatment of cancer, while Abbott Laboratories will
            have exclusive rights outside the United States for all products for
            the treatment of cancer and exclusive worldwide rights for all other
            products. The Company will receive research funding, and milestone
            and royalty payments for products, other than cancer treatment
            products, developed by Abbott Laboratories as a result of the
            collaboration. Each party will be responsible for the development,
            registration, and commercialization of its products in its
            respective territory. In addition, the agreement provides the
            Company with a library of chemical compounds for use in its own
            discovery programs. The Company received advance payment in 1995 for
            research to be conducted in 1996 under the agreement.

            In February 1997, the Company and Suntory Limited of Japan
            ("Suntory") formed a new joint venture company, Suncos Corporation
            ("Suncos"). The joint venture will develop and commercialize
            rPAF-AH. In forming Suncos, the Company granted a license for the
            rPAF-AH technology to Suncos, and Suntory made an initial capital
            contribution of $30 million. Both parties have committed to jointly
            fund all development activities and expenses of Suncos once the
            initial capital contribution of $30 million from Suntory has been
            used. Suncos will be managed jointly by Suntory and the Company. The
            Company has rights to market rPAF-AH in the United States and
            Suntory has market rights in Japan. Each company will pay royalties
            to Suncos for its territorial marketing rights. Suncos will retain
            all rights to market the product in territories outside the United
            States and Japan.

                                       37
<PAGE>

Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure

Not applicable.

                                       38
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information requested by this item is incorporated by reference from the
sections labeled "Election of Directors" and "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" in the Company's Proxy Statement for the
Annual Meeting of Stockholders to be held on May 7, 1997.

ITEM 11.  EXECUTIVE COMPENSATION

The information requested by this item is incorporated by reference from the
sections labeled "Compensation of Directors," "Executive Compensation," "Stock
Options," "Exercise of Options," "Report of the Compensation Committee on
Executive Compensation," "Stock Price Performance Graph," and "Employment
Contracts, Termination of Employment and Change of Control Arrangements" in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
May 7, 1997.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information requested by this item is incorporated by reference from the
section labeled "Security Ownership of Certain Beneficial Owners and Management"
in the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held on May 7, 1997.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information requested by this item is incorporated by reference from the
section labeled "Certain Relationships and Related Transactions" in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
May 7, 1997.

                                       39
<PAGE>

                                     PART IV

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

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

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

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

                           See Index to Financial Statements accompanying those
                           statements under Item 8 of this Form 10-K.

                  3.       Exhibits
                           --------

                           See Index to Exhibits filed herewith.

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

                  No reports on Form 8-K were filed during the fourth
                  quarter of the fiscal year ended December 31, 1996.

                                       40
<PAGE>

<TABLE>
<CAPTION>


                                Index to Exhibits
                                -----------------
                                                                                                                            Page
                                                                                                                            ----

      <S>                                                                                                                  <C>
      3.1          Restated Certificate of Incorporation of ICOS Corporation                                                *
      3.2          Restated Bylaws of ICOS Corporation                                                                      *
      4.1          Restated Certificate of Incorporation of ICOS Corporation (included in Exhibit 3.1)
     10.5          Collaboration Agreement dated October 3, 1991 by and among Glaxo Group
                   Limited, Glaxo Inc. and ICOS Corporation                                                                 U
     10.6          Joint Research Agreement dated as of October 16, 1991 by and between Cold Spring Harbor
                   Laboratory and ICOS Corporation                                                                          U
     10.7          ICOS Corporation 1989 Stock Option Plan (Amended and Restated as of January 8, 1997)                   #####
     10.8          ICOS Corporation 1991 Stock Option Plan for Non-employee Directors (Amended and Restated as
                   of January 8, 1997)                                                                                    #####
     10.9          Master Lease of Personal Property dated as of August 15, 1990 between Security Pacific
                   Leasing Inc. and ICOS Corporation                                                                       ***
     10.10         Industrial Real Estate Lease dated September 15, 1992 between WRC Properties, Inc.
                   and ICOS Corporation                                                                                     #
     10.11         Industrial Real Estate Lease dated August 1, 1992 between Trinity at Canyon
                   Park and ICOS Corporation                                                                                #
     10.12         Real Estate Purchase and Sale Agreement dated October 30, 1992 between Canyon
                   Park Business Center Limited Partnership and ICOS Corporation                                            #
     10.13         Industrial Real Estate Lease dated August 6, 1993 between John H. Harland Company and ICOS
                   Corporation                                                                                              ##
     10.14         Employment Agreement dated as of  September 16, 1993 between Gary Wilcox and ICOS Corporation
     10.15         R&D Collaboration/License Agreement dated April 1, 1995 between Abbott Laboratories and ICOS
                   Corporation                                                                                             ****
     10.16         Collaboration Agreement dated December 11, 1995 between Gryphon Sciences and ICOS Corporation
     10.17         Amendment, entered into as of January 24, 1997, to Collaboration Agreement between Glaxo
                   Group Limited, Glaxo Wellcome Inc. (f/k/a/ Glaxo Inc.) and ICOS Corporation.                            ####
     10.18         Shareholders Agreement, entered into December 18, 1996, among ICOS Corporation, Suntory
                   Limited and Suncos Corporation.                                                                         ####
     10.19         PAF-AH License Agreement, dated February 6, 1997, between ICOS Corporation and Suncos
                   Corporation                                                                                             ####
     10.20         Development and Supply Agreement, dated February 6, 1997, among ICOS Corporation, Suntory
                   Limited and Suncos Corporation                                                                          ####
     10.21         ICOS Services Agreement, dated February 6, 1997, between ICOS Corporation and Suncos
                   Corporation                                                                                             ####
     10.22         ICOS License Agreement, dated February 6, 1997, between Suncos Corporation and ICOS
                   Corporation                                                                                             ####
     23.1          Consent of KPMG Peat Marwick LLP                                                                         45
     27.1          Financial Data Schedule                                                                                #####

</TABLE>


                  SEE NEXT PAGE FOR EXPLANATORY NOTES

                                       41
<PAGE>

<TABLE>
-----------------
<S>     <C>
  *      Filed as an exhibit to the Company's Registration Statement (Registration No. 333-3312) effective May 7, 1996 and
         incorporated herein by reference.
  U      Filed as an exhibit to the Company's Registration Rtatement (Registration No. 33-43540) effective December 4, 1991 and
         incorporated herein by reference.
  **     Filed as an exhibit to the Company's Registration Statement (Registration No. 333-08485) effective July 19, 1996 and
         incorporated herein by reference.
  ***    Filed as an exhibit to the Company's Registration Statement (Registration No. 33-40022) effective June 6, 1991 and
         incorporated herein by reference.
  #      Filed as an exhibit to the Company's Form 10-K Annual Report on March 29, 1993 and incorporated herein by reference.
  ##     Filed as an exhibit to the Company's Form 10-Q Quarterly Report on November 2, 1993 and incorporated herein by reference.
  ****   Filed as an exhibit to the Company's Form 10-Q Quarterly Report on May 12, 1995 and incorporated herein by reference.
  ###    Filed as an exhibit to the Company's Form 10-K Annual Report on March 29, 1996 and incorporated herein by reference.
  ####   Filed with this document.  Confidential portions of this exhibit were filed separately with the Securities and Exchange
         Commission pursuant to an Application for Confidential Treatment.
  #####  Filed with this document.
</TABLE>

                                       42
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Bothell,
State of Washington, on the 28th day of March, 1997.

                           ICOS CORPORATION
                           (Registrant)




                           By: /S/ GEORGE B. RATHMANN
                               --------------------------
                               George B. Rathmann
                               Chairman of the Board of Directors,
                               Chief Executive Officer and President

                                       43
<PAGE>

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.
<TABLE>
<CAPTION>

                  Signature                                   Title                                                Date
                  ---------                                   -----                                                ----
<S>                                                           <C>                                            <C>

                                                             Chairman of the Board of Directors,
                  /S/ GEORGE B. RATHMANN                     Chief Executive Officer and President           March 28, 1997
-----------------------------------------------------------                                                  --------------
                    George B. Rathmann


                    /S/ GARY L. WILCOX                       Director and Executive Vice President,          March 28, 1997
-----------------------------------------------------------  Operations                                      --------------
                      Gary L. Wilcox


                 /S/ HOWARD S. MENDELSOHN                     Chief Accounting Officer                       March 28, 1997
-----------------------------------------------------------                                                  --------------
                   Howard S. Mendelsohn


                     /S/ FRANK T. CARY                        Director                                       March 28, 1997
-----------------------------------------------------------                                                  --------------
                       Frank T. Cary


                   /S/ JAMES L. FERGUSON                      Director                                       March 28, 1997
-----------------------------------------------------------                                                  --------------
                     James L. Ferguson


                 /S/ WILLIAM H. GATES, III                    Director                                       March 28, 1997
-----------------------------------------------------------                                                  --------------
                   William H. Gates, III


                   /S/ JANICE M. LECOCQ                       Director                                       March 28, 1997
-----------------------------------------------------------                                                  --------------
                     Janice M. LeCocq


                   /S/ DAVID V. MILLIGAN                      Director                                       March 28, 1997
-----------------------------------------------------------                                                  --------------
                     David V. Milligan


                   /S/ ROBERT W. PANGIA                       Director                                       March 28, 1997
-----------------------------------------------------------                                                  --------------
                     Robert W. Pangia


                /S/ ALEXANDER B. TROWBRIDGE                   Director                                       March 28, 1997
-----------------------------------------------------------                                                  --------------
                  Alexander B. Trowbridge


                   /S/ WALTER B. WRISTON                      Director                                       March 28, 1997
-----------------------------------------------------------                                                  --------------
                     Walter B. Wriston

</TABLE>

                                       44