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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


Form 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT UNDER SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934          
|  
|   |  | For the fiscal year ended December 31,
    2002                                             
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission File Number 0-29993

IntraBiotics Pharmaceuticals, Inc.

(Exact name of Registrant as specified in its
charter)


|                                                                   |  |                                      
|------------------------------------------------------------------ |  | -------------------------------------
|Delaware                                                           |  | 94-3200380                           
|(State or Other Jurisdiction
    of Incorporation or Organization) |  | (IRS Employer
    Identification No.)
|                                                                  
|2483 East Bayshore Road, Suite 100, Palo
    Alto, CA              |  | 94303                                
|(Address of principal executive
    offices)                       |  | (Zip code)                           

Registrants telephone number, including
area code:

(650) 526-6800


Securities registered under Section 12(b)
of the Exchange Act:

None.


Securities registered under Section 12(g)
of the Exchange Act:

Common Stock, par value $.001 per
share


(Title of Class)


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

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

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

The aggregate market value of the Common Stock,
held by non-affiliates of the registrant, based on the closing
price on June 28, 2002 as reported by the Nasdaq National
Market was approximately $32,019,000. The determination of
affiliate status for the purposes of this calculation is not
necessarily a conclusive determination for other purposes. The
calculation excludes approximately 12,987,000 shares held by
directors, officers and stockholders whose ownership exceeds
five percent of the Registrants outstanding common stock
as of June 28, 2002. Exclusion of these shares should not
be construed to indicate that such person controls, is
controlled by or is under common control with the Registrant.
The number of shares outstanding of the registrants Common
Stock, par value $0.001 per share, as of March 14, 2003 was
39,231,351 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Part III  Portions of the
registrants definitive proxy statement to be issued in
conjunction with the registrants annual stockholders
meeting to be held on June 5, 2003 are incorporated by
reference into this Form 10-K.



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TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                             
|              | Item 2. Properties                                                                           
|              | Item 3. Legal Proceedings                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II      
|              | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters            
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7A. Quantitative and Qualitative Disclosure About Market Risk                           
|              | 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                                      
|              | Item 14. Disclosure Controls and Procedures                                                  
|PART IV      
|              | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|EXHIBIT 3.1  
|EXHIBIT 10.2 
|EXHIBIT 10.3 
|EXHIBIT 10.22
|EXHIBIT 10.25
|EXHIBIT 10.26
|EXHIBIT 10.27
|EXHIBIT 10.28
|EXHIBIT 10.29
|EXHIBIT 23.1 
|EXHIBIT 99.1 



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PART I

This report contains forward-looking
statements. These forward-looking statements are based on our
current expectations about our business and industry, and
include, but are not limited to, statements and concerns about
plans to: continue development of our current product candidate;
conduct clinical trials with respect to product candidates; seek
regulatory approvals; address certain markets; engage third
party manufacturers to supply our commercial requirements;
market, sell and distribute our products; and evaluate
additional product candidates for subsequent clinical and
commercial development. In some cases, these statements may be
identified by terminology such as may,
will, should, expects,
plans, anticipates,
believes, estimates,
predicts, potential, or
continue or the negative of such terms and other
comparable terminology. These statements involve known and
unknown risk and uncertainties that may cause our or our
industrys results, levels of activity, performance or
achievements to be materially different from those expressed or
implied by the forward-looking statements. Factors that may
cause or contribute to such differences include, among others,
those discussed under the captions Business,
Risks Related to Our Business and
Managements Discussion and Analysis of Financial
Conditions and Results of Operations. Except as required
by law, we undertake no obligation to update any forward-looking
statement to reflect events after the date of this
report.






|        |         
|------- | --------
|Item 1. | Business

BUSINESS

IntraBiotics Pharmaceuticals, Inc. is a
biopharmaceutical company focused on developing iseganan HCl
oral solution for the prevention of ventilator-associated
pneumonia (VAP).

In 2002, we were primarily developing iseganan
HCl for the prevention of ulcerative oral mucositis. The
top-line results of our 545-patient phase III clinical
trial of iseganan HCl oral solution to treat patients undergoing
radiotherapy to prevent or reduce ulcerative oral mucositis
showed no significant difference between iseganan and placebo in
the primary or secondary end-points. The top-line results of our
509-patient phase III clinical trial of iseganan HCl oral
solution to treat patients undergoing aggressive chemotherapy to
prevent or reduce ulcerative oral mucositis showed no
significant difference between iseganan and placebo in the
primary end-point. Iseganan appears to be safe when applied to
the oral cavity. We are not pursuing further development of
iseganan HCl to treat oral mucositis at this time.

Previously, we have completed two earlier stage
trials of iseganan HCl for other indications: to prevent
pneumonia in patients requiring breathing assistance from a
mechanical ventilator and to treat respiratory infections in
patients with cystic fibrosis. The data from each of these
trials support the advancement to the next stage of human
clinical testing for each of these two indications. In February
2003, we announced plans to begin working on a phase II/III
clinical trial of iseganan HCl oral solution to prevent VAP. If
we are able to obtain additional financing, we anticipate having
the first patient enrolled before the end of the third quarter
of 2003.

Since commencing operations in 1994, we have not
generated any revenue from product sales, and we have funded our
operations primarily through the private sale of equity
securities, including a private placement of 5.9 million
shares of common stock resulting in net proceeds of
approximately $13.9 million in February 2002, a settlement
of $3.6 million from a vendor in January 2002, funds
received from a terminated collaboration agreement, the proceeds
of equipment financing arrangements and our initial public
offering of common stock in March 2000. We have incurred losses
in each year since inception, and we expect to incur substantial
losses for at least the next several years. We expect that
losses may fluctuate, and that such fluctuations may be
substantial. As of December 31, 2002, our accumulated
deficit was approximately $200.3 million. We will need to
raise additional funds in the future to continue our operations.

In April 2002, we acquired Apothogen, Inc. for
450,000 shares of our common stock. Concurrently with the
closing of the acquisition, Ernest Mario, Ph.D. joined
IntraBiotics as our Chairman and Chief Executive Officer.
Dr. Mario also acquired 1.2 million shares of our
common stock in a simultaneously completed private

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placement resulting in net proceeds to us of
$5.0 million. In January 2003, Dr. Mario stepped down
from the position of our Chief Executive Officer, while
remaining the Chairman of the Board. Henry J.
Fuchs, M.D., our President and Chief Operating Officer, was
appointed the Chief Executive Officer at that time.


In October 2002, we announced a restructuring
plan, which included a reduction in force. As a result of the
restructuring, we planned to reduce our expenses from
approximately $7.5 million per quarter to approximately
$1.5 million per quarter. The restructuring plan was
substantially completed by year-end and included a reduction of
approximately 26 positions, or 70% of our workforce. In
addition, we terminated some of our contracts, including our
real estate leases, which we believe will not be necessary for
our future operations. We have recorded charges related to the
impairment of equipment and the acquired workforce totaling
$1.6 million, which are included in our operating expenses
for the year ended December 31, 2002.

In February 2003, we entered into agreements with
certain investors providing for the issuance, in a private
placement financing, subject to shareholder approval of newly
created Series A convertible preferred stock, and warrants
to purchase common stock, for an aggregate gross purchase price
of $3.5 million. The primary purpose of completing the
private placement is to provide funds to allow us to conduct and
complete our clinical trial of iseganan HCl for the prevention
of VAP. A special meeting of stockholders at which the approval
and ratification of the private placement is solicited is
scheduled to take place on April 3, 2003. If the
stockholders approve the transaction, we anticipate completing
the private placement during the second quarter 2003. On March
19, 2003, we received an alternative financing proposal
from Mr. C. Robert Coates. We are currently evaluating Mr.
Coates proposal.

Iseganan HCl Oral Solution for Prevention of
Ventilator-Associated Pneumonia (VAP)

Iseganan HCl oral solution is a potential new
drug for the prevention of VAP. Iseganan is a novel
antimicrobial peptide whose properties may be well suited for
use in preventing VAP. Iseganan kills a wide spectrum of
bacteria known to cause pneumonia and to date no evidence of
resistance to iseganan has emerged in our early stage clinical
trials. VAP is a common infection occurring among patients in
the intensive care unit. Patients who require artificial
ventilation are vulnerable to developing pneumonia as a
consequence of the aspiration of bacteria-laden saliva. Prior
clinical trials using a variety of other antibiotics have
demonstrated that the incidence of VAP can be reduced through
prophylactic decontamination of the oral cavity. We believe
conventional antibiotics are not widely prescribed to prevent
VAP because of concerns for the development of antibiotic
resistance, and there are currently no approved therapeutics
specifically for the prevention of VAP. As a consequence,
patients who develop VAP incur extended stays in the intensive
care unit and increased hospital charges. In the United States,
over 400,000 patients are artificially ventilated each year for
at least 48 hours and are vulnerable to developing VAP.

In 2001, a phase I and IIa trial of iseganan
HCl oral solution in mechanically ventilated patients evaluating
safety and antimicrobial activity was completed. In February
2003, we began work on our new phase II/III trial. Single
doses of iseganan HCl were well tolerated in clinical studies in
mechanically ventilated patients, and were shown to effect
significant reductions in the level of bacteria in the oral
cavity of cancer patients as well as patients who require
artificial ventilation. Iseganan HCl reduced the levels of oral
microbial flora by more than 100-fold compared to pre-treatment
baseline levels after a single 9 mg oral-topical dose. The
phase IIa study evaluating the safety and antimicrobial
efficacy of iseganan HCl oral solution administered for up to
five days demonstrated that iseganan HCl oral solution was well
tolerated and provided a significant antimicrobial effect in
ventilated patients. We believe, these results support further
development of iseganan HCl oral solution for the prevention of
VAP. The phase II/III trial is designed to be a 500
patient, double blind, placebo controlled study, which is
anticipated to enroll the first patient before the end of the
third quarter of 2003 if we obtain financing to conduct the
trial. Preliminary data from this trial would be expected in the
second quarter of 2004. We cannot be certain that iseganan HCl
oral solution will prove to be safe or effective in the
prevention of VAP, or will receive regulatory approvals.

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Iseganan HCl Solution for Inhalation for
Treatment of Respiratory Infections

We believe iseganan HCl may be effective in
treating respiratory infections in cystic fibrosis (CF)
patients. Iseganan HCl has been formulated as a solution for
inhalation by patients with CF. Since iseganan is a broad
spectrum, rapidly acting antimicrobial agent with a low
propensity to result in antimicrobial resistance, we believe
iseganan HCl is well suited for this indication.

Two phase I studies of iseganan HCl solution
for inhalation, administered as a single dose or up to five
doses, have enabled us to establish the dose tolerance and
further develop the formulation for this product candidate.
These studies also demonstrated that iseganan HCl solution for
inhalation was well tolerated when administered to patients with
CF. However, we cannot be certain that after further study
iseganan HCl solution for inhalation will prove to be safe or
effective in treating respiratory infections, or will receive
regulatory approvals. In addition, we are currently focusing our
resources on the VAP program and are not expending significant
resources on the program for respiratory infections in CF
patients.

Ramoplanin Ointment for the Eradication of
Nasal Staphylococcus Aureus

The commercialization and development rights for
this formulation of ramoplanin were returned to Biosearch Italia
S.p.A. in April 2002.

Our Preclinical Research Programs

Prior to our reduction in force, we were
conducting research focused on discovering and developing
compounds with novel chemical structures and mechanisms of
antimicrobial activity against bacteria or fungi. We have filed
patent applications on these compounds. In May 2002, we sold the
two pre-clinical anti-infective programs to Micrologix Biotech
Inc. for cash of $400,000 and 750,000 shares of Series A
preferred stock of Micrologix.

Strategic Relationships



| |                                              
| | ---------------------------------------------
| | Biosearch Italia S.p.A., Gerenzano,
    Italy

In May 1998, we entered into a license agreement
with Biosearch Italia, under which we had exclusive rights in
the U.S. and Canada to develop and commercialize products
containing certain formulations of ramoplanin for the treatment
or prevention of human disease.

In May 2001, we announced an amendment to this
agreement. Under the new terms of the agreement, Biosearch
Italia reimbursed us for ongoing clinical trial expenses during
a three-month transition period, ending August 31, 2001.
During this period, Biosearch Italia assumed responsibility for
the clinical development of ramoplanin oral powder at its own
expense. In exchange for our clinical development expenses and
efforts to date, we will receive a royalty on future net sales
of ramoplanin in North America, if it is successfully developed.
Biosearch Italia waived all of our future milestone payments and
obligations for the development of oral formulations of
ramoplanin. Rights for the development and commercialization of
topical formulations of ramoplanin, which were retained under
certain conditions of the agreement, reverted back to Biosearch
Italia in April 2002.



| |                                                    
| | ---------------------------------------------------
| | PolyPeptide Laboratories A/S,
    Hillerød, Denmark

In January 1997, we entered into both a
Development Supply Agreement and a Purchase Supply Agreement
with PolyPeptide Laboratories A/S, for the development of
manufacturing processes for iseganan HCl and for the clinical
and commercial manufacture and supply of iseganan HCl, as a bulk
drug substance. Under these agreements, we made payments to
PolyPeptide upon achievement of certain development milestones
and upon receipt of materials to be used in clinical trials. As
of December 31, 2002, these payments totaled
$8.0 million.

In December 2002, we reached an agreement with
PolyPeptide to terminate the Development Supply Agreement, the
Purchase Supply Agreement, and a related purchase order
agreement entered into by the

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parties in September 1998 for the purchase of
35kg of iseganan HCl. Under this termination agreement, we paid
Polypeptide $4.7 million upon execution of the termination
agreement, assigned letters of credit totaling $547,000 and will
pay an additional $250,000 upon delivery and acceptance of
lot I of drug substance (seven kg), which is expected
sometime in the second quarter of 2003. As part of our cost
cutting efforts, Polypeptide agreed to deliver completed lots of
drug substance (lots H1-H4); to complete manufacture and
deliver certain lots of drug substance (lots I1-I3), and to
deliver partially completed lots of drug substance (lots J,
K, and L). In addition, we agreed to have the completed drug
substance and the partially completed lots stored at Polypeptide
at a cost of $50,000 per year for five years.




| |                                                
| | -----------------------------------------------
| | The Regents of the University of
    California

In April 1994, we entered a license agreement
with The Regents of the University of California, under which we
have exclusive rights to develop and commercialize
Protegrin-based products. In addition to a licensing fee, we are
obligated to make payments to the Regents upon the occurrence of
specific development milestones. These milestone payments are
anticipated to total $200,000 if all research and development
goals are achieved. We will also make royalty payments to the
Regents based on sales of Protegrin-based products.

We may terminate the agreement upon written
notice. We are obligated to diligently pursue the development of
Protegrin-based products or the Regents may terminate the
agreement.

Manufacturing

We intend to use contract manufacturers to
prepare our drugs instead of developing this capability
internally. Until the fourth quarter of 2002, we contracted with
PolyPeptide as a single source for supply of bulk drug substance
of iseganan HCl for use in the clinical trials. PolyPeptide
manufactured iseganan HCl on a pilot scale to our
specifications. We currently have sufficient quantities of
iseganan HCl to complete the current clinical trial for the
prevention of VAP. By using third-party manufacturers we can
leverage their expertise and capital investment.

As of the end of 2002, we no longer have a supply
agreement with PolyPeptide. If future contract manufacturers are
unable or fail to produce the required quantities of our drug
candidate for clinical trial use on a timely basis, at
commercially reasonable prices, our future clinical trials and
our product development efforts will be delayed. If these
facilities become unavailable for any reason, if our contract
manufacturers fail to comply with the FDAs current good
manufacturing practices, or if our contract manufacturers
terminate their agreements with us, we would need to find an
alternative source for manufacturing our drug candidates.
Contract manufacturers often encounter difficulties in scaling
up production, including problems involving production yields,
quality control, quality assurance and shortage of qualified
personnel. If our contract manufacturers are unable to scale up
production to meet our commercial needs, our potential revenues
may be adversely affected.

Intellectual Property

We own two U.S. patents covering iseganan.
Together, these patents contain claims to compositions of
matter, pharmaceutical compositions and methods of use,
including the treatment or prevention of oral mucositis. These
patents expire no earlier than 2015. In addition, we are either
the owner or exclusive licensee from The Regents of the
University of California of seven other U.S. patents
covering related antimicrobial peptides and/or their uses.
Applications covering iseganan and the related antimicrobial
peptides, as well as their uses, are either pending or have
issued in major foreign jurisdictions. We also own two pending
U.S. applications directed to specific uses of iseganan.

We cannot guarantee that patents will be issued
as a result of any patent application or that patents that have
issued will be sufficient to protect our technology or products.
We cannot predict the enforceability or scope of any issued
patent or those that may issue in the future. Moreover, others
may independently develop similar technologies or duplicate the
technology we have developed. We also rely on trade secrets and
proprietary know-how for protection of certain of our
intellectual property. We cannot guarantee that our
confidentiality agreements provide adequate protection or
remedies in the event of unauthorized use or

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disclosure of our intellectual property. Third
parties may assert infringement or other claims against us. Even
if these claims are without merit, defending a lawsuit takes
significant time, may be expensive and may divert management
attention from other business concerns and if unsuccessful, we
may be forced to license the intellectual property.


Marketing and Sales

We currently have no specific sales and marketing
infrastructure for iseganan HCl oral solution for the prevention
of VAP. We are evaluating opportunities to partner with other
pharmaceutical companies to develop and commercialize our
product candidate. We cannot guarantee that we will successfully
develop or commercialize our product candidate, achieve
significant market penetration, or generate any revenues from
our product.

Competition

Our competitors include fully integrated
pharmaceutical companies and biotechnology companies. We are
aware that several of these companies are actively engaged in
research and development in the areas related to antibiotic
development, including some companies that address the same
disease indication as we address. Many of these companies have
substantially greater experience, financial and other resources
than we do. In addition, they may have greater experience in
developing drugs, obtaining regulatory approvals and
manufacturing and marketing products. We believe the principal
bases for competition for our drug candidate are potential
effectiveness, price and reimbursement status, and ease of
administration and side effect profile. We cannot give any
assurances that we can effectively compete with these other
pharmaceutical and biotechnology companies.

Government Regulation

Governmental authorities in the U.S. and other
countries extensively regulate, among other things, the
research, development, testing, manufacture, labeling,
promotion, advertising, distribution, and marketing, of our
products. The FDA regulates drugs, including antibiotics, under
the Federal Food, Drug, and Cosmetic Act and its implementing
regulations. Failure to comply with the applicable
U.S. requirements may subject us to administrative or
judicial sanctions, such as FDA refusal to approve pending new
drug applications, warning letters, product recalls, product
seizures, total or partial suspension of production or
distribution, injunctions, and/or criminal prosecution.

The steps required before a drug may be marketed
in the U.S. include:



| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | submission to the FDA of an investigational new
    drug exemption for human clinical testing, which must become
    effective before human clinical trials may commence;
|
| |  | adequate and well-controlled clinical trials to
    establish the safety and efficacy of the drug for each
    indication;                                               
|
| |  | submission to the FDA of a new drug application;
    and                                                                                                                 
|
| |  | FDA review and approval of the new drug
    application.                                                                                                                 

An investigational new drug application
automatically becomes effective 30 days after receipt by the
FDA, unless before that time the FDA raises concerns or
questions about issues such as the conduct of the trials as
outlined in the investigational new drug exemption. In such a
case, the investigational new drug application sponsor and the
FDA must resolve any outstanding FDA concerns or questions
before clinical trials can proceed. We cannot be sure that
submission of an investigational new drug application will
result in the FDA allowing clinical trials to commence.

Clinical trials typically are conducted in three
sequential phases, but the phases may overlap or be combined.
Phase III trials usually further evaluate clinical efficacy and
test further for safety by using the drug in its final form in
an expanded patient population. We cannot assure you that
phase I, phase II, or phase III testing will be
completed successfully within any specified period of time, if
at all. Furthermore, we, or the

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FDA may suspend clinical trials at any time on
various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.


Assuming successful completion of the required
clinical testing, the results of the pre-clinical studies and of
the clinical trials, together with other detailed information,
including information on the manufacture and composition of the
drug, are submitted to the FDA in the form of a new drug
application requesting approval to market the product for one or
more indications. Before approving a new drug application, the
FDA usually will inspect the facility or the facilities at which
the drug is manufactured, and will not approve the product
unless compliance with current good manufacturing practices is
satisfactory. If the FDA determines the new drug application and
the manufacturing facilities are acceptable, the FDA will issue
an approval letter. If the FDA determines the new drug
application submission or manufacturing facilities are not
acceptable, the FDA will outline the deficiencies in the
submission and often will request additional testing or
information. Notwithstanding the submission of any requested
additional information, the FDA ultimately may decide that the
new drug application does not satisfy the regulatory criteria
for approval. The testing and approval process requires
substantial time, effort, and financial resources, and we cannot
be sure that any approval will be granted on a timely basis, if
at all. After approval, certain changes to the approved product,
such as adding new indications, manufacturing changes, or
additional labeling claims are subject to further FDA review and
approval.

If regulatory approval is obtained, we will be
required to comply with a number of post-approval requirements.
For example, as a condition of approval of the new drug
application, the FDA may require post marketing testing and
surveillance to monitor the drugs safety or efficacy. In
addition, holders of an approved new drug application are
required to report certain adverse reactions, if any, to the
FDA, and to comply with certain requirements concerning
advertising and promotional labeling for their products. Also,
quality control and manufacturing procedures must continue to
conform to current good manufacturing practices after approval,
and the FDA periodically inspects manufacturing facilities to
assess compliance with current good manufacturing practices.
Accordingly, manufacturers must continue to expend time, money,
and effort in the area of production and quality control to
maintain compliance with current good manufacturing practices.

We use and will continue to use third-party
manufacturers to produce our products in clinical and commercial
quantities, and we cannot be sure that future FDA inspections
will not identify compliance issues at the facilities of our
contract manufacturers that may disrupt production or
distribution, or require substantial resources to correct. In
addition, discovery of problems with a product may result in
restrictions on a product, manufacturer, or holder of an
approved new drug application, including withdrawal of the
product from the market. Also, new government requirements may
be established that could delay or prevent regulatory approval
of our products under development.

The FDA provides periods of marketing exclusivity
for new drugs that are the subject of an approved new drug
application. Iseganan HCl oral solution, if approved, may
qualify for marketing exclusivity, which would prevent any
competitors from seeking approval of a generic version until
five years after approval of our product candidate. Even if a
product is approved and granted exclusivity, it does not prevent
the approval and marketing of competing products.

Outside the U.S., our ability to market our
products will also be contingent upon receiving marketing
authorizations from the appropriate regulatory authorities. The
foreign regulatory approval process includes all the risks
associated with FDA approval described above. The requirements
governing conduct of clinical trials and marketing authorization
vary widely from country to country.

Under European Union regulatory systems,
marketing authorizations may be submitted either under a
centralized or decentralized procedure. The centralized
procedure provides for the grant of a single marketing
authorization that is valid for all European Union member
states. The decentralized procedure provides for mutual
recognition of national approval decisions. Under this
procedure, the holder of a national marketing authorization may
submit an application to the remaining member states. Within
90 days of receiving the applications and assessment
report, each member state must decide whether to recognize
approval.

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We plan to choose the appropriate route of
European regulatory filing in an attempt to accomplish the most
rapid regulatory approvals. However, the chosen regulatory
strategy may not secure regulatory approvals or approvals of the
chosen product indications. In addition, these approvals, if
obtained, may take longer than anticipated. We cannot assure you
that any of our product candidates will prove to be safe or
effective, will receive regulatory approvals, or will be
successfully commercialized.

Employees

As of March 15, 2003, we had eight full-time
employees, three of whom are engaged in product development
activities and five of who were engaged in general and
administrative activities. Our employees are not represented by
a collective bargaining agreement.

Website Address

Our website address is www.intrabiotics.com. We
make available free of charge through our website, our annual
report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to these
reports as soon as reasonably practicable after filing.

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RISKS RELATED TO OUR BUSINESS

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

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

We have never generated revenue from product
sales and have incurred significant net losses in each year
since inception. We incurred net losses of $45.6 million in
2000, $67.4 million in 2001 and $34.5 million in 2002.
As of December 31, 2002, our accumulated deficit was
approximately $200.3 million. We expect to continue to
incur substantial additional losses for the foreseeable future,
and we may never become profitable. To date, we have financed
our operations primarily through the private sale of equity
securities, funds received from a terminated collaboration
agreement, the proceeds of equipment financing arrangements, and
our initial public offering of common stock in March 2000. We
have begun a new phase II/III trial of iseganan HCl oral
solution for the prevention of ventilator-associated pneumonia
(VAP) in the first quarter of 2003. We may also develop iseganan
for other indications in the future or acquire or license other
products.

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

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

At December 31, 2002, our cash and cash
equivalents, including short-term investments, were
$13.3 million, which included restricted cash of $250,000.
During the fourth quarter of 2002, we entered into several
settlement agreements to terminate some of our contracts,
including our real estate leases, supply agreements with
Polypeptide Laboratories A/S and debt agreement with Silicon
Valley Bank, which resulted in aggregate cash payments of
approximately $22.3 million. We believe that our existing
cash, cash equivalents and investments will be sufficient to
meet our current operating and capital requirements for at least
the next fifteen months. However, we have based this estimate on
assumptions that may prove to be wrong. For example, we are
assuming that we will have iseganan HCl in active clinical
development over the next twelve months without any significant
staff or other resources expansion. In addition, in February
2003, we entered into agreements to sell to certain investors,
in a private placement, Series A preferred stock and
warrants to purchase common stock, subject to stockholder
approval and ratification of the transaction. If we are able to
secure stockholder approval, and the transaction is successfully
completed, we will receive aggregate gross proceeds of
approximately $3.5 million. We believe that this additional
capital would be sufficient to meet our operating and capital
needs for an additional three months. However, we cannot assure
you that the stockholders will approve the transaction, or that
our current estimates and assumptions will remain unchanged. To
the extent we pursue the development of iseganan for other
indications or acquire or license other products, we will need
to raise additional capital to fund clinical development costs.
For the years ended December 31, 2000, 2001 and 2002, net
cash used for operating activities was $50.4 million,
$53.6 million, and $26.3 million, respectively. Our
future liquidity and capital requirements will depend on many
factors, including timing, cost and progress of our VAP trial,
our evaluation of, and decisions with respect to, our strategic
alternatives, costs associated with, the regulatory approvals,
securing in-licensing opportunities, purchasing additional
products or drug candidates and conducting pre-clinical research
and clinical development of those drug candidates.

We believe that additional financing will be
required in the future to fund our operations, complete our VAP
trial, conduct any other possible iseganan HCl trials or
commercialize our current and any future product candidates. We
do not know whether additional financing will be available when
needed or on

8



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##### Table of Contents



acceptable terms, if at all. If we are unable to
raise additional financing, including our currently proposed
private placement, when necessary, we may have to delay our
product development efforts or any product acquisitions or be
forced to cease operations. Any additional equity financing will
be dilutive to existing stockholders, and debt financing, if
available, may involve restrictive covenants. Collaborative
arrangements may require us to relinquish our rights to certain
of our technologies, drug candidates or marketing territories.


Our only late stage clinical candidate failed
to meet the primary endpoint in our phase III clinical
trials for the prevention of oral mucositis in cancer
patients.

We had only one late stage lead product, iseganan
HCl, which failed in the phase III trial conducted on
patients with head and neck cancer receiving radiotherapy and
the phase III trial conducted on patients with cancer
receiving aggressive chemotherapy. Our other indications for
iseganan are in an early stage of clinical development. We
initiated work on a phase II/III trial for the prevention of VAP
in the first quarter of 2003. If this trial fails to meet its
primary endpoint, we may not be able to continue to operate as a
going concern and maybe forced to cease operations.

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

Before obtaining regulatory approvals for the
commercial sale of any products, we must demonstrate through
pre-clinical research and clinical trials that our drug
candidates are safe and effective for use in humans. If we are
unable to demonstrate the safety and efficacy of a drug
candidate, we will be unable to obtain regulatory approval from
the FDA and to commercialize the drug candidate, and we will be
unable to generate product revenue from that candidate for that
indication. Clinical trials are expensive and time-consuming to
conduct, and the timing and outcome of these trials is
uncertain. A number of new drugs have shown promising results in
early clinical trials, but subsequently failed to establish
sufficient safety and efficacy data to obtain necessary
regulatory approvals. A number of companies have suffered
significant setbacks in advanced clinical trials, even after
promising results in earlier trials. For example, in May 2002,
we announced that our phase III clinical trial of iseganan
HCl oral solution to treat patients undergoing radiotherapy to
prevent or reduce oral mucositis had failed to demonstrate any
difference between iseganan and placebo in the primary or
secondary endpoints, and in September 2002, we announced that
our phase III clinical trial of iseganan HCl oral solution
to treat patients undergoing aggressive chemotherapy to prevent
or reduce oral mucositis had failed to demonstrate any
difference between iseganan and placebo in the primary endpoint.
We believe that iseganan does not provide clinical benefit for
these patients. We have begun work on a phase II/III trial
for prevention of VAP and are focusing our resources on this
trial. If this trial fails to meet its primary endpoint, and we
do not acquire or license any additional product candidates, we
will not be able to commercialize any products or generate any
revenue. In addition, as a result of our focus on the VAP trial
and the delay in clinical development of any other drug
candidates, our ability to generate product revenue will be
delayed and we do not expect to generate product revenue in the
near term.

If our collaborative partners assisting in our
clinical trials fail to appropriately manage our clinical trial,
the trial could be delayed or could fail.

We rely on contract research organizations to
assist us in managing and monitoring our clinical trial. The FDA
may inspect some of our clinical investigational sites, our
collaborative partners records and our facility and files
to determine if the clinical trial is conducted according to
good clinical practices. If the FDA determines that the trial is
not in compliance with good clinical practices, we may be
required to repeat the clinical trial. If our contract research
organizations fail to perform under our agreements with them, we
may face delays in completing our clinical trial or failure of
our clinical program.

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

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



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

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

In addition to initial regulatory approval, our
drug candidate will be subject to extensive and rigorous ongoing
domestic and foreign government regulation. Any approvals, once
obtained, may be withdrawn if compliance with regulatory
requirements is not maintained or safety problems are
identified. Failure to comply with these requirements may
subject us to stringent penalties.

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

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

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

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

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



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

10



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We will be able to protect our proprietary rights
from unauthorized use by third parties only to the extent that
our proprietary rights are covered by valid and enforceable
patents or are effectively maintained as trade secrets.

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

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

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

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

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

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



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

Physicians will not recommend our products until
such time as clinical data or other factors demonstrate the
safety and efficacy of our drugs as compared to other
treatments. In practice, competitors may be more

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effective in marketing their drugs. Even if the
clinical safety and efficacy of our product is established,
physicians may elect not to recommend its use. For example,
physicians may be reluctant to prescribe widespread use of our
product because of concern about developing bacterial strains
that are resistant to our drugs, or because of the cost of our
drug.


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

We are highly dependent on our management and
technical staff. Competition for personnel is intense. If we
lose the services of any of our senior management or technical
staff, we may be unable to successfully complete our planned
clinical trial for VAP. We do not maintain key person life
insurance and do not have employment agreements with our
management and technical staff. In October 2002 we announced a
restructuring, including a reduction in force of approximately
70% of our workforce. In order to pursue any future product
development, marketing and commercialization, we will need to
hire additional qualified scientific personnel to perform
research and development and personnel with expertise in
clinical testing, government regulation, manufacturing,
marketing and finance. We may not be able to attract and retain
personnel on acceptable terms given the competition for such
personnel among biotechnology, pharmaceutical and other
companies.

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

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

Our directors, executive officers, principal
stockholders and affiliated entities beneficially own, in the
aggregate, approximately 36% of our outstanding common stock.
These stockholders, if acting together, may be able to
significantly influence any matters requiring approval by our
stockholders, including the election of directors and the
approval of mergers or other business combination transactions.

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

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

These provisions:



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

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

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

On November 12, 2002, we received a letter
from Nasdaq advising us that our common stock had not met
Nasdaqs minimum bid price requirement for 30 consecutive
trading days and that, if we were unable to demonstrate
compliance with this requirement during the 90 calendar days
ending February 10, 2003, our common stock may be subject
to delisting from the Nasdaq National Market. On March 19,
2003, we received an additional letter from Nasdaq advising us
that our grace period for regaining compliance has been extended
in accordance with Nasdaqs new rules, until May 12,
2003. The Nasdaq National Market also requires maintenance of
minimum stockholders equity of $10 million. Without
raising additional equity capital, it is likely that our
stockholders equity will fall below the $10 million
minimum during 2003. If we are unable to meet the Nasdaq
National Market requirements, at the discretion of Nasdaq, our
common stock may be transferred to the Nasdaq SmallCap Market.
Transferring to the Nasdaq SmallCap Market would provide us with
an additional grace period to satisfy the minimum requirement
bid price requirement provided that we meet the Nasdaq SmallCap
Markets other listing requirements, including the
maintenance of stockholders equity of at least
$5 million; however, we would nevertheless be subject to
certain adverse consequences described below. In addition, in
such event we would still be required to satisfy various listing
maintenance standards for our common stock to be quoted on the
Nasdaq SmallCap Market, including the minimum bid price
requirement after expiration of any grace periods. If we fail to
meet such standards, our common stock would likely be delisted
from the Nasdaq SmallCap Market and trade on the
over-the-counter bulletin board, commonly referred to as the
pink sheets. Such alternatives are generally
considered as less efficient markets and would seriously impair
the liquidity of our common stock and limit our potential to
raise future capital through the sale of our common stock, which
could materially harm our business.

While we are planning to effect a reverse stock
split in the effort to regain compliance, we cannot assure you
that we will be able to secure stockholder approval of the
proposed stock split or, if effected, the stock split will be
sufficient to maintain our stock price on a sustainable basis.
In addition, as we expend our capital resources on our clinical
trial, we may have difficulty complying with other Nasdaq
listing requirements, such as the minimum stockholders
equity requirement for example.

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



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

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

The market prices for securities of biotechnology
companies in general have been highly volatile and our stock may
be subject to volatility. During 2002, our closing stock price
ranged from a low of $0.27 to a high of $4.80. The following
factors, in addition to the other risk factors described in this
section, may have a significant impact on the market price of
our common stock:



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






|        |           
|------- | ----------
|Item 2. | Properties

We are currently leasing one facility on 2483
East Bayshore Road, Suite 100, in Palo Alto, California.
The facility provides approximately 3,600 square feet of
office space. The lease expires in June 2004.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are currently not a party to any legal
proceedings. The previously disclosed arbitration between
IntraBiotics and a contract vendor relating to a dispensing
error in the iseganan HCl oral solution phase III clinical
trial was resolved amicably on January 21, 2002, and we
received a cash settlement payment of $3.6 million.

14



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##### Table of Contents








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

No matters were submitted to a vote of security
holders during the fourth quarter 2002.




PART II




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

Market for Common Equity

Our common stock began trading on the Nasdaq
National Market on March 28, 2000, under the symbol
IBPI. Prior to that time, there had been no public
market for our common stock. The table below sets forth the high
and low closing prices for our common stock for the periods
indicated:

|                                     |  |      |       |     |  |   |      | 
|------------------------------------ |  | ---- | ----- | --- |  | - | ---- | 
|                                     |  | High |       | Low
|                                     |  |      |       |    
|1st Quarter ended March 31, 2001     |  | $    | 10.25 |     |  | $ | 2.06 | 
|2nd Quarter ended June 30, 2001      |  | $    | 3.37  |     |  | $ | 1.25 | 
|3rd Quarter ended September 30, 2001 |  | $    | 1.82  |     |  | $ | 1.00 | 
|4th Quarter ended December 31, 2001  |  | $    | 2.73  |     |  | $ | 1.23 | 
|1st Quarter ended March 31, 2002     |  | $    | 4.30  |     |  | $ | 2.44 | 
|2nd Quarter ended June 30, 2002      |  | $    | 4.80  |     |  | $ | 1.19 | 
|3rd Quarter ended September 30, 2002 |  | $    | 2.22  |     |  | $ | 0.46 | 
|4th Quarter ended December 31, 2002  |  | $    | 0.50  |     |  | $ | 0.27 | 

As of March 14, 2003, there were 146 holders
of record of common stock. Certain record holders are
represented by brokers and other institutions on behalf of
stockholders. We estimate that included within the holders of
record are approximately 3,500 beneficial owners of common
stock. As of March 14, 2003, the closing price for our
common stock was $0.18.

Use of Proceeds from Registered
Securities

Our Registration Statement on Form S-1 filed
pursuant to the Securities Act of 1933 (No. 333-95461) was
declared effective on March 27, 2000. We incurred related
offering costs of approximately $9.2 million during the
year ended December 31, 2000, of which $7.9 million
represented underwriting discounts and commissions. All initial
public offering costs were direct or indirect payments to
others. The net offering proceeds to us after all expenses were
approximately $103.3 million. We have now utilized all of
the proceeds from our initial public offering.

Dividend Policy

We have not paid and do not plan to pay any cash
dividends on our common stock in the foreseeable future. We
intend to retain any earnings for use in our business operations.

Issuance of Unregistered Securities

During the fourth quarter of 2002, we issued
1.25 million shares of our common stock to the landlord as
a part of the negotiated termination of the lease of
2011 Steirlin Court. These shares were valued at
$.31 per share based on the average closing price of the
securities two days prior to and two days subsequent, to and
including, the closing date on November 22, 2002. In
addition, we issued 150,000 shares valued at the same price
per share, to a consultant in consideration for services
performed as a part of the negotiation of the lease termination.
We also issued a warrant to purchase 50,000 shares of our
common stock to the landlord of the 1245 Terra Bella Avenue
building as a part of the negotiated termination of our lease on
the building. The warrant has an exercise price of
$0.29 per share and will expire on December 31, 2007.
All of the issuances were made to accredited
investors as defined in the securities laws.

15



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Equity Compensation Plan Information

The following table provides certain information
with respect to all of our equity compensation plans in effect
as of December 31, 2002.

|                                                               |                                                |                      |           |                   |  |                      |   |      |  |  |           |           |    
|-------------------------------------------------------------- | ---------------------------------------------- | -------------------- | --------- | ----------------- |  | -------------------- | - | ---- |  |  | --------- | --------- | ---
|                                                               |                                                |                      |           |                   |  | Number of Securities
|                                                               |                                                | Number of            |           |                   |  | Remaining Available 
|                                                               |                                                | Securities           |           | Weighted-Average  |  | for Issuance under  
|                                                               |                                                | to be Issued         |           | Exercise Price    |  | Equity Compensation 
|                                                               |                                                | upon Exercise of     |           | of Outstanding    |  | Plans (Excluding    
|                                                               |                                                | Outstanding Options, |           | Options, Warrants |  | Securities Reflected
|                                                               |                                                | Warrants and Rights  |           | and Rights        |  | in Column (a))      
|Plan Category                                                  |                                                | (a)                  |           | (b)               |  | (c)                 
|                                                               |                                                |                      |           |                   |  |                     
|Equity compensation plans approved by security
    holders     |                                                |                      |           |                   |  |                      |   |      |  |  |           |          
|                                                               | Amended and Restated 1995 Stock Option Plan(1) |                      |           | 954,471           |  |                      | $ | 1.35 |  |  |           |          |    
|                                                               | 2000 Employee Stock Purchase Plan              |                      |           | N/A               |  |                      |   | N/A  |  |  |           | 456,252   | (2)
|                                                               | 2000 Equity Incentive Plan                     |                      |           | 5,508,763         |  |                      | $ | 3.68 |  |  |           | 922,177   | (3)
|Equity compensation plans not approved by
    security holders |                                                |                      |           |                   |  |                      |   |      |  |  |           |          
|                                                               | 2002 Non-Officer Equity Incentive Plan         |                      |           | 437,902           |  |                      | $ | 1.30 |  |  |           | 2,062,098 |    
|                                                               | Stock option grant to Kathleen D. LaPorte(4)   |                      |           | 25,000            |  |                      | $ | 2.00 |  |  |           |          |    
|                                                               | Stock option grant to Ernest Mario, Ph.D.(4)   |                      |           | 650,000           |  |                      | $ | 4.02 |  |  |           |          |    
|                                                               |                                                |                      |           |                   |  |                      |   |      |  |  |           |          
|Total                                                          |                                                |                      | 7,576,136 |                   |  |                      |   |      |  |  | 3,440,527 |          
|                                                               |                                                |                      |           |                   |  |                      |   |      |  |  |           |          



---



|    |                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | No new stock awards may be granted under the
    Amended and Restated 1995 Stock Option Plan.                                                                                                                                                                             
|   
|(2) | On each December 31, the 2000 Employee Stock
    Purchase Plan share reserve will increase automatically by the
    least of (i) 1% of the outstanding Common Stock,
    (ii) five hundred thousand (500,000) shares or (iii) a
    lesser amount determined by the Board.
|   
|(3) | On each December 31, the 2000 Equity
    Incentive Plan share reserve will increase automatically by the
    least of (i) 5% of the outstanding Common Stock,
    (ii) two million (2,000,000) shares or (iii) a lesser
    amount determined by the Board.               
|   
|(4) | Options granted to Ms. LaPorte and
    Dr. Mario were cancelled effective February 6, 2003,
    each in exchange for a new option granted under the Incentive
    Plan.                                                                                                   

The following is a brief summary of material
features of the plans adopted without stockholder approval.

2002 Non-Officer Equity Incentive
Plan

Our 2002 Non-Officer Equity Incentive Plan
provides for stock awards (grants of nonstatutory stock options,
stock bonuses or rights to acquire restricted stock) to
employees and consultants who are not our officers. Officers not
previously employed by us may also be granted stock awards. An
aggregate of 2,500,000 shares of common stock has been
reserved for issuance under this plan. As of December 31,
2002, options to purchase 437,902 shares were outstanding
and 1,162,098 shares remained available for grant. In
addition, in February 2003, our Board of Directors authorized an
increase in the aggregate number of shares reserved for issuance
under the plan in the amount of 900,000 shares. The
exercise price of options granted under the plan may not be less
than 85% of the fair market value of our common stock on the
date of the grant. Options granted under the plan have a maximum
term of ten years and typically vest over a four-year period.
Options may be exercised prior to vesting, subject to repurchase
rights in favor of IntraBiotics that expire over the vesting
period. Shares issued under a stock bonus award may be issued in
exchange for past services performed for us. Shares issued
pursuant to restricted stock awards may not be purchased for
less than 85% of the fair market value of our common stock on
the date of grant. Shares issued pursuant to stock

16



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##### Table of Contents



bonuses and restricted stock awards may be
subject to vesting and a repurchase option in favor of
IntraBiotics. The plan and stock awards issued thereunder may be
amended by the Board at any time or from time to time. The plan
is subject to certain adjustment and change of control
provisions similar to those governing the terms of our equity
incentive plans approved by stockholders.


Options Granted to Ms. LaPorte and
Dr. Mario

On February 6, 2002, the Board granted
Kathleen D. LaPorte, a member of our Board of Directors, a
nonstatutory stock option to purchase 25,000 shares of our
common stock at an exercise price of $2.00 per share. The
option was granted in connection with her service as Acting
Chairman of the Board from November 2001 to April 2002. The
option was cancelled on February 6, 2003 in exchange for a
new option for the equivalent number of shares granted under our
2000 Equity Incentive Plan.

On April 23, 2002, the Board granted Ernest
Mario, Ph.D. a nonstatutory stock option to purchase
650,000 shares of our common stock at an exercise price of
$4.02 per share. In accordance with Nasdaq
Rule 4350(i)(1)(A), the option was granted as an inducement
essential to Dr. Marios entering into employment with
us and to serve as our Chief Executive Officer and Chairman of
the Board. The option was cancelled on February 6, 2003 in
exchange for a new option for 150,000 shares granted under
our 2000 Equity Incentive Plan.

The remaining terms and conditions of these two
options were substantially similar as follows. Each option had a
ten-year term. Each option was subject to a vesting schedule and
could not be exercised prior to the time it was vested. The new
options issued to Ms. LaPorte and Dr. Mario in
exchange for these two options are exercisable for
$0.23 per share and have substantially similar terms as
other options under our 2000 Equity Incentive Plan, except for
vesting which for the Kathleen D. LaPorte options will
occur in full on the first anniversary of the date of grant and
for the Dr. Mario options which will occur monthly over a
four year period, and except for the term of the options which
is limited to five years. Variable accounting will be used in
the future on the new common stock grants and could have a
potential material impact on our results of operations.

17



---



##### Table of Contents





|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected financial data should be
read in conjunction with our financial statements and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included in
Items 7 and 8 of this report. The financial data for
periods prior to the financial statements presented in
Item 8 of this Form 10-K are derived from audited
financial statements not included in this Form 10-K.

|                                                                                      |                                   |                                          |         |        |   |      |         |        |  |      |         |        |  |   |         |        |  |   |         |        | 
|------------------------------------------------------------------------------------- | --------------------------------- | ---------------------------------------- | ------- | ------ | - | ---- | ------- | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ |  | - | ------- | ------ | 
|                                                                                      |                                   |                                         
|                                                                                      |                                   | Year Ended December 31,                 
|                                                                                      |                                   |                                         
|                                                                                      |                                   | 2002                                     |         | 2001   |   | 2000 |         | 1999   |  | 1998
|                                                                                      |                                   |                                          |         |        |   |      |         |        |  |     
|                                                                                      |                                   |                                         
|                                                                                      |                                   | (In thousands, except per share amounts)
|Statement of Operations Data:                                                         |                                   |                                          |         |        |   |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Revenues:                                                                             |                                   |                                          |         |        |   |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|                                                                                      | Contract revenue                  |                                          | $       |       |   |      | $       |       |  |      | $       |       |  |   | $       | 7,863  |  |   | $       | 5,357  | 
|                                                                                      | License fee and milestone revenue |                                          |         |       |   |      |         |       |  |      |         |       |  |   |         |       |  |   |         | 1,000  | 
|                                                                                      |                                   |                                          |         |        |   |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Total revenues                                                                        |                                   |                                          |        |        |   |      |        |        |  |      |        |        |  |   | 7,863   |        |  |   | 6,357   |       
|                                                                                      |                                   |                                          |         |        |   |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Operating expenses:                                                                   |                                   |                                          |         |        |   |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|                                                                                      | Research and development          |                                          |         | 23,053 |   |      |         | 38,034 |  |      |         | 39,152 |  |   |         | 26,102 |  |   |         | 21,997 | 
|                                                                                      | General and administrative        |                                          |         | 8,617  |   |      |         | 9,202  |  |      |         | 11,560 |  |   |         | 6,082  |  |   |         | 2,533  | 
|                                                                                      | Impairment of acquired workforce  |                                          |         | 1,365  |   |      |         |       |  |      |         |       |  |   |         |       |  |   |         |       | 
|                                                                                      | Restructuring and other charges   |                                          |         | 6,118  |   |      |         | 21,956 |  |      |         |       |  |   |         |       |  |   |         |       | 
|                                                                                      | Arbitration settlement            |                                          |         | (3,600 | ) |      |         |       |  |      |         |       |  |   |         |       |  |   |         |       | 
|                                                                                      |                                   |                                          |         |        |   |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Total operating expenses                                                              |                                   |                                          | 35,553  |        |   |      | 69,192  |        |  |      | 50,712  |        |  |   | 32,184  |        |  |   | 24,530  |       
|                                                                                      |                                   |                                          |         |        |   |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Operating loss                                                                        |                                   |                                          | (35,553 | )      |   |      | (69,192 | )      |  |      | (50,712 | )      |  |   | (24,321 | )      |  |   | (18,173 | )     
|Interest income                                                                       |                                   |                                          | 703     |        |   |      | 2,843   |        |  |      | 5,699   |        |  |   | 1,372   |        |  |   | 963     |       
|Interest expense                                                                      |                                   |                                          | (459    | )      |   |      | (1,110  | )      |  |      | (563    | )      |  |   | (166    | )      |  |   | (172    | )     
|Other income                                                                          |                                   |                                          | 856     |        |   |      | 93      |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                                                                      |                                   |                                          |         |        |   |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Net loss                                                                              |                                   | $                                        | (34,453 | )      |   | $    | (67,366 | )      |  | $    | (45,576 | )      |  | $ | (23,115 | )      |  | $ | (17,382 | )     
|                                                                                      |                                   |                                          |         |        |   |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Basic and diluted net loss per share                                                  |                                   | $                                        | (0.94   | )      |   | $    | (2.29   | )      |  | $    | (2.02   | )      |  | $ | (21.62  | )      |  | $ | (20.89  | )     
|                                                                                      |                                   |                                          |         |        |   |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Shares used to compute basic and diluted net loss
    per share                       |                                   |                                          | 36,763  |        |   |      | 29,432  |        |  |      | 22,512  |        |  |   | 1,069   |        |  |   | 832     |       
|                                                                                      |                                   |                                          |         |        |   |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Pro forma basic and diluted net loss per share
    (unaudited)                        |                                   |                                          |         |        |   |      |         |        |  | $    | (1.67   | )      |  | $ | (1.27   | )      |  |   |         |       
|                                                                                      |                                   |                                          |         |        |   |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Shares used to compute pro forma basic and
    diluted net loss per share (unaudited) |                                   |                                          |         |        |   |      |         |        |  |      | 27,231  |        |  |   | 18,172  |        |  |   |         |       
|                                                                                      |                                   |                                          |         |        |   |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       

|                                                                                |  |                   |          |      |  |      |          |      |  |      |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------- |  | ----------------- | -------- | ---- |  | ---- | -------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                |  |                  
|                                                                                |  | As of December 31
|                                                                                |  |                  
|                                                                                |  | 2002              |          | 2001 |  | 2000 |          | 1999 |  | 1998
|                                                                                |  |                   |          |      |  |      |          |      |  |     
|                                                                                |  |                  
|                                                                                |  | (In thousands)   
|Balance Sheet Data:                                                             |  |                   |          |      |  |      |          |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash, cash equivalents, restricted cash deposits
    and short-term investments |  | $                 | 13,315   |      |  | $    | 35,470   |      |  | $    | 86,065  |   |  | $ | 31,429  |   |  | $ | 29,869  |  
|Working capital                                                                 |  |                   | 15,191   |      |  |      | 29,629   |      |  |      | 86,142  |   |  |   | 25,743  |   |  |   | 21,279  |  
|Total assets                                                                    |  |                   | 16,226   |      |  |      | 42,465   |      |  |      | 108,288 |   |  |   | 35,958  |   |  |   | 32,099  |  
|Long term obligations, less current portion                                     |  |                   |         |      |  |      | 5,000    |      |  |      | 8,309   |   |  |   | 1,725   |   |  |   | 867     |  
|Accumulated deficit                                                             |  |                   | (200,269 | )    |  |      | (165,816 | )    |  |      | (98,450 | ) |  |   | (52,874 | ) |  |   | (29,759 | )
|Total stockholders equity                                                      |  |                   | 15,480   |      |  |      | 26,212   |      |  |      | 89,955  |   |  |   | 27,914  |   |  |   | 22,498  |  

18



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion and analysis of our
financial condition and results of operations should be read
together with our financial statements and related notes
appearing elsewhere in this Form 10-K. This discussion and
analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. The actual results may differ
materially from those anticipated in these forward-looking
statements as a result of many factors, including but not
limited to those set forth under Risks Related To Our
Business and elsewhere in this Form 10-K. All
forward-looking statements included in this document are based
on information available to us on the date of this document and
we assume no obligation to update any forward looking statements
contained in this Form 10-K.

Overview

IntraBiotics Pharmaceuticals, Inc. is a
biopharmaceutical company focused on developing
iseganan HCl oral solution for the prevention of
ventilator-associated pneumonia (VAP).

In 2002, we focused our resources mainly on
developing iseganan HCl for the prevention of ulcerative
oral mucositis. The top-line results of our 545-patient
phase III clinical trial of iseganan HCl oral solution
to treat patients undergoing radiotherapy to prevent or reduce
ulcerative oral mucositis showed no significant difference
between iseganan and placebo in the primary or secondary
end-points. The top-line results of our 509-patient
phase III clinical trial of iseganan HCl oral solution
to treat patients undergoing aggressive chemotherapy to prevent
or reduce ulcerative oral mucositis showed no significant
difference between iseganan and placebo in the primary
end-point. Iseganan appears to be safe when applied to the oral
cavity. We are not pursuing further development of
iseganan HCl to treat oral mucositis.

Previously, we completed two earlier stage trials
for other indications of iseganan HCl to prevent pneumonia
in patients requiring breathing assistance from a mechanical
ventilator and to treat respiratory infections in patients with
cystic fibrosis. We believe the data from each of these trials
support the advancement to the next stage of human clinical
testing for each of these two indications. In February 2003, we
announced plans to launch a 500 patient phase II/III
clinical study of iseganan HCl for the prevention of VAP.
We recently concluded a productive meeting with the FDA to
discuss the development of iseganan for VAP and anticipate
enrolling the first patient before the end of the third quarter
2003 if we obtain additional financing.

Since commencing operations in 1994, we have not
generated any revenue from product sales, and we have funded our
operations primarily through the private sale of equity
securities, funds received from a terminated collaboration
agreement, the proceeds of equipment financing arrangements and
our initial public offering of common stock in March 2000.
During the quarter ended March 31, 2002, we completed a
private placement of 5.9 million shares of common stock
resulting in net proceeds of $13.9 million, and during the
quarter ended June 30, 2002, we completed a private
placement of 1.2 million shares of common stock to Ernest
Mario, Ph.D. resulting in proceeds of $5.0 million. In
addition, during the quarter ended June 30, 2002, we sold
two pre-clinical anti-infective programs to Micrologix Biotech
Inc., a Canadian company, for cash and 750,000 shares of
Series A preferred shares of Micrologix, and recognized
other income of $775,000. During the quarter ended
September 30, 2002, we also recognized $200,000 of other
income in connection with the redemption of 400,000 shares of
Series A preferred shares of Micrologix, which was
triggered by a milestone set forth in our agreement with
Micrologix. We have incurred losses in each year since
inception, and we expect to incur substantial losses for at
least the next several years. We expect that losses may
fluctuate, and that such fluctuations may be substantial. As of
December 31, 2002, our accumulated deficit was
approximately $200.3 million. We will need to raise
additional funds in the future to continue our operations.

In April 2002, we acquired Apothogen, Inc., a
privately held pharmaceutical in-licensing company based in
North Carolina. We issued 450,000 shares of its common
stock in exchange for all of Apothogens outstanding
capital stock. The total purchase price of $2.0 million was
determined based on the average closing price of our common
stock on the two days prior to the closing date, the closing
date and two days after the closing date.

19



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We allocated the purchase price based on the
relative fair value of the net tangible and intangible assets
acquired. The amount of the purchase price in excess of the net
tangible assets acquired of $1.7 million was allocated to
acquired workforce, which was to be amortized over three years.
The acquired workforce, net of amortization, of
$1.4 million was deemed to be impaired after the negative
results of the phase III trial of iseganan HC1 for the
prevention of oral mucositis in cancer patients receiving
chemotherapy were announced. The acquired workforce was
comprised of sales and marketing management, and given there
would be no drug approval in the near future, the acquired
workforce was deemed impaired, and therefore written down to
zero in December 2002.

Concurrent with the closing of the acquisition,
Ernest Mario, Ph.D. joined us as Chairman and Chief Executive
Officer and purchased $5.0 million of newly issued shares
of our common stock in a private placement at a purchase price
per share of $4.01.

In October 2002, we announced a restructuring
plan, which included a significant reduction in force. As a
result of the restructuring, we planned to reduce our expenses
from approximately $7.5 million per quarter to
approximately $1.5 million per quarter. The restructuring
plan was substantially completed by year-end and included a
reduction of approximately 26 positions, or 70% of our
workforce. In addition, we terminated some of our contracts
including our real estate leases, which we believe are not
necessary for our future operations. We have recorded charges
related to the impairment of equipment and acquired workforce
totaling $1.6 million, which are included in operating
expenses for the year ended December 31, 2002.

In February 2003, we entered into agreements with
certain investors providing for the issuance, in a private
placement financing, subject to shareholder approval, of newly
created Series A convertible preferred stock, and warrants
to purchase common stock, for an aggregate gross purchase price
of $3.5 million. The primary purpose of completing the
private placement is to provide funds to allow us to conduct and
complete our clinical trial of iseganan HCl for the
prevention of VAP. A special meeting of stockholders at which
the approval and ratification of the private placement is
solicited is scheduled to take place on April 3, 2003. If
the stockholders approve the transaction, we anticipate
completing the private placement during the second quarter 2003.
On March 19, 2003, we received an alternative financing
proposal from Mr. C. Robert Coates. We are currently evaluating
Mr. Coates proposal.

Critical Accounting Policies



| |          
| | ---------
| | Estimates

Our discussion and analysis of our financial
condition and results of operations is based upon our financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires
management to make estimates and judgments that affect the
reported amounts of assets, liabilities and expenses, and
related disclosures. On an on-going basis, we evaluate these
estimates, including those related to clinical trial accruals,
restructuring accruals and stock based compensation. Estimates
are based on historical experience, information received from
third parties and on various other assumptions that are believed
to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

Long-lived assets and certain identifiable
intangible assets to be held and used are reviewed for
impairment when events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of
undiscounted cash flows resulting from the use of the assets and
their eventual disposition. In the event that such cash flows
are insufficient to recover the carrying amount of the assets,
the assets are written down to the estimated fair value.
Long-lived assets to be disposed of are reported at the lower of
the carrying amount or the estimated fair value less costs to
sell.

20



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##### Table of Contents





| |                        
| | -----------------------
| | Clinical Trial Accruals

Our accrued costs for clinical trial activities
performed by contract research organizations are based upon
estimates of the percentage of work completed over the life of
the individual study. These estimates may or may not match the
actual services performed by the organization as determined by
patient enrollment levels and related activities. We monitor
patient enrollment levels and related activities to the extent
possible, however, if we underestimated activity levels
associated with various studies at a given point in time, we
could record significant research and development expenses in
future periods. All such costs are charged to R&D expense as
incurred.



| |                      
| | ---------------------
| | Restructuring charges

Our restructuring charges include our estimate of
the costs for terminated employees in accordance with
EITF 94-3 and related interpretations. We continue to
monitor the actual costs and expected remaining obligations in
connection with our restructuring plan, and revise the estimates
accordingly. Severance estimates were determined based on our
assessment of remaining payroll and employee benefits for the
employees involved.

Results of Operations



| |                                                         
| | --------------------------------------------------------
| | Comparison of Years Ended December 31,
    2002 and 2001

Revenues

IntraBiotics had no product sales or contract
revenue for the years ended December 31, 2002 and 2001. We
do not anticipate any product revenue in the near future.



| |         
| | --------
| | Expenses



| |                         
| | ------------------------
| | Research and Development

Research and development expenses decreased to
$23.1 million for the year ended December 31, 2002
compared to $38.0 million for the same period in 2001. The
decrease primarily consists of decreases of $5.1 million in
salaries and benefits, $6.7 million of outside services
related to clinical trials and $2.1 million of license
fees. During 2001, we commenced a research and technology
licensing agreement with New Chemical Entities, Inc. (now Albany
Molecular Research, Inc. (AMRI)) and with Diversa Corporation.
In conjunction with the May 2001 restructuring, we terminated or
restructured research and licensing collaborations with AMRI,
Biosearch Italia, S.p.A., Cetek Corporation and Diversa
Corporation. The total research and development expenses
incurred in 2001 in conjunction with these collaborations were
$4.5 million of which $1.75 million was charged to
research and development and $2.75 million was charged to
restructuring. In addition, we issued 700,000 warrants to
Diversa Corporation, valued at $560,000, which was also charged
to restructuring. Research and development expenses include
salaries for research and development personnel, contractor and
clinical trial site fees, drug substance, building and equipment
costs, supplies, collaboration expenses, administrative expenses
and allocations of corporate costs. In 2002, approximately 58%
of research and development expenses were for various contractor
and clinical trial site fees compared to 50% in 2001. Included
in research and development expenses are non-cash stock
compensation charges of $656,000 and $1.5 million in 2002
and 2001, respectively.

During 2002, we completed two phase III clinical
studies. We are no longer developing iseganan HCl oral solution
for the reduction in incidence and severity of ulcerative oral
mucositis. Subsequent to our October 2002 restructuring, we
terminated our supply agreement with PolyPeptide Laboratories
for iseganan HCl manufacturing. As a result of this termination
agreement, during the quarter ended December 31, 2002, we
have expensed $4.8 million related to the delivery of lots
H, J, K and L, and recorded a prepaid for drug substance of
$2.4 million as of December 31, 2002, which will be
expensed upon delivery of lots I1-I3.

Research and development expenses may increase in
the future if we are able to advance new and existing product
candidates into later stages of clinical development. For
example, we anticipate that the initiation of our phase II/ III
clinical trial for VAP will result in increased research and
development expenses, compared

21



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##### Table of Contents



to expenses incurred when no clinical trial is in
progress. The commencement and completion of our clinical trials
may be delayed by many factors, including: slower than expected
rate of patient enrollment; our inability to adequately obtain
data about patients after their treatment in our clinical
trials; additional regulatory requests; inability to manufacture
sufficient quantities of materials used for clinical trials or
unforeseen safety issues. As a result, our research and
development expenses may also fluctuate. Our future capital
requirements will depend on many factors, including the timing,
cost, extent and results of clinical trials, payments associated
with manufacturing scale-up, the costs and timing of regulatory
approvals, costs associated with researching drug candidates,
securing in-licensing opportunities and conducting pre-clinical
research.




| |                           
| | --------------------------
| | General and Administrative

General and administrative expenses decreased to
$8.6 million for the year ended December 31, 2002,
compared to $9.2 million for the same period in 2001. The
decrease was primarily attributed to the restructuring
implemented in May 2001 with a large percentage attributable to
costs related to the reduction in headcount for all of 2002.
This decrease was partially offset due to the acquisition of
Apothogen in April 2002, as general and administrative headcount
was increased as a result of the acquisition. General and
administrative expenses include salaries for administrative
personnel, outside contractors, travel costs, legal fees,
building and equipment costs, supplies and other general
administrative expenses. Included in general and administrative
expenses are non-cash stock compensation charges of
$1.7 million and $1.4 million in 2002 and 2001,
respectively. In addition, approximately $344,000 was incurred
in conjunction with the termination of our property leases at
1245 and 1255 Terra Bella Avenue, Mountain View, California
during the fourth quarter of 2002.

During November 2001, we entered into an
agreement to modify the vesting of the former CEOs
unvested stock options so that a portion of his unvested options
would vest upon his departure in January 2002, and the remaining
options would continue to vest over a consulting period. In
connection with this modification, compensation expense of
$413,000, including the amortization of $408,000 of previously
recorded deferred stock compensation associated with the awards,
was recorded in general and administrative expense in the year
ended December 31, 2001. In connection with this
modification, compensation expense of $155,000, including the
amortization expense of $112,000 of previously recorded deferred
stock compensation associated with the awards, was recorded in
general and administrative expense in the year ended
December 31, 2002. We expect to continue to record
consulting expense through July 31, 2003 related to the
periodic revaluation of these stock options as they vest in
accordance with EITF 96-18. In addition, in 2003, we will
amortize the remaining deferred stock compensation originally
recorded in connection with these options, of approximately
$57,000.



| |                                    
| | -----------------------------------
| | Restructuring and Other
    Charges

In October 2002 we announced a restructuring plan
as a result of the failure of two phase III clinical
trials. This plan reduced headcount by 26 employees, or 70% of
the workforce. We recorded restructuring charges of $848,000 for
severance costs of which, $784,000 was paid as of
December 31, 2002. No other charges were incurred as a
result of the restructuring plan. At December 31, 2002,
there were no remaining employees working who were affected by
the restructuring plan. The remaining accrued severance as of
December 31, 2002 of $64,000 remains in the liability
account and was paid in January 2003 to employees who left the
company in December 2002. As of December 31, 2002, we had 11
full-time employees.

In May 2001, we implemented a restructuring plan
intended to conserve capital and focus resources on the
development of iseganan HCl. As a result of this restructuring
plan, we recorded restructuring charges of $10.1 million
and asset write down charges of $11.8 million for a total
of approximately $22.0 in the second quarter of 2001. The
$10.1 million restructuring charge was for costs incurred
in work force reduction of $2.9 million, the termination of
collaboration agreements of $4.1 million and facilities
consolidation $3.2 million.

For the year ended December 31, 2001, we
paid $8.9 million of the restructuring charges in cash,
primarily in severance costs to approximately 90 employees, rent
payments on vacant buildings, and

22



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##### Table of Contents



termination fees on collaboration agreements, and
also expensed $560,000 for warrants issued as part of a
collaboration agreement termination.


The May 2001 restructuring included a reduction
in force of approximately 90 positions in research and
administration, or 71% of our previous workforce of 127
employees. All of the terminated employees left in 2001. The
estimated costs for terminated employees were reduced by
$236,000 in the fourth quarter of 2001, as no remaining
severance amounts were payable. In the quarter ended
March 30, 2002 we received a refund for workers comp
insurance of approximately $75,000 related to employees
terminated as a result of the May 2001 reduction in force, which
was recorded as an adjustment to reflect a revised estimate of
the restructuring charges.

The May 2001 restructuring also included the
termination of certain research and development collaborations
and the consolidation of operations into one existing facility
in Mountain View, California. The estimated costs associated
with terminated collaboration agreements were increased by
$483,000 in the fourth quarter of 2001 and $166,000 in 2002.
There are no remaining amounts payable for such agreements and
costs at December 31, 2002.

We vacated three facilities in Mountain View,
California as a part of the May 2001 restructuring plan,
comprising 142,000 square feet. One of the vacated facilities
was subleased during 2001, and the landlord took another back,
with no continuing obligation to us. In the fourth quarter of
2001, an adjustment was made to increase restructuring charges
associated with facilities consolidation by $1.9 million
for additional costs related the third vacated facility. In
November 2002, we reached agreements with the landlords of this
building and the facility, which we had subleased, to terminate
the leases. The additional expense recorded during in 2002 was
$5.2 million and included cash payments, the issuance of
common stock and the write-off of a deferred rent balance. At
December 31, 2002, we had no further lease obligations and
hence, there are no accrued restructuring charges related to
these facilities.

Additionally as a part of the May 2001
restructure plan, we wrote down to estimated fair value
$11.8 million of leasehold improvements, laboratory
equipment, computers and other assets that were no longer being
used. In the fourth quarter of 2001, we received proceeds from
the disposition of certain leasehold improvements and other
assets previously written down, in excess of the amounts
originally estimated, and as a result recognized a gain of $2.2
million in the fourth quarter of 2001 in restructuring and other
charges in the statement of operations.



| |                       
| | ----------------------
| | Arbitration Settlement

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



| |                            
| | ---------------------------
| | Interest Income and Expense

Interest income decreased to $703,000 for the
year ended December 31, 2002 from $2.8 million for the
same period in 2001. The decrease in interest income resulted
from the decrease in average cash and investment balances as
well as a decline in interest rates.

Interest expense decreased to $459,000 for the
year ended December 31, 2002 from $1.1 million for the
same period in 2001. The decrease was primarily attributed to a
repayment of our line of credit and bank loan in October 2002,
as well as a reduction in the interest rate on our line of
credit.



| |             
| | ------------
| | Other Income

In May 2002, the we completed the sale of two
pre-clinical anti-infective programs to Micrologix Biotech Inc.,
a Canadian company, for cash and 750,000 shares of Series A
preferred shares of Micrologix, and recognized other income of
$775,000. The Series A preferred shares are redeemable at
$1 per share or convertible into common stock at the
election of Micrologix upon the occurrence of certain time and
achievement milestones. During the quarter ended
September 30, 2002, $200,000 of other income was

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recognized in connection with the redemption of
400,000 shares of Series A preferred shares of Micrologix,
which was triggered by a milestone set forth in the sales
agreement with Micrologix.




| |                                                         
| | --------------------------------------------------------
| | Comparison of Years Ended December 31,
    2001 and 2000



| |         
| | --------
| | Revenues

IntraBiotics had no product sales or contract
revenue for the years ended December 31, 2001 and 2000.



| |         
| | --------
| | Expenses



| |                         
| | ------------------------
| | Research and Development

Research and development expenses decreased to
$38.0 million for the year ended December 31, 2001
compared to $39.2 million for the same period in 2000. As
we have advanced our product candidate into later stage clinical
trials, our related expenses generally have increased. The
decrease in clinical trial costs in 2001 is a result of a
significant reduction in our research expenditures in an effort
to focus our resources on our iseganan HCl development program,
especially following the restructuring implemented in May 2001.
In the second half of 2001, research and development expenses
were $12.5 million (relating to the iseganan HCl for the
prevention of oral mucositis program) compared to
$25.5 million in the first half of 2001. These costs
include salaries for research and development personnel,
contractor and clinical trial site fees, building and equipment
costs, supplies, administrative expenses and allocations of
corporate costs. In 2001 approximately 50% of research and
development expenses were for various contractor and clinical
trial site fees. Included in research and development expenses
are non-cash stock compensation charges of $1.5 million and
$1.8 million in 2001 and 2000, respectively.

See Research and Development in the
Comparison of Years Ended December 31, 2002 and 2001
portion of the MD&A for a detailed discussion of 2001
activities.



| |                           
| | --------------------------
| | General and Administrative

General and administrative expenses decreased to
$9.2 million for the year ended December 31, 2001,
compared to $11.6 million for the same period in 2000. The
decrease was primarily attributed to the restructuring in May
2001 with a large percentage attributable to costs related to
headcount. In the second half of 2001, general and
administrative expenses were $2.3 million compared to
$6.9 million in the first half of 2001. These costs include
salaries for administrative personnel, outside contractors,
legal fees, accounting fees, building and equipment costs,
supplies and other general administrative expenses. Included in
general and administrative expenses are non-cash stock
compensation charges of $1.4 million and $1.4 million
in 2001 and 2000, respectively.

See General and administrative in the
Comparison of Years Ended December 31, 2002 and
2001 portion of the MD&A for a detailed discussion of
2001 activities.



| |                                    
| | -----------------------------------
| | Restructuring and other
    charges

See Restructuring and other charges
in the Comparison of Years Ended December 31, 2002
and 2001 portion of the MD&A. There were no
restructuring charges in the year 2000.



| |                            
| | ---------------------------
| | Interest Income and Expense

Interest income decreased to $2.8 million
for the year ended December 31, 2001 from $5.7 million
for the same period in 2000. The decrease in interest income
resulted from the decrease in average cash and investment
balances.

Interest expense increased to $1.1 million
for the year ended December 31, 2001 from $563,000 for the
same period in 2000. The increase was primarily attributed to an
increase in the average debt outstanding in 2001 compared to
2000.

24



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Income Taxes

Since inception, we have incurred operating
losses and accordingly have not recorded a provision for income
taxes for any of the periods presented. As of December 31,
2002, we had net operating loss carryforwards for federal and
state income tax purposes of approximately $180.0 million
and $40.0 million, respectively. We also had federal and
state research and development tax credits of approximately
$1.9 million and $1.8 million, respectively. If not
utilized, the net operating losses and credits will expire in
the years 2004 through 2022. Utilization of net operating losses
and credits may be subject to a substantial annual limitation
due to ownership change limitations provided by the Internal
Revenue Code of 1986, as amended. The annual limitation may
result in the expiration of our net operating losses and credit
carryforwards before they can be used. Please read Note 10 of
the Notes to the Financial Statements included in Item 8 of
this Form 10-K for further information.

Liquidity and Capital Resources

In February 2003, we entered into agreements with
certain investors providing for the issuance, in a private
placement financing, subject to shareholder approval, of newly
created Series A convertible preferred stock, and warrants
to purchase common stock, for an aggregate gross purchase price
of $3.5 million. The primary purpose of completing the
private placement is to provide funds to allow us to conduct and
complete our clinical trial of iseganan HCl for the prevention
of VAP. A special meeting of stockholders at which the approval
and ratification of the private placement is solicited is
scheduled to take place on April 3, 2003. If the
stockholders approve the transaction, we anticipate completing
the private placement during the second quarter 2003. On March
19, 2003, we received an alternative financing proposal
from Mr. C. Robert Coates. We are currently evaluating Mr.
Coates proposal.

During the quarter ended March 31, 2002, we
sold 5.9 million shares of common stock in a private
placement resulting in net cash proceeds of approximately
$13.9 million. Also during the quarter ended March 31,
2002, we received cash of $3.6 million in settlement of our
arbitration with a contract vendor relating to a drug dispensing
error in iseganan HCl oral solution phase III clinical trials.
During the quarter ended June 30, 2002, we completed a
private placement of 1.2 million shares of common stock to
Ernest Mario, Ph.D. resulting in net proceeds of
$5.0 million. In the initial public offering, which was
completed in March 2000 we sold 7.5 million shares of
common stock at a price of $15.00 per share. Net proceeds from
the initial public offering were approximately
$103.3 million. Prior to our initial public offering, we
had financed our operations primarily through private placements
of preferred stock and warrants, funds received from our prior
collaboration with Pharmacia & Upjohn S.p.A. and the
proceeds of equipment financings. Through December 31,
1999, we had raised aggregate net proceeds from the sale of
preferred stock and warrants of $79.6 million. Prior to
termination of the Pharmacia & Upjohn S.p.A. agreement, we
received an aggregate of $21.4 million in cash payments
under this agreement, of which $1.7 million of unused
development funding was returned to Pharmacia & Upjohn
S.p.A. in 2000.

Cash, cash equivalents, restricted cash and
short-term investments were $13.3 million at
December 31, 2002, compared to $35.5 million at
December 31, 2001. On December 31, 2002, we had
restricted cash of $250,000 compared to $7.5 million at
December 31, 2001. The $250,000 of restricted cash consists
of a certificate of deposit guaranteeing a standby letter of
credit for product supplies. The reduction in restricted cash is
due to the release of funds in connection with debt and lease
terminations.

Net of restricted cash, our cash, cash
equivalents and short-term investments on December 31, 2002
were $13.1 million compared to $28.0 million at
December 31, 2001.

Net cash used for operating activities was
$26.3 million for the year ended December 31, 2002,
$53.6 million for the year ended December 31, 2001 and
$50.4 million for the year ended December 31, 2000.
The decrease from 2001 to 2002 was a result of decreased net
losses, primarily due to the $22.0 million of restructuring
expense recorded in May 2001, the effect of May 2001
restructuring in reducing overall headcount for 2002 and the
completion of two of the phase III trials during 2002. The
increase from 2000 to 2001 was primarily due to increased
research and development activity and the cost of the
restructuring plan implemented in May 2001.

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Net cash provided by (used in) investing
activities was $(1.6) million for the year ended
December 31, 2002, $44.7 million for the year ended
December 31, 2001 and $(42.7) million for the year ended
December 31, 2000. The decrease in the cash used by
investing activities in 2002 from the cash provided by investing
activities in 2001 is reflected in the maturities of short-term
investments of $51.8 million in 2001. The increase in cash
provided by investing activities in 2001 from a use of cash in
2000 was also due to the maturities of short-term investments
used to fund our operations in 2001.

Net cash provided by (used in) financing
activities was $10.1 million for the year ended
December 31, 2002, $(2.1) million for the year ended
December 31, 2001 and $113.5 million for the year ended
December 31, 2000. The cash provided by financing
activities in 2002 was due to the issuance of 7.1 million
shares of common stock in private placements and the issuance of
300,000 shares of common stock upon exercise of options for a
total of $19.5 million, offset by $9.4 million paid to
Silicon Valley Bank (SVB) during the fourth quarter of
2002, for principal and interest payments to retire our
corporate debt. The cash used in financing activities in 2001
was primarily due to payments on financing obligations partially
offset by proceeds from financing obligations. The cash provided
by financing activities for the year ended December 31,
2000 was due to the issuance of common stock, including net
proceeds of $103.3 million from the initial public offering, and
proceeds of $10.8 million from equipment lease financing
arrangements, partially offset by payments on these obligations.

In August 2001, we refinanced all of the existing
financing obligations by entering into a new line of credit of
$2.5 million and term loan agreement of $7.5 million
with SVB. The interest rate varied according to the prime rate.
On October 10, 2002, we repaid to SVB, the
$2.5 million line of credit and the remaining
$5.5 million balance of the $7.5 million term loan at
which time the restriction on the $2.5 million certificate
of deposit was released. At December 31, 2002, the Company
had no obligations to SVB.

At December 31, 2002, we had no lease
commitments on facilities. In February 2003, we entered into an
agreement to lease a facility under an operating lease
agreement, which expires in June 2004. Under the terms of this
lease we are committed to pay approximately $84,000 in 2003 and
$43,000 in 2004.

The following are future contractual commitments
at December 31, 2002, (in thousands):

|                              |  |                        |     |        |  |           |     |           |  |            |     |  |  |   |     |  |  |   |   | 
|----------------------------- |  | ---------------------- | --- | ------ |  | --------- | --- | --------- |  | ---------- | --- |  |  | - | --- |  |  | - | - | 
|                              |  |                       
|                              |  | Payments Due by Period
|                              |  |                       
|Contractual Commitment        |  | Total                  |     | 1 year |  | 2-3 years |     | 4-5 years |  | Thereafter
|                              |  |                        |     |        |  |           |     |           |  |           
|Consultant payments           |  | $                      | 220 |        |  | $         | 220 |           |  | $          |    |  |  | $ |    |  |  | $ |  | 
|Polypeptide Labs              |  |                        | 540 |        |  |           | 340 |           |  |            | 100 |  |  |   | 100 |  |  |   |  | 
|                              |  |                        |     |        |  |           |     |           |  |            |     |  |  |   |     |  |  |   |   | 
|Total contractual commitments |  | $                      | 760 |        |  | $         | 560 |           |  | $          | 100 |  |  | $ | 100 |  |  | $ |  | 
|                              |  |                        |     |        |  |           |     |           |  |            |     |  |  |   |     |  |  |   |   | 

The $540,000 commitment to Polypeptide Labs
represents, in year one, the payment of $250,000 for drug
substance, $40,000 for a completion report, and $50,000 fee for
storage of drug substance and for future years the remaining
$200,000 represents storage fees for our drug substance.

We have an obligation to pay ongoing consulting
payments to a former officer during 2003 totaling approximately
$220,000.

We expect to continue to incur substantial
operating losses. We believe that existing capital resources
will be sufficient to fund our operations for at least the next
15 months. In addition, in February 2003, we entered into
agreements to sell to certain investors, in a private placement,
Series A preferred stock and warrants to purchase common
stock, subject to stockholder approval and ratification of the
transaction. If we are able to secure stockholder approval, and
the transaction is successfully completed, we will receive
aggregate gross proceeds of approximately $3.5 million. We
believe that this additional capital would be sufficient to meet
our operating and capital needs for an additional three months.
However, we cannot assure you that the stockholders will approve
the transaction, or that our current estimates and assumptions
will remain

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




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

Until we can generate sufficient cash from our
operations, which we do not expect for the foreseeable future,
we expect to finance future cash needs through private and
public financings, including equity financings. We cannot be
certain that additional funding will be available when needed or
on favorable terms. If additional funding is not available, we
may need to delay or curtail our development and clinical trial
activities to a significant extent.

Recent Accounting Pronouncements

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

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

In December 2002, the FASB issued Statement
No. 148 (SFAS 148), Accounting
for Stock-Based Compensation, Transition and Disclosure.SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation.
SFAS No. 148 also requires that disclosures of the pro
forma effect of using the fair value method of accounting for
stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148
requires disclosure of the pro forma effect in interim financial
statements. The transition and annual disclosure requirements of
SFAS No. 148 are effective for the Companys
fiscal year 2002. We have elected to follow the intrinsic value
method of accounting as prescribed by APB 25 to account for
employee and director stock options. See Stock-based
compensation in Note 2 of our Notes to Consolidated
Financial Statements for disclosures required by SFAS 148.

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. FIN 46
requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors
in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance

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its activities without additional subordinated
financial support from other parties. FIN 46 is effective
for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of
FIN 46 must be applied for the first interim or annual
period beginning after June 15, 2003. We do not believe
there will be material effect upon our financial condition or
results of operations from the adoption of the provisions of
FIN 46.





Item 7A.Quantitative
and Qualitative Disclosure About Market Risk

The primary objective of our investment
activities is to preserve our capital until it is required to
fund operations while at the same time maximizing the income we
receive from our investments without significantly increasing
risk. We own financial instruments that are sensitive to market
risks as part of our investment portfolio. To minimize this
risk, we maintain a portfolio of cash equivalents and short-term
investments in a variety of securities, including money market
funds and certificates of deposit. The average duration of all
our investments in fiscal 2002 and 2001 was less than one year.
Due to the short-term nature of these investments, a
50 basis point movement in market interest rates would not
have a material impact on the fair value of our portfolio as of
December 31, 2002 and 2001. We have no investments
denominated in foreign country currencies and therefore our
investments are not subject to foreign currency exchange risk.

The following table summarizes the average
interest rate and fair market value of the short-term
investments held by us as of December 31, 2002, 2001 and
2000 (in thousands).

|                               |  |            |        |             |  |               |        |  |  |  |      |  
|------------------------------ |  | ---------- | ------ | ----------- |  | ------------- | ------ |  |  |  | ---- | -
|                               |  |            |        | Fair Market |  | Average      
|Available for sale securities: |  | Total Cost |        | Value       |  | Interest Rate
|                               |  |            |        |             |  |              
|December 31, 2002              |  | $          | 2,895  |             |  | $             | 2,895  |  |  |  | 1.83 | %
|December 31, 2001              |  | $          |       |             |  | $             |       |  |  |  |     |  
|December 31, 2000              |  | $          | 45,525 |             |  | $             | 45,711 |  |  |  | 7.10 | %

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

INTRABIOTICS PHARMACEUTICALS, INC.

INDEX TO FINANCIAL STATEMENTS

|                                                                                  |  |  |    | 
|--------------------------------------------------------------------------------- |  |  | -- | 
|Report of Ernst & Young LLP, Independent
    Auditors                             |  |  | 30 | 
|Balance Sheets As of December 31, 2002 and
    2001                               |  |  | 31 | 
|Statements of Operations for the Three Years
    Ended December 31, 2002          |  |  | 32 | 
|Statement of Stockholders Equity for the
    Three Years Ended December 31, 2002 |  |  | 33 | 
|Statements of Cash Flows for the Three Years
    Ended December 31, 2002          |  |  | 34 | 
|Notes to Financial Statements                                                     |  |  | 35 | 

29



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##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

The Board of Directors and Stockholders of

IntraBiotics Pharmaceuticals, Inc.


We have audited the accompanying balance sheets
of IntraBiotics Pharmaceuticals, Inc. as of December 31,
2002 and 2001, and the related statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2002. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
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 IntraBiotics Pharmaceuticals, Inc. as of
December 31, 2002 and 2001, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Palo Alto, California

January 31, 2003


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INTRABIOTICS PHARMACEUTICALS, INC.

BALANCE SHEETS

(In thousands, except share and per share
amounts)


|                                         |                                                                                                                                                                        |                                            |          |        |        |  |          |        |        | 
|---------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------- | ------ | ------ |  | -------- | ------ | ------ | 
|                                         |                                                                                                                                                                        |                                           
|                                         |                                                                                                                                                                        | December 31,                              
|                                         |                                                                                                                                                                        |                                           
|                                         |                                                                                                                                                                        | 2002                                       |          | 2001  
|                                         |                                                                                                                                                                        |                                            |          |       
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                        |                                            |          |        |        |  |          |       
|                                         | Cash and cash equivalents                                                                                                                                              |                                            | $        | 10,170 |        |  | $        | 27,982 |       
|                                         | Restricted cash deposits                                                                                                                                               |                                            |          | 250    |        |  |          | 7,488  |       
|                                         | Short-term investments                                                                                                                                                 |                                            |          | 2,895  |        |  |          |       |       
|                                         | Prepaid drug substance                                                                                                                                                 |                                            |          | 2,375  |        |  |          | 1,900  |       
|                                         | Prepaid expenses                                                                                                                                                       |                                            |          | 247    |        |  |          | 3,512  |       
|                                         |                                                                                                                                                                        |                                            |          |        |        |  |          |       
|                                         |                                                                                                                                                                        | Total current assets                       |          |        | 15,937 |  |          |        | 40,882 | 
|Property and equipment, net              |                                                                                                                                                                        |                                            | 112      |        |        |  | 1,540    |       
|Other assets                             |                                                                                                                                                                        |                                            | 177      |        |        |  | 43       |       
|                                         |                                                                                                                                                                        |                                            |          |        |        |  |          |       
|                                         |                                                                                                                                                                        | Total assets                               |          | $      | 16,226 |  |          | $      | 42,465 | 
|                                         |                                                                                                                                                                        |                                            |          |        |        |  |          |       
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                        |                                            |          |        |        |  |          |       
|                                         | Accounts payable                                                                                                                                                       |                                            | $        | 345    |        |  | $        | 515    |       
|                                         | Accrued clinical costs                                                                                                                                                 |                                            |          |       |        |  |          | 1,663  |       
|                                         | Accrued employee liabilities                                                                                                                                           |                                            |          | 135    |        |  |          | 610    |       
|                                         | Accrued restructuring charges                                                                                                                                          |                                            |          | 64     |        |  |          | 2,861  |       
|                                         | Deferred rent                                                                                                                                                          |                                            |          |       |        |  |          | 618    |       
|                                         | Other accrued liabilities                                                                                                                                              |                                            |          | 202    |        |  |          | 611    |       
|                                         | Current financing obligations                                                                                                                                          |                                            |          |       |        |  |          | 4,375  |       
|                                         |                                                                                                                                                                        |                                            |          |        |        |  |          |       
|                                         |                                                                                                                                                                        | Total current liabilities                  |          |        | 746    |  |          |        | 11,253 | 
|Long-term financing obligations          |                                                                                                                                                                        |                                            |         |        |        |  | 5,000    |       
|Commitments                              |                                                                                                                                                                        |                                            |          |        |        |  |          |       
|Stockholders equity:                    |                                                                                                                                                                        |                                            |          |        |        |  |          |       
|Preferred stock, $0.001 par value:       |                                                                                                                                                                        |                                            |          |        |        |  |          |       
|                                         | 5,000,000 convertible shares authorized at
    December 31, 2002 and 2001; no shares outstanding at
    December 31, 2002 and 2001                                     |                                            |          |       |        |  |          |       |       
|Common stock, $0.001 par value:          |                                                                                                                                                                        |                                            |          |        |        |  |          |       
|                                         | 50,000,000 shares authorized at December 31,
    2002 and 2001; 39,225,824 and 29,798,203 shares issued and
    outstanding at December 31, 2002 and 2001, repectively |                                            |          | 39     |        |  |          | 30     |       
|Additional paid-in capital               |                                                                                                                                                                        |                                            | 216,430  |        |        |  | 196,575  |       
|Deferred stock compensation              |                                                                                                                                                                        |                                            | (720     | )      |        |  | (4,577   | )     
|Accumulated deficit                      |                                                                                                                                                                        |                                            | (200,269 | )      |        |  | (165,816 | )     
|                                         |                                                                                                                                                                        |                                            |          |        |        |  |          |       
|                                         |                                                                                                                                                                        | Total stockholders equity                 |          |        | 15,480 |  |          |        | 26,212 | 
|                                         |                                                                                                                                                                        |                                            |          |        |        |  |          |       
|                                         |                                                                                                                                                                        | Total liabilities and stockholders equity |          | $      | 16,226 |  |          | $      | 42,465 | 
|                                         |                                                                                                                                                                        |                                            |          |        |        |  |          |       

See accompanying notes.

31



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##### Table of Contents



INTRABIOTICS PHARMACEUTICALS, INC.

STATEMENTS OF OPERATIONS

(In thousands, except per share
amounts)


|                                                                                      |                                  |                         |         |        |   |      |         |        |  |   |         |        | 
|------------------------------------------------------------------------------------- | -------------------------------- | ----------------------- | ------- | ------ | - | ---- | ------- | ------ |  | - | ------- | ------ | 
|                                                                                      |                                  |                        
|                                                                                      |                                  | Year Ended December 31,
|                                                                                      |                                  |                        
|                                                                                      |                                  | 2002                    |         | 2001   |   | 2000
|                                                                                      |                                  |                         |         |        |   |     
|Operating expenses:                                                                   |                                  |                         |         |        |   |      |         |        |  |   |         |       
|                                                                                      | Research and development         |                         | $       | 23,053 |   |      | $       | 38,034 |  |   | $       | 39,152 | 
|                                                                                      | General and administrative       |                         |         | 8,617  |   |      |         | 9,202  |  |   |         | 11,560 | 
|                                                                                      | Impairment of acquired workforce |                         |         | 1,365  |   |      |         |       |  |   |         |       | 
|                                                                                      | Restructuring and other charges  |                         |         | 6,118  |   |      |         | 21,956 |  |   |         |       | 
|                                                                                      | Arbitration settlement           |                         |         | (3,600 | ) |      |         |       |  |   |         |       | 
|                                                                                      |                                  |                         |         |        |   |      |         |        |  |   |         |       
|Total operating expenses                                                              |                                  |                         | 35,553  |        |   |      | 69,192  |        |  |   | 50,712  |       
|                                                                                      |                                  |                         |         |        |   |      |         |        |  |   |         |       
|Operating loss                                                                        |                                  |                         | (35,553 | )      |   |      | (69,192 | )      |  |   | (50,712 | )     
|Interest income                                                                       |                                  |                         | 703     |        |   |      | 2,843   |        |  |   | 5,699   |       
|Interest expense                                                                      |                                  |                         | (459    | )      |   |      | (1,110  | )      |  |   | (563    | )     
|Other income                                                                          |                                  |                         | 856     |        |   |      | 93      |        |  |   |        |       
|                                                                                      |                                  |                         |         |        |   |      |         |        |  |   |         |       
|Net loss                                                                              |                                  | $                       | (34,453 | )      |   | $    | (67,366 | )      |  | $ | (45,576 | )     
|                                                                                      |                                  |                         |         |        |   |      |         |        |  |   |         |       
|Basic and diluted net loss per share                                                  |                                  | $                       | (0.94   | )      |   | $    | (2.29   | )      |  | $ | (2.02   | )     
|                                                                                      |                                  |                         |         |        |   |      |         |        |  |   |         |       
|Shares used to compute basic and diluted net loss
    per share                       |                                  |                         | 36,763  |        |   |      | 29,432  |        |  |   | 22,512  |       
|                                                                                      |                                  |                         |         |        |   |      |         |        |  |   |         |       
|Pro forma basic and diluted net loss per share
    (unaudited)                        |                                  |                         |         |        |   |      |         |        |  | $ | (1.67   | )     
|                                                                                      |                                  |                         |         |        |   |      |         |        |  |   |         |       
|Shares used to compute pro forma basic and
    diluted net loss per share (unaudited) |                                  |                         |         |        |   |      |         |        |  |   | 27,231  |       
|                                                                                      |                                  |                         |         |        |   |      |         |        |  |   |         |       

See accompanying notes.

32



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##### Table of Contents



INTRABIOTICS PHARMACEUTICALS, INC.

STATEMENT OF STOCKHOLDERS
EQUITY

(In thousands, except share amounts)


|                                                                                                       |                               |             |         |        |  |            |    |              |  |               |         |             |  |               |         |   |  |   |     |      |   |   |          |         |   |   |         |         |  
|------------------------------------------------------------------------------------------------------ | ----------------------------- | ----------- | ------- | ------ |  | ---------- | -- | ------------ |  | ------------- | ------- | ----------- |  | ------------- | ------- | - |  | - | --- | ---- | - | - | -------- | ------- | - | - | ------- | ------- | -
|                                                                                                       |                               |             |         |        |  |            |    |              |  | Accumulated   |         |             |  |              
|                                                                                                       |                               | Convertible |         |        |  | Additional |    | Deferred     |  | Other         |         |             |  | Total        
|                                                                                                       |                               | Preferred   |         | Common |  | Paid-In    |    | Stock        |  | Comprehensive |         | Accumulated |  | Stockholders
|                                                                                                       |                               | Stock       |         | Stock  |  | Capital    |    | Compensation |  | Income (Loss) |         | Deficit     |  | Equity       
|                                                                                                       |                               |             |         |        |  |            |    |              |  |               |         |             |  |              
|Balances at December 31, 1999                                                                          |                               | $           | 79,609  |        |  | $          | 1  |              |  | $             | 13,828  |             |  | $             | (12,650 | ) |  | $ |    |      |   | $ | (52,874  | )       |   | $ | 27,914  |        
|Conversion of preferred stock to
    19,742 shares of common stock at the initial public offering      |                               |             | (79,609 | )      |  |            | 20 |              |  |               | 79,589  |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   |        |        
|Initial public offering of 7,500 shares of common
    stock for cash (net of issuance costs of $9,221) |                               |             |        |        |  |            | 7  |              |  |               | 103,272 |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   | 103,279 |        
|Issuance of 532 shares of common stock upon
    exercise of options for cash                           |                               |             |        |        |  |            | 1  |              |  |               | 549     |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   | 550     |        
|Issuance of 34 shares of common stock upon net
    exercise of warrants                                |                               |             |        |        |  |            |   |              |  |               |        |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   |        |        
|Issuance of 49 shares of common stock for the
    employee stock purchase plan for cash                |                               |             |        |        |  |            |   |              |  |               | 403     |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   | 403     |        
|Issuance of warrants to purchase 10 shares of
    common stock                                         |                               |             |        |        |  |            |   |              |  |               | 25      |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   | 25      |        
|Deferred stock compensation                                                                            |                               |             |        |        |  |            |   |              |  |               | 722     |             |  |               | (722    | ) |  |   |    |      |   |   |         |         |   |   |        |        
|Amortization of deferred stock compensation                                                            |                               |             |        |        |  |            |   |              |  |               |        |             |  |               | 3,174   |   |  |   |    |      |   |   |         |         |   |   | 3,174   |        
|Comprehensive loss:                                                                                    |                               |             |         |        |  |            |    |              |  |               |         |             |  |               |         |   |  |   |     |      |   |   |          |         |   |   |         |        
|                                                                                                       | Net loss                      |             |         |       |  |            |    |             |  |               |         |            |  |               |         |  |  |   |     |     |   |   |          | (45,576 | ) |   |         | (45,576 | )
|                                                                                                       | Unrealized gain on securities |             |         |       |  |            |    |             |  |               |         |            |  |               |         |  |  |   |     | 186  |   |   |          |        |   |   |         | 186     |  
|                                                                                                       |                               |             |         |        |  |            |    |              |  |               |         |             |  |               |         |   |  |   |     |      |   |   |          |         |   |   |         |        
|Comprehensive loss                                                                                     |                               |             |         |        |  |            |    |              |  |               |         |             |  |               |         |   |  |   |     |      |   |   |          |         |   |   | (45,390 | )      
|                                                                                                       |                               |             |         |        |  |            |    |              |  |               |         |             |  |               |         |   |  |   |     |      |   |   |          |         |   |   |         |        
|Balances at December 31, 2000                                                                          |                               |             |        |        |  |            | 29 |              |  |               | 198,388 |             |  |               | (10,198 | ) |  |   | 186 |      |   |   | (98,450  | )       |   |   | 89,955  |        
|Issuance of 543 shares of common stock upon
    exercise of options for cash                           |                               |             |        |        |  |            | 1  |              |  |               | 434     |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   | 435     |        
|Stock compensation for consultant services                                                             |                               |             |        |        |  |            |   |              |  |               | 5       |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   | 5       |        
|Issuance of 30 shares of common stock for the
    employee stock purchase plan for cash                |                               |             |        |        |  |            |   |              |  |               | 36      |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   | 36      |        
|Issuance of warrants to purchase 700 shares of
    common stock                                        |                               |             |        |        |  |            |   |              |  |               | 560     |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   | 560     |        
|Issuance of 29 shares of common stock for
    employee services                                        |                               |             |        |        |  |            |   |              |  |               | 39      |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   | 39      |        
|Amortization of deferred stock compensation                                                            |                               |             |        |        |  |            |   |              |  |               |        |             |  |               | 2,734   |   |  |   |    |      |   |   |         |         |   |   | 2,734   |        
|Cancellation of stock options related to employee
    terminations                                     |                               |             |        |        |  |            |   |              |  |               | (2,887  | )           |  |               | 2,887   |   |  |   |    |      |   |   |         |         |   |   |        |        
|Comprehensive loss:                                                                                    |                               |             |         |        |  |            |    |              |  |               |         |             |  |               |         |   |  |   |     |      |   |   |          |         |   |   |         |        
|                                                                                                       | Net loss                      |             |         |       |  |            |    |             |  |               |         |            |  |               |         |  |  |   |     |     |   |   |          | (67,366 | ) |   |         | (67,366 | )
|                                                                                                       | Unrealized gain on securities |             |         |       |  |            |    |             |  |               |         |            |  |               |         |  |  |   |     | (186 | ) |   |          |        |   |   |         | (186    | )
|                                                                                                       |                               |             |         |        |  |            |    |              |  |               |         |             |  |               |         |   |  |   |     |      |   |   |          |         |   |   |         |        
|                                                                                                       |                               |             |         |        |  |            |    |              |  |               |         |             |  |               |         |   |  |   |     |      |   |   |          |         |   |   | (67,552 | )      
|                                                                                                       |                               |             |         |        |  |            |    |              |  |               |         |             |  |               |         |   |  |   |     |      |   |   |          |         |   |   |         |        
|Balances at December 31, 2001                                                                          |                               |             |        |        |  |            | 30 |              |  |               | 196,575 |             |  |               | (4,577  | ) |  |   |    |      |   |   | (165,816 | )       |   |   | 26,212  |        
|Issuance of 347 shares of common stock upon
    exercise of options for cash                           |                               |             |        |        |  |            |   |              |  |               | 471     |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   | 471     |        
|Issuance of 7,147 shares of common stock on
    private placement for cash                             |                               |             |        |        |  |            | 7  |              |  |               | 18,974  |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   | 18,981  |        
|Issuance of 450 shares of common stock on
    acquisition of Apothogen Inc.                            |                               |             |        |        |  |            | 1  |              |  |               | 1,923   |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   | 1,924   |        
|Stock compensation for consultant services                                                             |                               |             |        |        |  |            |   |              |  |               | 512     |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   | 512     |        
|Issuance of 13 shares of common stock for the
    employee stock purchase plan for cash                |                               |             |        |        |  |            |   |              |  |               | 10      |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   | 10      |        
|Issuance of warrants to purchase 50 shares of
    common stock                                         |                               |             |        |        |  |            |   |              |  |               | 7       |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   | 7       |        
|Issuance of 1,475 shares of common stock for
    services                                              |                               |             |        |        |  |            | 1  |              |  |               | 544     |             |  |               |        |   |  |   |    |      |   |   |         |         |   |   | 545     |        
|Amortization of deferred stock compensation                                                            |                               |             |        |        |  |            |   |              |  |               |        |             |  |               | 1,271   |   |  |   |    |      |   |   |         |         |   |   | 1,271   |        
|Cancellation of stock options related to employee
    terminations                                     |                               |             |        |        |  |            |   |              |  |               | (2,586  | )           |  |               | 2,586   |   |  |   |    |      |   |   |         |         |   |   |        |        
|Net loss and comprehensive loss                                                                        |                               |             |        |        |  |            |   |              |  |               |        |             |  |               |        |   |  |   |    |      |   |   | (34,453  | )       |   |   | (34,453 | )      
|                                                                                                       |                               |             |         |        |  |            |    |              |  |               |         |             |  |               |         |   |  |   |     |      |   |   |          |         |   |   |         |        
|Balances at December 31, 2002                                                                          |                               | $           |        |        |  | $          | 39 |              |  | $             | 216,430 |             |  | $             | (720    | ) |  | $ |    |      |   | $ | (200,269 | )       |   | $ | 15,480  |        
|                                                                                                       |                               |             |         |        |  |            |    |              |  |               |         |             |  |               |         |   |  |   |     |      |   |   |          |         |   |   |         |        

See accompanying notes.

33



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##### Table of Contents



INTRABIOTICS PHARMACEUTICALS, INC.

STATEMENTS OF CASH FLOWS

(In thousands)


|                                                         |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |         |         |        |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ---------------------------------- | ------- | ------ | ------ | ------- | ------- | ------- | ------ | ------ | ------- | ------- | ------ | -
|                                                         |                                                                                 |                                                                               
|                                                         |                                                                                 | Year Ended December 31,                                                       
|                                                         |                                                                                 |                                                                               
|                                                         |                                                                                 | 2002                                                                           |                                    | 2001    |        | 2000  
|                                                         |                                                                                 |                                                                                |                                    |         |        |       
|Operating activities                                     |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|                                                         | Net loss                                                                        |                                                                                | $                                  | (34,453 | )      |        | $       | (67,366 | )       |        | $      | (45,576 | )      
|                                                         | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                                |                                    |         |        |        |         |         |         |        |        |         |        
|                                                         |                                                                                 | Amortization of deferred stock compensation                                    |                                    |         | 1,271  |        |         |         | 2,734   |        |        |         | 3,174   |       
|                                                         |                                                                                 | Write down of property and equipment                                           |                                    |         | 274    |        |         |         | 9,658   |        |        |         |        |       
|                                                         |                                                                                 | Fair value of warrants issued                                                  |                                    |         | 7      |        |         |         | 560     |        |        |         | 25      |       
|                                                         |                                                                                 | Depreciation and amortization                                                  |                                    |         | 725    |        |         |         | 1,690   |        |        |         | 1,512   |       
|                                                         |                                                                                 | Stock compensation expense                                                     |                                    |         | 1,057  |        |         |         | 44      |        |        |         |        |       
|                                                         |                                                                                 | Amortization of acquired workforce                                             |                                    |         | 329    |        |         |         |        |        |        |         |        |       
|                                                         |                                                                                 | Gain on sale of pre-clinical programs and other
    assets                     |                                    |         | (975   | )      |         |         |        |        |        |         |        |       
|                                                         |                                                                                 | Write down of acquired workforce                                               |                                    |         | 1,365  |        |         |         |        |        |        |         |        |       
|                                                         |                                                                                 | Change in assets and liabilities:                                              |                                    |         |        |        |         |         |         |        |        |         |         |       
|                                                         |                                                                                 |                                                                                | Restricted cash                    |         |        | 7,238  |         |         |         | (6,117 | )      |         |         | (1,021 | )
|                                                         |                                                                                 |                                                                                | Other current assets               |         |        | 3,087  |         |         |         | 4,689  |        |         |         | (9,468 | )
|                                                         |                                                                                 |                                                                                | Other assets                       |         |        | 41     |         |         |         | 23     |        |         |         | 2      |  
|                                                         |                                                                                 |                                                                                | Accounts payable                   |         |        | (245   | )       |         |         | (1,341 | )      |         |         | (615   | )
|                                                         |                                                                                 |                                                                                | Accrued clinical liabilities       |         |        | (1,663 | )       |         |         | (1,573 | )      |         |         | 2,320  |  
|                                                         |                                                                                 |                                                                                | Accrued employee liabilities       |         |        | (475   | )       |         |         | (46    | )      |         |         | 304    |  
|                                                         |                                                                                 |                                                                                | Accrued restructuring charges      |         |        | (2,797 | )       |         |         | 2,861  |        |         |         |       |  
|                                                         |                                                                                 |                                                                                | Deferred rent                      |         |        | (618   | )       |         |         | 384    |        |         |         | 234    |  
|                                                         |                                                                                 |                                                                                | Other accrued liabilities          |         |        | (515   | )       |         |         | 198    |        |         |         | 406    |  
|                                                         |                                                                                 |                                                                                | Amount payable to contract partner |         |        |       |         |         |         |       |        |         |         | (1,677 | )
|                                                         |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|                                                         | Net cash used in operating activities                                           |                                                                                |                                    | (26,347 | )      |        |         | (53,602 | )       |        |        | (50,380 | )      
|Investing activities                                     |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|                                                         |                                                                                 | Capital expenditures                                                           |                                    |         | (41    | )      |         |         | (3,665  | )      |        |         | (9,740  | )     
|                                                         |                                                                                 | Proceeds from sale of property and equipment                                   |                                    |         | 526    |        |         |         | 2,833   |        |        |         |        |       
|                                                         |                                                                                 | Proceeds from sale of pre-clinical programs and
    other assets               |                                    |         | 800    |        |         |         |        |        |        |         |        |       
|                                                         |                                                                                 | Purchase of short-term investments                                             |                                    |         | (2,895 | )      |         |         | (6,296  | )      |        |         | (61,453 | )     
|                                                         |                                                                                 | Maturities of short-term investments                                           |                                    |         |       |        |         |         | 51,821  |        |        |         | 28,495  |       
|                                                         |                                                                                 | Cash received in acquisition of subsidiary                                     |                                    |         | 58     |        |         |         |        |        |        |         |        |       
|                                                         |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|                                                         | Net cash provided by (used in) investing
    activities                         |                                                                                |                                    | (1,552  | )      |        |         | 44,693  |         |        |        | (42,698 | )      
|Financing activities                                     |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|                                                         |                                                                                 | Proceeds from issuance of common stock, net of
    issuance costs              |                                    |         | 19,462 |        |         |         | 471     |        |        |         | 104,232 |       
|                                                         |                                                                                 | Proceeds from financing obligations                                            |                                    |         |       |        |         |         | 11,209  |        |        |         | 10,833  |       
|                                                         |                                                                                 | Payments on financing obligations                                              |                                    |         | (9,375 | )      |         |         | (13,772 | )      |        |         | (1,516  | )     
|                                                         |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|                                                         | Net cash provided by (used in) financing
    activities                         |                                                                                |                                    | 10,087  |        |        |         | (2,092  | )       |        |        | 113,549 |        
|                                                         |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|Net (decrease)/increase in cash and cash
    equivalents |                                                                                 |                                                                                | (17,812                            | )       |        |        | (11,001 | )       |         |        | 20,471 |        
|Cash and cash equivalents at beginning of period         |                                                                                 |                                                                                | 27,982                             |         |        |        | 38,983  |         |         |        | 18,512 |        
|                                                         |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|Cash and cash equivalents at end of period               |                                                                                 | $                                                                              | 10,170                             |         |        | $      | 27,982  |         |         | $      | 38,983 |        
|                                                         |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|Supplemental disclosures of cash flow information        |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|                                                         |                                                                                 | Interest paid                                                                  |                                    | $       | 459    |        |         | $       | 1,110   |        |        | $       | 563     |       
|                                                         |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|Supplemental disclosure of non-cash
    information      |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|                                                         |                                                                                 | Conversion of preferred stock to common stock                                  |                                    | $       |       |        |         | $       |        |        |        | $       | 79,609  |       
|                                                         |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|                                                         |                                                                                 | Net deferred stock compensation (cancelations due
    to employee termination) |                                    | $       | (2,586 | )      |         | $       | (2,887  | )      |        | $       | 722     |       
|                                                         |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|                                                         |                                                                                 | Other assets received from sale of pre-clinical
    programs                   |                                    | $       | 375    |        |         | $       |        |        |        | $       |        |       
|                                                         |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|Cash flow for acquisition of subsidiary                  |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|                                                         |                                                                                 | Acquired workforce                                                             |                                    | $       | 1,694  |        |         |         |         |        |        |         |         |       
|                                                         |                                                                                 | Other current assets acquired                                                  |                                    |         | 297    |        |         |         |         |        |        |         |         |       
|                                                         |                                                                                 | Property and equipment acquired                                                |                                    |         | 56     |        |         |         |         |        |        |         |         |       
|                                                         |                                                                                 | Liabilities assumed                                                            |                                    |         | (75    | )      |         |         |         |        |        |         |         |       
|                                                         |                                                                                 | Acquisition costs incurred                                                     |                                    |         | (106   | )      |         |         |         |        |        |         |         |       
|                                                         |                                                                                 | Common stock issued                                                            |                                    |         | (1,924 | )      |         |         |         |        |        |         |         |       
|                                                         |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        
|                                                         |                                                                                 | Cash received in acquisition                                                   |                                    | $       | (58    | )      |         |         |         |        |        |         |         |       
|                                                         |                                                                                 |                                                                                |                                    |         |        |        |         |         |         |        |        |        

See accompanying notes.

34



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS

1.     Description of
Business

IntraBiotics Pharmaceuticals, Inc.
(IntraBiotics or the Company), was
incorporated in the state of Delaware on January 19, 1994.
IntraBiotics is focused on developing iseganan HCl oral
solution for the prevention of ventilator-associated pneumonia
(VAP). The Company has devoted substantially all of its efforts
and resources since incorporation to research and development
related to its antimicrobial products.

The Company has funded its operations primarily
through the private sale of equity securities, funds received
from a terminated collaboration agreement, the proceeds of
equipment financing arrangements, the sale of two pre-clinical
anti-infective programs, and the Companys initial public
offering of common stock in March 2000. Prior to achieving
profitable operations, the Company intends to fund operations
principally through private and public financings, including
equity financings.

On March 27, 2000, the Company completed its
initial public offering of common stock in which it sold
7,500,000 shares of common stock at a price of
$15.00 per share. Net proceeds to the Company from the
initial public offering were approximately $103.3 million.

In February 2002, the Company completed a private
placement of 5.9 million shares of common stock resulting
in net proceeds of $13.9 million, and in April 2002, the
Company completed a private placement of 1.2 million shares
of common stock to Ernest Mario, Ph.D. resulting in
proceeds of $5.0 million.

The Company expects available cash and cash
equivalents, short-term investments and restricted cash of
$13.3 million at December 31, 2002 will be adequate to
fund operations through December 2003 assuming cost containment
measures are effective. The Company may require additional
financing resources to complete development and
commercialization of its product. Management plans to continue
to finance the Companys operations primarily through
issuance of equity securities. Prior to product
commercialization, if the financing arrangements contemplated by
the Company are not consummated, the Company may have to seek
other sources of capital or re-evaluate its operating plans. The
Company intends to seek additional funding through public or
private equity or debt financing, when market conditions allow.
There can be no assurance that the Company will be able to enter
into financing arrangements on acceptable terms in the future,
if at all.

2.     Summary of
Significant Accounting Policies



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes, including amounts accrued for clinical trial
costs, accrued restructuring charges, and stock based
compensation.

The Companys estimate of the accrued costs
is based on historical experience, information received from
third parties and on various other assumptions that are believed
to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results could therefore differ materially from
those estimates under different assumptions or conditions.



| |                                                
| | -----------------------------------------------
| | Cash Equivalents and Short-Term
    Investments

The Company considers all highly liquid
investments purchased with original maturities of three months
or less to be cash equivalents. Cash equivalents and short-term
investments include money market funds and certificates of
deposit. All cash equivalents and short-term investments are
classified as available-for-sale and mature within one year.

The Companys investment securities are
recorded at their fair market value, based on quoted market
values, with any unrealized gains and losses recorded as a
separate component of stockholders equity and

35



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS  (Continued)


included in other comprehensive loss. At
December 31, 2002 and 2001, there were no unrealized gains
or losses on available-for-sale securities. The cost of
securities when sold is based upon specific identification. For
the years ended December 31, 2002, 2001, and 2000, there
were no gross realized gains and losses on available-for-sale
securities.

At December 31, 2002, the Companys
investment portfolio consists of money market funds of
$6.7 million, which are recorded as cash equivalents and
certificates of deposit of $2.9 million, which are recorded
as short-term investments.

At December 31, 2001, the Company investment
portfolio consists of money market funds of $26.4 million,
which are recorded as cash equivalents.



| |                
| | ---------------
| | Restricted Cash

Restricted cash at December 31, 2002 was
$250,000, which has been pledged to a supplier for drug
substance that is expected to be delivered in 2003. Restricted
cash at December 31, 2001 was $7.5 million, which
consisted of $3.0 million pledged to a supplier for drug
substance, $2.5 million pledged as security on a line of
credit which was paid off in 2002, and $2.0 million pledged
as security deposits on leased facilities.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The fair value of financial instruments,
including cash and cash equivalents, short-term investments, and
financing obligations, which have variable rates, approximate
their carrying value.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost less
accumulated depreciation, which is provided using the
straight-line method over the estimated useful lives of the
respective assets, generally three to five years. Leasehold
improvements are depreciated over the terms of the building
leases.



| |                      
| | ---------------------
| | Restructuring Charges

The Companys restructuring charges include
an estimate of the costs for terminated employees in accordance
with EITF 94-3 and related interpretations. The Company
continues to monitor the actual costs and expected remaining
obligations in connection with our restructuring plan, and
revise the estimates accordingly. Severance estimates were
determined based on our assessment of remaining payroll and
employee benefits for the employees involved.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

Long-lived assets and certain identifiable
intangible assets to be held and used are reviewed for
impairment when events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable.
Determination of recoverability is generally based on an
estimate of undiscounted cash flows resulting from the use of
the assets and their eventual disposition. In the event that
such cash flows are insufficient to recover the carrying amount
of the assets, the assets are written down to the estimated fair
value. Long-lived assets to be disposed of are reported at the
lower of the carrying amount or the estimated fair value less
costs to sell.



| |                         
| | ------------------------
| | Research and Development

Research and development expenditures are charged
to operations as incurred. Research and development expenses,
including direct and allocated expenses, consist of independent
research and development costs, and costs associated with
collaborative research and development arrangements. Direct
costs include salaries, costs of drug product, fees paid to
contract research organizations in addition to general
departmental

36



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS  (Continued)


costs. Independent research and development costs
and costs associated with collaborative research and development
arrangements are charged to expense as incurred.

The Company relies on contract manufacturers to
manufacture the bulk drug substance and formulated drug product
on a commercial scale. The Company depends on these
single-source contract manufacturers to produce products for use
in its clinical trial. If these contract manufacturers are
unable or fail to produce the required quantities of
iseganan HCl for clinical use or commercial sale on a
timely basis, at commercially reasonable prices, and with
sufficient purity, the Company will not have sufficient
quantities to complete current and future clinical trials, or to
meet commercial demand.



| |                        
| | -----------------------
| | Clinical Trial Accruals

The Companys accrued costs for clinical
trial activities performed by contract research organizations
are based upon estimates of the percentage of work completed
over the life of the individual study. These estimates may or
may not match the actual services performed by the organization
as determined by patient enrollment levels and related
activities. The Company monitors patient enrollment levels and
related activities to the extent possible, however, if the
company underestimated activity levels associated with various
studies at a given point in time, the company could record
significant research and development expenses in future periods.
All such costs are charged to R&D expense as incurred.



| |                         
| | ------------------------
| | Stock-Based Compensation

As permitted by SFAS No. 123
(SFAS 123), Accounting for Stock-Based
Compensation, the Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, (APB 25) and related
Interpretations in accounting for stock-based employee
compensation. Under APB 25, if the exercise price of the
Companys employee and director stock options equals or
exceeds the deemed fair value of the underlying stock on the
date of grant, no compensation expense is recognized.

When the exercise price of the employee or
director stock options is less than the deemed fair value of the
underlying stock on the grant date, the Company records deferred
compensation for the difference. Deferred compensation is being
amortized on a straight-line basis over the vesting period of
the original award, ranging from four to six years. Options or
stock awards issued to non-employees are recorded at their fair
value as determined in accordance with SFAS 123, and are
recognized over the related service period and are periodically
remeasured as the underlying options vest.

The following table illustrates the effect on net
loss and loss per share if the Company had applied the fair
value recognition provisions of SFAS 123 to stock-based
employee compensation. Future pro forma net income (loss)
results may be materially different from actual amounts reported.

|                                                                                                                    |                                 |                        |         |       |   |      |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ---------------------- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                    |                                 |                       
|                                                                                                                    |                                 | Year Ended December 31
|                                                                                                                    |                                 |                       
|                                                                                                                    |                                 | 2002                   |         | 2001  |   | 2000
|                                                                                                                    |                                 |                        |         |       |   |     
|Net loss, as reported                                                                                               |                                 | $                      | (34,453 | )     |   | $    | (67,366 | )     |   | $ | (45,576 | )    
|Add: Stock-based employee compensation expense
    included in reported net loss                                    |                                 |                        | 1,271   |       |   |      | 2,734   |       |   |   | 3,174   |      
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards |                                 |                        | (6,084  | )     |   |      | (5,895  | )     |   |   | (5,350  | )    
|                                                                                                                    |                                 |                        |         |       |   |      |         |       |   |   |         |      
|Pro forma net loss                                                                                                  |                                 | $                      | (39,266 | )     |   | $    | (70,527 | )     |   | $ | (47,752 | )    
|                                                                                                                    |                                 |                        |         |       |   |      |         |       |   |   |         |      
|Earnings per share:                                                                                                 |                                 |                        |         |       |   |      |         |       |   |   |         |      
|                                                                                                                    | Basic and diluted  as reported |                        | $       | (0.94 | ) |      | $       | (2.29 | ) |   | $       | (2.02 | )
|                                                                                                                    |                                 |                        |         |       |   |      |         |       |   |   |         |      
|                                                                                                                    | Basic and diluted  pro forma   |                        | $       | (1.07 | ) |      | $       | (2.40 | ) |   | $       | (2.12 | )
|                                                                                                                    |                                 |                        |         |       |   |      |         |       |   |   |         |      

37



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS  (Continued)


Pro forma information regarding net loss is
required by SFAS 123, as amended by SFAS 148, and has
been determined as if the Company had accounted for its employee
stock options under the fair value method of that statement. The
fair value for these options was estimated at the date of the
grant using the Black-Scholes option pricing model in 2002, 2001
and 2000 with the following weighted-average assumptions.

|                         |  |                          |         |      |  |      |         |   |  |  |         |  
|------------------------ |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                         |  |                         
|                         |  | Years Ended December 31,
|                         |  |                         
|                         |  | 2002                     |         | 2001 |  | 2000
|                         |  |                          |         |      |  |     
|Risk-free interest rates |  |                          | 2.89    | %    |  |      | 3.75    | % |  |  | 6.00    | %
|Volatility               |  |                          | 1.00    |      |  |      | 0.75    |   |  |  | 0.75    |  
|Dividend yield           |  |                          |        |      |  |      |        |   |  |  |        |  
|Expected life of option  |  |                          | 5 years |      |  |      | 5 years |   |  |  | 5 years |  



| |                   
| | ------------------
| | Comprehensive Loss

The Companys comprehensive loss for the
years ended December 31, 2002, 2001, and 2000 was
$34.5 million, $67.6 million and $45.4 million,
respectively. Other comprehensive loss for the year ended
December 31, 2001 comprises net unrealized losses on
available-for-sale securities of $186,000. Other comprehensive
income for the year ended December 31, 2000 comprises net
unrealized gains on available-for-sale securities of $186,000.



| |                   
| | ------------------
| | Net Loss Per Share

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

Pro forma basic and diluted net loss per share,
as presented in the statements of operations, has been computed
for the year ended December 31, 2000, as described above,
and also gives effect to the conversion of the convertible
preferred stock which automatically converted to common stock
immediately prior to the completion of the Companys
initial public offering (using the if-converted method) from the
original date of issuance.

38



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS  (Continued)


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

|                                                              |                                                                                                                        |                         |       |         |   |      |       |         |   |   |        |         |  
|------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ----------------------- | ----- | ------- | - | ---- | ----- | ------- | - | - | ------ | ------- | -
|                                                              |                                                                                                                        |                        
|                                                              |                                                                                                                        | Year Ended December 31,
|                                                              |                                                                                                                        |                        
|                                                              |                                                                                                                        | 2002                    |       | 2001    |   | 2000
|                                                              |                                                                                                                        |                         |       |         |   |     
|                                                              | Net loss                                                                                                               |                         | $     | (34,453 | ) |      | $     | (67,366 | ) |   | $      | (45,576 | )
|                                                              |                                                                                                                        |                         |       |         |   |      |       |         |   |   |        |        
|                                                              | Shares used to compute basic and diluted net loss
    per share                                                        |                         |       | 36,763  |   |      |       | 29,432  |   |   |        | 22,512  |  
|                                                              |                                                                                                                        |                         |       |         |   |      |       |         |   |   |        |        
|Basic and diluted net loss per share                          |                                                                                                                        | $                       | (0.94 | )       |   | $    | (2.29 | )       |   | $ | (2.02  | )      
|                                                              |                                                                                                                        |                         |       |         |   |      |       |         |   |   |        |        
|Pro forma basic and diluted:                                  |                                                                                                                        |                         |       |         |   |      |       |         |   |   |        |        
|                                                              | Shares used above                                                                                                      |                         |       |         |   |      |       |         |   |   |        | 22,512  |  
|                                                              | Pro forma adjustment to reflect weighted-average
    effect of conversion of preferred stock from the date of issuance |                         |       |         |   |      |       |         |   |   |        | 4,719   |  
|                                                              |                                                                                                                        |                         |       |         |   |      |       |         |   |   |        |        
|Total weighted-average shares of common stock
    outstanding |                                                                                                                        |                         |       |         |   |      |       |         |   |   | 27,231 |        
|                                                              |                                                                                                                        |                         |       |         |   |      |       |         |   |   |        |        
|Pro forma basic and diluted net loss per share                |                                                                                                                        |                         |       |         |   |      |       |         |   | $ | (1.67  | )      
|                                                              |                                                                                                                        |                         |       |         |   |      |       |         |   |   |        |        

The total number of shares excluded from the
calculations of diluted net loss per share for stock options,
warrants and convertible preferred stock were 8,326,136,
4,448,444, and 5,829,297 for the years ended December 31,
2002, 2001, and 2000, respectively. Such securities, had they
been dilutive, would have been included in the computations of
diluted net loss per share (see Note 8 for further
information on these securities).



| |                  
| | -----------------
| | Reclassifications

Certain reclassifications of prior year amounts
have been made to conform to current year classifications. The
total current liabilities amounts remain unchanged.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

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

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

39



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS  (Continued)


In December 2002, the FASB issued Statement
No. 148 (SFAS 148), Accounting for
Stock-Based Compensation, Transition and Disclosure.SFAS No. 148 provides alternative methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS
No. 148 also requires that disclosures of the pro forma
effect of using the fair value method of accounting for
stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148
requires disclosure of the pro forma effect in interim financial
statements. The transition and annual disclosure requirements of
SFAS No. 148 are effective for the Companys fiscal
year 2002. We have elected to follow the intrinsic value method
of accounting as prescribed by APB 25 to account for employee
and director stock options. See Stock-based
compensation in Note 2 of our Notes to Consolidated
Financial Statements for disclosures required by SFAS 148.

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. FIN 46
requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors
in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46
is effective for all new variable interest entities created or
acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or
annual period beginning after June 15, 2003. We do not
believe there will be material effect upon our financial
condition or results of operations from the adoption of the
provisions of FIN 46.

3.     Collaboration
Agreement with Pharmacia & Upjohn S.p.A.

In October 1997, the Company entered into a
collaboration agreement with Pharmacia & Upjohn S.p.A.
(Pharmacia), to develop and commercialize the Companys
iseganan HCl (formerly known as Protegrin IB-367), on
a worldwide basis.

The Company mutually agreed with Pharmacia in
July 1999 to terminate the agreement with funding through
December 31, 1999. As a result of the termination, the
Company has retained global rights to iseganan HCl.
Pharmacia has no further obligations to pay future milestones or
development expenses, or to purchase additional shares of common
stock subsequent to the termination.

4.     Property and
Equipment

Property and equipment consist of the following
(in thousands):

|                                               |  |              |      |      |  |   |        |  
|---------------------------------------------- |  | ------------ | ---- | ---- |  | - | ------ | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |      | 2001
|                                               |  |              |      |     
|Machinery and equipment                        |  | $            | 258  |      |  | $ | 2,492  |  
|Furniture and fixtures                         |  |              | 107  |      |  |   | 90     |  
|Leasehold improvements                         |  |              | 16   |      |  |   | 982    |  
|                                               |  |              |      |      |  |   |        |  
|                                               |  |              | 381  |      |  |   | 3,564  |  
|Less accumulated depreciation and amortization |  |              | (269 | )    |  |   | (2,024 | )
|                                               |  |              |      |      |  |   |        |  
|Property and equipment, net                    |  | $            | 112  |      |  | $ | 1,540  |  
|                                               |  |              |      |      |  |   |        |  

Depreciation and amortization for property and
equipment totaled $725,000, $1.7 million and
$1.5 million for the years ended December 31, 2002,
2001 and 2000, respectively.

5.     Commitments
and Financing Obligations

At December 31, 2002, the Company had no
lease commitments on facilities. In prior periods, the Company
leased its facilities under operating lease agreements, which
were set to expire in July 2004 and

40



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS  (Continued)


April 2011. In November 2002, the Company reached
agreements with its landlords to terminate all of its long-term
leases. See Note 6 for further discussion. At December 31,
2001, the Company had restricted cash of $2.0 million, in
connection with these facility leases.

Total rent expense for the years ended
December 31, 2002, 2001, and 2000 was approximately
$3.0 million, $5.0 million, and $2.4 million,
respectively. Of the $3.0 million rent expense in 2002,
$2.5 million was included in restructuring charges. Of the
$5.0 million rent expense in 2001, $3.2 million was
included in restructuring charges.

In August 2001, the Company refinanced all of the
existing financing obligations by entering into a new line of
credit of $2.5 million and term loan agreement of
$7.5 million with Silicon Valley Bank (SVB). The interest
rate varied according to the prime rate. On October 10,
2002, the Company repaid to SVB, the $2.5 million line of
credit and the remaining $5.5 million balance of the
$7.5 million term loan, at which time the restriction on
the $2.5 million certificate of deposit was released. At
December 31, 2002, the Company had no obligations to SVB.

The weighted average interest rates of the
financing obligations during 2002, 2001, and 2000 were 6.6%,
11.0% and 10.0%, respectively. The carrying value of the term
loan obligation approximates fair value based on the fact that
the interest rate on the obligation is variable.

The Company has an obligation to pay ongoing
consulting payments to a former officer of the Company during
2003 totaling approximately $220,000.

6.     Restructuring
and Other Charges

The Companys restructuring charges include
an estimate of the costs for terminated employees in accordance
with EITF 94-3 and related interpretations. The Company
continues to monitor the actual costs and expected remaining
obligations in connection with our restructuring plan, and
revise the estimates accordingly. Severance estimates were
determined based on our assessment of remaining payroll and
employee benefits for the employees involved.

On May 31, 2001, the Company implemented a
restructuring plan intended to conserve capital and focus
resources. As a result of this restructuring plan, the Company
recorded restructuring charges of $10.1 million and asset
write down charges of $11.8 million for a total of
approximately $22.0 in the second quarter of 2001. The
$10.1 million restructuring charge was for costs incurred
in work force reduction of $2.9 million, the termination of
collaboration agreements of $4.1 million and facilities
consolidation $3.2 million.

For the year ended December 31, 2001, the
Company paid $8.9 million of the restructuring charges in
cash, primarily in severance costs to approximately
90 employees, rent payments on vacant buildings, and
termination fees on collaboration agreements, and also expensed
$560,000 for warrants issued as part of a collaboration
agreement termination.

The May 2001 restructuring included a reduction
in force of approximately 90 positions in research and
administration, or 71% of the Companys previous workforce
of 127 employees. All of the terminated employees left the
Company in 2001. The estimated costs for terminated employees
were reduced by $236,000 in the fourth quarter of 2001, as no
remaining severance amounts were payable. In the quarter ended
March 30, 2002, we received a refund for workers comp
insurance of approximately $75,000 related to employees
terminated as a result of the May 2001 reduction in force, which
was recorded as an adjustment to reflect a revised estimate of
the restructuring charges.

The May 2001 restructuring also included the
termination of certain research and development collaborations
and the consolidation of operations into one existing facility
in Mountain View, California. The estimated costs associated
with terminated collaboration agreements were increased by
$483,000 in the fourth quarter of 2001 and $166,000 in 2002. At
December 31, 2002, there are no remaining amounts payable
for such agreements and costs.

41



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NOTES TO FINANCIAL
STATEMENTS  (Continued)


The Company vacated three facilities in Mountain
View, California as a part of the May 2001 restructuring plan,
comprising 142,000 square feet. One of the vacated facilities
was sub-leased during 2001, and the landlord took another back,
with no continuing obligation to the Company. In the fourth
quarter of 2001, an adjustment was made to increase
restructuring charges associated with facilities consolidation
by $1.9 million for additional costs related to the third
vacated facility. In November 2002, the Company reached
agreements with the landlords of this building and the facility,
which the Company had subleased to terminate the leases. The
additional expense recorded in 2002 was $5.2 million and
included cash payments, the issuance of common stock and the
reclassification of a deferred liability. At December 31,
2002, the Company had no further lease obligations and hence,
there are no accrued restructuring charges related to these
facilities.

Additionally as a part of the May 2001
restructure plan, the Company wrote down to estimated fair value
$11.8 million of leasehold improvements, laboratory
equipment, computers and other assets that were no longer being
used. In the fourth quarter of 2001, the Company received
proceeds from the disposition of certain leasehold improvements
and other assets previously written down, in excess of the
amounts originally estimated, and as a result recognized a gain
of $2.2 million in the fourth quarter of 2001 in
restructuring and other charges in the statement of operations.

The May 2001 restructuring consist of the
following activity (in thousands):

|                                                       |  |            |        |               |  |               |        |       |  |   |        |   |  |   |        |  
|------------------------------------------------------ |  | ---------- | ------ | ------------- |  | ------------- | ------ | ----- |  | - | ------ | - |  | - | ------ | -
|                                                       |  |            |        |               |  | Terminated    |        |      
|                                                       |  | Costs for  |        |               |  | Collaboration |        |      
|                                                       |  | Terminated |        | Facilities    |  | Agreements    |        |      
|                                                       |  | Employees  |        | Consolidation |  | and Other     |        | Total
|                                                       |  |            |        |               |  |               |        |      
|2001 Activity                                          |  |            |        |               |  |               |        |       |  |   |        |   |  |   |        |  
|Original restructuring charges                         |  | $          | 2,911  |               |  | $             | 3,150  |       |  | $ | 4,060  |   |  | $ | 10,121 |  
|Cash refund (payments)                                 |  |            | (2,675 | )             |  |               | (2,219 | )     |  |   | (3,983 | ) |  |   | (8,877 | )
|Non-cash expenses  issuance of warrants               |  |            |       |               |  |               |       |       |  |   | (560   | ) |  |   | (560   | )
|Adjustment to reflect revised estimates                |  |            | (236   | )             |  |               | 1,930  |       |  |   | 483    |   |  |   | 2,177  |  
|                                                       |  |            |        |               |  |               |        |       |  |   |        |   |  |   |        |  
|Accrued restructuring charges at
    December 31, 2001 |  |            |       |               |  |               | 2,861  |       |  |   |       |   |  |   | 2,861  |  
|2002 Activity                                          |  |            |        |               |  |               |        |       |  |   |        |   |  |   |        |  
|Cash refund (payments)                                 |  |            | 75     |               |  |               | (8,464 | )     |  |   | (166   | ) |  |   | (8,555 | )
|Non-cash expenses  issuance of common
    stock       |  |            |       |               |  |               | (437   | )     |  |   |       |   |  |   | (437   | )
|Reclass deferred rent liability                        |  |            |       |               |  |               | 861    |       |  |   |       |   |  |   | 861    |  
|Adjustment to reflect revised estimates                |  |            | (75    | )             |  |               | 5,179  |       |  |   | 166    |   |  |   | 5,270  |  
|                                                       |  |            |        |               |  |               |        |       |  |   |        |   |  |   |        |  
|Accrued restructuring charges at
    December 31, 2002 |  | $          |       |               |  | $             |       |       |  | $ |       |   |  | $ |       |  
|                                                       |  |            |        |               |  |               |        |       |  |   |        |   |  |   |        |  

On October 14, 2002, the Company announced
another restructuring plan as a result of the failure of two
phase III clinical trials. This restructure plan reduced
headcount by 26 employees in research and development and
general and administrative, or 70% of the Companys
workforce. The Company recorded restructuring charges of
$848,000 for severance costs of which $784,000 were paid as of
December 31, 2002. No other charges were expensed as a
result of the restructuring plan. At December 31, 2002
there were no remaining employees working who were affected by
the restructuring plan. The remaining severance accrual as of
December 31, 2002 of $64,000 was paid in January 2003 to
employees who left the company in December 2002.

42



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS  (Continued)


7.     Acquisition

In April 2002, the Company acquired Apothogen,
Inc., a privately held pharmaceutical in-licensing company based
in North Carolina. The Company issued 450,000 shares of its
common stock in exchange for all of Apothogens outstanding
capital stock. The total purchase price of $2.0 million was
determined based on the average closing price of the
Companys stock on the two days prior to the closing date,
the closing date and two days after the closing date.

The Company allocated the purchase price based on
the relative fair value of the net tangible and intangible
assets acquired. The amount of the purchase price in excess of
the net tangible assets acquired of $1.7 million was
allocated to acquired workforce, which was to be amortized over
three years. The acquired workforce, net of amortization, of
$1.4 million was deemed to be impaired after the failed
results of the phase III trial of iseganan HCl for the
prevention of oral mucositis in cancer patients receiving
chemotherapy were announced. The acquired workforce was
comprised of sales and marketing management, and given there
would be no drug approval in the near future, the acquired
workforce was deemed impaired, and therefore written down to
zero in December 2002.

Concurrent with the closing of the acquisition,
Ernest Mario, Ph.D. joined the Company as Chairman and
Chief Executive Officer and purchased $5.0 million of newly
issued shares of the Companys common stock in a private
placement at a purchase price per share of $4.01.

8.     Stockholders
Equity



| |                                              
| | ---------------------------------------------
| | Common Stock Reserved for Future
    Issuance

Shares of common stock of the Company reserved
for future issuance at December 31, 2002 were as follows:

|                             |                                           |  |           |            | 
|---------------------------- | ----------------------------------------- |  | --------- | ---------- | 
|Equity incentive plans       |                                           |  | 9,660,411 |           
|Warrants                     |                                           |  | 750,000   |           
|Employee stock purchase plan |                                           |  | 456,252   |           
|                             |                                           |  |           |           
|                             | Total shares reserved for future issuance |  |           | 10,866,663 | 
|                             |                                           |  |           |           



| |                            
| | ---------------------------
| | Convertible Preferred Stock

The Company is authorized to issue 5,000,000
shares of preferred stock, $0.001 par value, none of which
was outstanding as of December 31, 2002 and 2001. At the
time of the public offering in March 2000, the shares of
convertible preferred stock then outstanding were converted, at
a two-to-one ratio, automatically to common stock of the
Company. The Board of Directors may determine the rights,
preferences and privileges of any preferred stock issued in the
future.



| |         
| | --------
| | Warrants

In October 1999, the Company issued warrants to
purchase 1,250,000 shares of the Companys
Series H preferred stock at an exercise price of
$5.00 per share. These warrants were issued in connection
with the Series H preferred stock financing, and expired on
December 31, 2001. The value of these warrants was included
with the Series H preferred stock issued on that date and
converted to common stock at the initial public offering. The
Company has determined that the consideration received
represents the fair value of the combined instruments.

In December 2000, the Company issued warrants to
purchase 10,000 shares of the Companys common stock
at an exercise price of $29.625 per share. These warrants
were issued in connection with an equipment financing agreement.
The warrants expired on July 26, 2001. The value assigned
to these warrants was $24,900, which was amortized as interest
expense over the equipment financing agreement term.

43



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS  (Continued)


In July 2001, the Company issued a warrant to
purchase 700,000 shares of the Companys common stock
at an exercise price of $2.00 per share. These warrants
were issued in connection with the termination of the discovery,
development and license agreement with Diversa Corporation. The
warrants are exercisable immediately for a period of four years.
The fair value of these warrants was estimated using the
Black-Scholes option pricing model with the following weighted
average assumptions: risk free interest rate of 6%; dividend
yield of zero; expected volatility factor of 0.75; and a
contractual life of four years. The weighted-average fair value
of these warrants was $0.80. The value assigned to these
warrants was $560,000, which was included as part of the
Companys May 2001 restructuring charges.

In December 2002, the Company issued a warrant to
purchase 50,000 shares of the Companys common stock
at an exercise price of $0.29 per share. These warrants
were issued in connection with the termination of the lease
agreement with the landlord of 1245 Terra Bella. The warrants
are exercisable immediately for a period of five years. The fair
value of these warrants was estimated using the Black-Scholes
option pricing model with the following weighted average
assumptions: risk free interest rate of 1.5%; dividend yield of
zero; expected volatility factor of 0.5; and a contractual life
of five years. The weighted-average fair value of these warrants
was $0.13. The value assigned to these warrants was $6,500,
which was included in General and administrative as
part of the Companys operating expense.



| |                   
| | ------------------
| | Stock Option Plans

The 1995 Incentive Stock Plan (1995 Plan) was
terminated as of the effective date of the initial public
offering in March 2000, and no new stock options may be granted
thereunder. The termination of the 1995 Plan will have no effect
on the options that have been granted thereunder. Stock options
granted under the 1995 Plan may be either incentive stock
options or nonstatutory stock options. Incentive stock options
were granted with exercise prices of not less than the fair
value of the common stock on the date of grant, as determined by
the Board of Directors. Nonstatutory options were granted with
exercise prices of not less than 85% of the fair value of the
common stock on the date of the grant, as determined by the
Board of Directors. All options granted have a term not greater
than 10 years from the grant date. The options granted
generally vest ratably over a period ranging from four to six
years.

The 2000 Equity Incentive Plan (2000 Plan) was
adopted in 2000 and allows the granting of options, stock
bonuses and rights to acquire restricted stock of up to
5,000,000 shares of common stock to employees, consultants,
and directors.

Under the 2000 Plan, on December 31 of each
year, starting with December 31, 2000 and continuing
through December 31, 2008, the share reserve will
automatically be increased by a number of shares equal to the
lesser of:



| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | 1% of the then outstanding shares of common stock
    on a fully diluted basis;
|
| |  | 2,000,000 shares; or                                                           
|
| |  | a lesser number of shares to be determined by the
    Board of Directors.      

For the years ended December 31, 2002 and
2001, the Board of Directors determined not to increase the
number of shares in the reserve. During 2000, the Board of
Directors increased the number of shares in the reserve by
1,634,623 shares.

Stock options granted under the 2000 Plan may be
either incentive stock options or nonstatutory stock options.
Incentive stock options may be granted with exercise prices of
not less than the common stock price on the date of the grant.
Nonstatutory options may be granted with exercise prices of not
less than 85% of the common stock price on the date of the
grant. All options are to have a term not greater than
10 years from the grant date. The Board of Directors shall
determine the time or times during the term when the options may
be exercised and the number of shares for which an option may be
granted. Options generally vest ratably over a period ranging
from 18 months to six years.

44



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS  (Continued)


The 2002 Non-Officer Equity Incentive Plan (2002
Plan) was adopted in August 2002 and allows the granting of
stock awards through nonstatutory stock options, stock bonuses
and rights to acquire restricted common stock of up to
1,600,000 million shares of common stock to employees and
consultants of the Company.

Stock options granted under the 2002 Plan, must
be nonstatutory stock options. Nonstatutory options may be
granted with exercise prices of not less than 85% of the common
stock price on the date of the grant. All options are to have a
term not greater than 10 years from the grant date. The
Board of Directors shall determine the time or times during the
term when the options may be exercised and the number of shares
for which an option may be granted. Options generally vest
ratably over a period ranging from 18 months to six years.

A summary of the Companys stock option
activity and related information follows:

|                             |           |                     |           |                  |   |   |      |       | 
|---------------------------- | --------- | ------------------- | --------- | ---------------- | - | - | ---- | ----- | 
|                             |           |                    
|                             |           | Options Outstanding
|                             |           |                    
|                             |           | Number of           |           | Weighted-Average
|                             |           | Shares              |           | Exercise Price  
|                             |           |                     |           |                 
|Balance at December 31, 1999 |           |                     | 3,746,896 |                  |   | $ | 1.16 |      
|                             | Granted   |                     |           | 2,537,475        |   |   | $    | 15.17 | 
|                             | Exercised |                     |           | (532,288         | ) |   | $    | 0.88  | 
|                             | Cancelled |                     |           | (557,786         | ) |   | $    | 1.61  | 
|                             |           |                     |           |                  |   |   |      |      
|Balance at December 31, 2000 |           |                     | 5,194,297 |                  |   | $ | 7.73 |      
|                             | Granted   |                     |           | 2,849,200        |   |   | $    | 5.14  | 
|                             | Exercised |                     |           | (543,397         | ) |   | $    | 0.87  | 
|                             | Cancelled |                     |           | (3,751,656       | ) |   | $    | 9.96  | 
|                             |           |                     |           |                  |   |   |      |      
|Balance at December 31, 2001 |           |                     | 3,748,444 |                  |   | $ | 4.34 |      
|                             | Granted   |                     |           | 5,725,000        |   |   | $    | 2.89  | 
|                             | Exercised |                     |           | (347,085         | ) |   | $    | 1.33  | 
|                             | Cancelled |                     |           | (1,550,223       | ) |   | $    | 4.51  | 
|                             |           |                     |           |                  |   |   |      |      
|Balance at December 31, 2002 |           |                     | 7,576,136 |                  |   | $ | 3.27 |      
|                             |           |                     |           |                  |   |   |      |      

45



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS  (Continued)


At December 31, 2002, 2001, and 2000,
options to purchase 2,533,575, 1,314,439, and
1,026,584 shares, respectively, of common stock were
exercisable. The following table summarizes information about
options outstanding at December 31, 2002:

|               |  |                     |           |                     |  |                  |      |           |  |                  |       |  |  |  |           |  |  |   |       | 
|-------------- |  | ------------------- | --------- | ------------------- |  | ---------------- | ---- | --------- |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|               |  |                     |           |                    
|               |  | Options Outstanding |           | Options Exercisable
|               |  |                     |           |                    
|               |  |                     |           | Weighted-Average    |  |                  |      |          
|Range of       |  | Number of           |           | Remaining           |  | Weighted-Average |      | Number of |  | Weighted-Average
|Exercise Price |  | Shares              |           | Contractual Life    |  | Exercise Price   |      | Shares    |  | Exercise Price  
|               |  |                     |           |                     |  |                  |      |           |  |                 
|$0.20-$0.90    |  |                     | 187,052   |                     |  |                  | 3.40 |           |  | $                | 0.29  |  |  |  | 187,052   |  |  | $ | 0.29  | 
|$1.00-$1.00    |  |                     | 417,921   |                     |  |                  | 4.87 |           |  | $                | 1.00  |  |  |  | 337,746   |  |  | $ | 1.00  | 
|$1.30-$1.30    |  |                     | 1,402,902 |                     |  |                  | 9.58 |           |  | $                | 1.30  |  |  |  | 137,024   |  |  | $ | 1.30  | 
|$1.50-$1.60    |  |                     | 340,549   |                     |  |                  | 6.36 |           |  | $                | 1.51  |  |  |  | 142,431   |  |  | $ | 1.51  | 
|$1.65-$1.65    |  |                     | 594,015   |                     |  |                  | 8.38 |           |  | $                | 1.65  |  |  |  | 594,015   |  |  | $ | 1.65  | 
|$1.85-$2.40    |  |                     | 567,533   |                     |  |                  | 8.24 |           |  | $                | 2.03  |  |  |  | 266,111   |  |  | $ | 2.15  | 
|$2.52-$3.30    |  |                     | 493,887   |                     |  |                  | 9.07 |           |  | $                | 2.80  |  |  |  | 311,941   |  |  | $ | 2.80  | 
|$4.00-$4.05    |  |                     | 2,981,317 |                     |  |                  | 8.74 |           |  | $                | 4.02  |  |  |  | 158,299   |  |  | $ | 4.03  | 
|$8.00-$9.56    |  |                     | 481,098   |                     |  |                  | 7.91 |           |  | $                | 9.55  |  |  |  | 309,419   |  |  | $ | 9.54  | 
|$12.00-$29.63  |  |                     | 109,862   |                     |  |                  | 7.37 |           |  | $                | 17.13 |  |  |  | 89,537    |  |  | $ | 18.02 | 
|               |  |                     |           |                     |  |                  |      |           |  |                  |       |  |  |  |           |  |  |   |       | 
|               |  |                     | 7,576,136 |                     |  |                  | 8.66 |           |  | $                | 3.27  |  |  |  | 2,533,575 |  |  | $ | 3.32  | 
|               |  |                     |           |                     |  |                  |      |           |  |                  |       |  |  |  |           |  |  |   |       | 

The weighted-average fair value of options
granted during 2002, 2001, and 2000 was $2.16, $3.15, and $9.39,
respectively.

During the year ended December 31, 2000, in
connection with the grant of certain stock options to employees
and officers, the Company recorded deferred stock compensation
of $722,000, representing the difference between the exercise
price and the deemed fair value of the Companys common
stock for financial reporting purposes on the date such stock
options were granted. Subsequent to the initial public offering,
the fair value of the common stock was determined based on the
closing price of the stock on the Nasdaq stock exchange as of
the grant date. In previous years, when the stock was not yet
publicly traded, the deemed fair value of the common stock was
based on an analysis of key events and milestones in our
research an development programs, including progress with
clinical studies and FDA regulatory matters, and the closing of
preferred stock financings.

Deferred compensation is included as a component
of stockholders equity and is being amortized to expense
on a straight-line basis over the vesting period of the options,
ranging from four to six years. During the years ended
December 31, 2002, 2001, and 2000 the Company recorded
amortization of deferred stock compensation expense of
approximately $1.3 million, $2.7 million, and
$3.2 million, respectively. In connection with the
termination of various employees and cancellation of unvested
stock options, the Company recorded a reduction to deferred
compensation of $2.6 million for the year ended
December 31, 2002 and $2.9 million for the year ended
December 31, 2001.



| |                                      
| | -------------------------------------
| | 2000 Employee Stock Purchase
    Plan

In January 2000, the board adopted the 2000
Employee Stock Purchase Plan (the Purchase Plan),
which was approved by stockholders in February 2000, authorizing
the issuance of 500,000 shares of common stock pursuant to
purchase rights granted to employees.

46



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS  (Continued)


On December 31 of each year, starting with
December 31, 2000 through December 31, 2008, the share
reserve will automatically be increased by a number of shares
equal to the lesser of:



| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | 1% of the then outstanding shares of common stock
    on a fully diluted basis;
|
| |  | 500,000 shares; or                                                             
|
| |  | a lesser number of shares to be determined by the
    board of directors.      

For the years ended December 31, 2002 and
2001, the Board of Directors determined not to increase the
number of shares in the reserve. As of December 31, 2000,
the Board of Directors resolved to increase the number of shares
in the reserve by 49,287.

The Purchase Plan is intended to qualify as an
employee stock purchase plan within the meaning of
Section 423 of the Internal Revenue Code of 1986, as
amended.

The Purchase Plan permits eligible employees to
purchase common stock at a discount, but only through payroll
deductions, during defined offering periods. The price at which
stock is purchased under the purchase plan is equal to 85% of
the fair market value of the common stock on the first or last
day of the offering period, whichever is lower. The initial
offering period commenced on the effective date of the initial
public offering.

During 2002, 2001 and 2000, 13,105, 29,566 and
49,287 shares of common stock were purchased under the Purchase
Plan, respectively. The fair value of the employees
purchase rights was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions
for 2002: risk free interest rate of 1.26%, dividend yield of
zero, expected volatility factor of 1.0; and an expected life of
6 months. The assumptions used for 2001 were: risk free
interest rate of 3.75%, dividend yield of zero, expected
volatility factor of 0.75, and an expected life of
6 months. The assumptions used for 2000 were: risk free
interest rate of 6.00%, dividend yield of zero, expected
volatility factor of 0.75, and an expected life of
6 months. The weighted-average fair value for rights issued
under the Purchase Plan for 2002, 2001 and 2000 was $0.45, $2.70
and $2.79, respectively.



| |                   
| | ------------------
| | Stock Compensation

During June 2001, the Company granted 29,000
shares of common stock to employees for services rendered. The
common stock, and related compensation expense of $39,000 was
recorded at the fair value of the Companys stock on the
grant date as research and development expense.

During July 2001, the Company awarded 200,000
restricted common stock rights to certain officers. Of these
200,000 restricted common stock rights, 87,500 were cancelled
during the year, 75,000 vested on December 31, 2001 in
accordance with the vesting terms of the award, and the
remaining 37,500 rights will vest on June 30, 2006, if
the respective officer is still employed by the Company. The
Company recorded $109,000 of compensation expense (of which
$54,500 was research and development expense and $54,500 was
general and administrative expense) and a related liability as
of December 31, 2001, based on the fair value of the
Companys stock on the grant date. The common stock related
to the rights that have vested as of December 31, 2001 was
issued in 2002.

During November 2001, the Company entered into an
agreement to modify the vesting of one officers unvested
stock options so that a portion of the officers unvested
options would vest upon his termination in January 2002, and the
remaining options would continue to vest over a consulting
period. In connection with this modification, compensation
expense of $413,000, including the amortization of $408,000 of
previously recorded deferred stock compensation associated with
the awards, was recorded in general and administrative expenses
in the year ended December 31, 2001. In connection with
this modification, compensation expense of $155,000, including
amortization expense of $112,000 of previously recorded deferred
stock compensation associated with the awards, was recorded in
general and administrative expense in the year ended
December 31, 2002. The Company expects to continue to
record consulting expense through July 31, 2003 related to
the periodic revaluation of these stock options as they vest in
accordance with EITF 96-18. In addition, in

47



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS  (Continued)


2003, the Company will amortize the remaining
deferred stock compensation originally recorded in connection
with these options, of approximately $57,000.

9.     Licensing,
Research, and Technology Contracts

In January 2001, the Company entered a strategic
drug discovery, development and licensing agreement with Diversa
Corporation (Diversa) to identify novel types of antimicrobial
drugs. Under the terms of this agreement, the companies planned
to collaborate to identify and develop novel drugs derived from
Diversas recombinant natural product libraries that
demonstrate antibacterial or antifungal properties. Diversa was
to receive technology access fees, research support, and
success-based milestone payments for each drug developed as well
as royalties on any products commercialized under the agreement.
The technology access fee under this agreement was $3.0 million,
with the first fee payment of $1.0 million paid in January
2001 and expensed to research and development, $1.0 million
fee which would have been payable on December 1, 2001 and
the final $1.0 million fee payable on December 1,
2002. In exchange, IntraBiotics was to have an exclusive,
worldwide license to any products identified and developed
during the collaboration. On July 27, 2001, the Company
terminated the discovery, development and license agreement with
Diversa Corporation. Under the terms of this termination
agreement, IntraBiotics paid Diversa Corporation
$2.45 million and issued warrants to purchase
700,000 shares of its common stock at an exercise price of
$2.00 per share, exercisable immediately for a period of
four years, which were included in the restructuring expense. No
additional payments are due under this agreement.

In January 2001, the Company entered into a
renewable, two-year research and technology licensing agreement
for the discovery of new anti-infective therapies with Albany
Molecular Research, Inc. (AMRI). The agreement provided that
AMRI was to receive technology access fees, research funding,
and success-based milestone payments for each drug discovered
during the collaboration and developed by our sublicenses or us.
AMRI was to be entitled to royalty payments on any third and
subsequent products resulting from the collaboration. The
Company paid an initial signing fee of $200,000 under this
agreement in January 2001, which was included in research and
development expense. In addition, the technology access fee was
$400,000, payable in eight quarterly payments of $50,000
beginning in January 2001 through November 2002. In exchange,
the Company was to have an exclusive, worldwide license to
develop and commercialize drugs that emerge from the
collaboration. On June 21, 2001, the Company terminated its
collaborative research and technology agreement with AMRI. Under
the terms of this termination agreement, IntraBiotics paid AMRI
$300,000, which was included in the restructuring expense. No
additional payments are due under this agreement.

In January 2000, the Company entered into a
collaborative research and license agreement with NAEJA
Pharmaceutical Inc. to perform research activities for initial
non-clinical and pre-clinical research of products including
manufacturing scale-up work. The goal was to identify and
optimize compounds with antifungal or antibacterial activity,
for commencement of IND-enabling studies, and subsequent studies
necessary for development and commercialization of such
compounds. The Company is responsible for the development of the
licensed product. The Company paid a license fee of $750,000 in
late 1999 at the signing of the agreement. In addition, NAEJA,
at the Companys cost, had maintained six full time
equivalent employees (FTE) at an annualized rate of
$125,000 per FTE. In 2001 and 2000, the Company incurred
$375,000 and $750,000, respectively, in expenses related to this
collaboration. In aggregate, payments totaling $1,875,000 had
been made to NAEJA through December 31, 2001, which were
expensed to research and development. In November 2000, the
agreement was terminated effective May 2001.

In 2000, the Company continued its collaborative
research and license agreement with BioSource Pharm, Inc.
(BioSource) to conduct fermentation, chemical
design, synthesis, and/or modification activities to Polyene
Compounds and Amphomycin-Related Compounds. In May 2000, the
Company extended the agreement and increased the scope of
research for which the Company increased payments to $125,000
(from $75,000) per calendar quarter. The Company paid a total of
$250,000 in 2001 and $450,000 to BioSource in

48



---



##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS  (Continued)


2000 as a result of the collaboration, which was
expensed to research and development. On August 31, 2001,
the research portion of this agreement ended and was not renewed.

During 1998, the Company recorded $2,000,000 in
license fee expense in connection with the purchase of rights
from Biosearch Italia S.p.A. to develop and commercialize
ramoplanin, which was a phase I clinical-stage product
candidate. The purchase price, which was expensed as in-process
research and development as the rights had no alternative future
use, consisted of the issuance of 250,000 shares of
Series F preferred stock at $4.00 per share and $1,000,000
in cash. In 1998, the Company paid and recorded a milestone of
$2,000,000 for the commencement of the phase II clinical trial.
In 2000, the Company paid and recorded a $2,500,000 milestone
payment to Biosearch Italia for the commencement of Phase III
clinical studies. In May 2001, the Company amended its licensing
and development agreement for its late stage ramoplanin program
with Biosearch Italia, S.p.A. Under the terms of the amended
agreement, the Company was reimbursed for ongoing clinical trial
expenses during a three-month transition period ended
August 31, 2001. At the end of this period, Biosearch
Italia S.p.A. assumed responsibility for the clinical
development of ramoplanin oral powder at its own expense and
retained worldwide rights to the product. In exchange for its
clinical development expenses and efforts, the Company will
receive a royalty on future net sales of ramoplanin oral in
North America, if it is successfully developed.

The Company retained the rights for the
development and commercialization of topical formulations of
ramoplanin. These rights reverted to Biosearch Italia on
April 1, 2002.

In January 1997, the Company entered into an
agreement with PolyPeptide Laboratories A/S to develop a
manufacturing process for its drug substance iseganan HCl,
previously referred to as Protegrin IB-367, and was
obligated to pay up to $2,895,000 based upon achievement of
certain development milestones. The Company also entered into a
related purchase and supply agreement with Polypeptide. For the
years ended December 31, 2002, 2001 and 2000, the Company
has incurred milestone payments of approximately $0, $40,000,
and $120,000, respectively, under the agreement, which were
charged to research and development expense. In December 2002,
the Company reached an agreement with Poly Peptide Laboratories
A/S to (i) take delivery of 14 kg of completed
iseganan, (ii) take delivery of partially completed
fragments, (iii) cancel the development, purchase and
supply agreements between the companies, and (iv) for Poly
Peptide Laboratories A/S to store the finished product and the
fragments for a period of up to five years at a cost of $50,000
per year. Under this agreement, the Company paid Polypeptide
$4.7 million upon execution of the termination agreement,
assigned letters of credit totaling $547,000 and will pay an
additional $250,000 upon delivery and acceptance of lot I
of drug substance (seven kg), which is expected sometime in the
second quarter of 2003. As a result of this termination
agreement, in December 2002, the Company expensed
$4.8 million related to the delivery of lots H, J, K,
and L, and recorded a prepaid for drug substance of
$2.4 million as of December 31, 2002, which will be
expensed upon delivery of lots I1-I3.

From 1994 to 1997, the Company entered into a
series of agreements with The Regents of the University of
California under which it obtained certain licenses to its
protegrin technology under development. In consideration for
these licenses, the Company has made certain payments totaling
$125,000, and agreed to pay The Regents of the University of
California additional amounts and specified royalties upon
occurrence of certain events related to the development of the
technology. These events include commencement of clinical
trials, drug approvals, and product sales.

49



---



##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS  (Continued)


10.     Income
Taxes

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting and the amount used for
income tax purposes. Significant components of the
Companys deferred tax assets as follows (in thousands):

|                          |                                            |              |         |        |  |   |         |        | 
|------------------------- | ------------------------------------------ | ------------ | ------- | ------ |  | - | ------- | ------ | 
|                          |                                            |             
|                          |                                            | December 31,
|                          |                                            |             
|                          |                                            | 2002         |         | 2001  
|                          |                                            |              |         |       
|Deferred tax assets:      |                                            |              |         |        |  |   |         |       
|                          | Net operating loss carryforwards           |              | $       | 63,700 |  |   | $       | 53.300 | 
|                          | Research and development credits           |              |         | 3,000  |  |   |         | 3,600  | 
|                          | Capitalized research and development costs |              |         | 8,200  |  |   |         | 6,100  | 
|                          | Other, net                                 |              |         | 200    |  |   |         | 700    | 
|                          |                                            |              |         |        |  |   |         |       
|Total deferred tax assets |                                            |              | 75,100  |        |  |   | 63,700  |       
|Valuation allowance       |                                            |              | (75,100 | )      |  |   | (63,700 | )     
|                          |                                            |              |         |        |  |   |         |       
|Net deferred tax assets   |                                            | $            |        |        |  | $ |        |       
|                          |                                            |              |         |        |  |   |         |       

Realization of deferred tax assets is dependent
upon future earnings, if any, the timing and amount of which are
uncertain. Accordingly, the net deferred tax assets have been
fully offset by a valuation allowance. The valuation allowance
increased by $11.4 million, $26.2 million and
$17.9 million during 2002, 2001 and 2000, respectively.

As of December 31, 2002, the Company had net
operating loss carryforwards for federal income tax purposes of
approximately $180.0 million, which expire in the years
2009 through 2022, and federal research and development credits
of approximately $1.9 million, which expire in the years
2009 through 2022. In addition, the Company had net operating
loss carryforwards for state income tax purposes of
approximately $40.0 million, which expire in the years 2004
through 2013 and state research and development tax credits of
approximately $1.8 million, which do not expire. As a
result of California legislation, the utilization of a
substantial portion of the Companys California state net
operating loss carryforward is suspended for 2003.

Utilization of the Companys net operating
loss may be subject to substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue
Code and similar state provisions. Such an annual limitation
could result in the expiration of the net operating loss before
utilization.

11.     Quarterly
Financial Data (Unaudited)

|                    |                   |                                          |        |        |   |       |        |        |   |       |         |        |   |       |         |        |   |   |         |       |   |   |         |       |   |   |        |       |   |   |        |       |  
|------------------- | ----------------- | ---------------------------------------- | ------ | ------ | - | ----- | ------ | ------ | - | ----- | ------- | ------ | - | ----- | ------- | ------ | - | - | ------- | ----- | - | - | ------- | ----- | - | - | ------ | ----- | - | - | ------ | ----- | -
|                    |                   |                                          |        |       
|                    |                   | 2002                                     |        | 2001  
|                    |                   |                                          |        |       
|                    |                   | First                                    |        | Second |   | Third |        | Fourth |   | First |         | Second |   | Third |         | Fourth
|                    |                   |                                          |        |        |   |       |        |        |   |       |         |        |   |       |         |       
|                    |                   |                                         
|                    |                   | (In thousands, except per share amounts)
|Operating loss      |                   | $                                        | (4,992 | )      |   | $     | (8,858 | )      |   | $     | (11,483 | )      |   | $     | (10,220 | )      |   | $ | (19,632 | )     |   | $ | (34,789 | )     |   | $ | (7,081 | )     |   | $ | (7,690 | )    
|Net loss            |                   |                                          | (4,880 | )      |   |       | (7,972 | )      |   |       | (11,271 | )      |   |       | (10,330 | )      |   |   | (18,713 | )     |   |   | (34,314 | )     |   |   | (6,901 | )     |   |   | (7,438 | )    
|Net loss per share: |                   |                                          |        |        |   |       |        |        |   |       |         |        |   |       |         |        |   |   |         |       |   |   |         |       |   |   |        |       |   |   |        |      
|                    | Basic and diluted |                                          | $      | (0.14  | ) |       | $      | (0.22  | ) |       | $       | (0.30  | ) |       | $       | (0.27  | ) |   | $       | (0.64 | ) |   | $       | (1.17 | ) |   | $      | (0.23 | ) |   | $      | (0.25 | )

12.     Subsequent
Events (Unaudited)

In February 2003, the Company entered into
agreements with certain investors providing for the issuance, in
a private placement financing, subject to shareholder approval,
of newly created Series A convertible preferred stock, and
warrants to purchase common stock, for an aggregate gross
purchase price of $3.5 million. The primary purpose of
completing the private placement is to provide funds to allow
the Company to conduct and complete its clinical trial of
iseganan HCl for the prevention of VAP. A special meeting of
stockholders at which the approval and ratification of the
private placement is solicited is scheduled to take place on
April 3,

50



---



##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS  (Continued)


2003. If the stockholders approve the
transaction, the Company anticipates completing the private
placement during the second quarter 2003. On March 19, the
Company received an alternative financing proposal from Mr.
Coates. The Company is currently evaluating Mr. Coates
proposal.

Also in February 2003, the Board of Directors
approved a re-pricing of stock options held by the remaining
employees, consultants and directors of the Company.
Participants in the program, elected to trade-in their current
stock option shares in a one-for-one exchange for new option
shares, except for Dr. Marios 650,000 shares granted
earlier in the year outside of the plan were exchanged for
150,000 new shares. Upon election, all current stock option
shares were cancelled and new stock options were granted.
Variable accounting will be used in the future on the new common
stock grants and could have a potential material impact on the
Companys results of operations. All new options vest
monthly over a four-year period beginning in March 2003. The new
options have a five-year life and must be exercised before March
2008. The exercise price was equal to the closing price on
February 5, 2003, or $0.23 per share.

On February 10, 2003, the Company entered
into a 15-month lease for approximately 3,600 square feet in
Palo Alto, California. The Companys headquarters now
occupy this space. Total lease payments for 2003 are $84,000 and
$43,000 for 2004.

51



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.




PART III






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

The information required by the item relating to
our executive officers and directors is incorporated by
reference from the Companys proxy statement related to the
2002 annual stockholders meeting to be held on June 5, 2003
to be filed with the Securities and Exchange Commission (2002
Proxy Statement).






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

The information required by this item is
incorporated by reference from the 2002 Proxy Statement.






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

The information required by this item is
incorporated by reference from the 2002 Proxy Statement.






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

The information required by this item is
incorporated by reference from the 2002 Proxy Statement.






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

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

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

52



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##### Table of Contents






PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K



| |     |                                         
| | --- | ----------------------------------------
| | (a) | 1.Financial
    Statements and Schedules



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | See index to Consolidated Financial Statements at
    Item 8 of this Form 10-K.                                                                                                                 
|
| | All financial statement schedules are omitted
    because they were not required or the required information is
    included in the Consolidated Financial Statements and the
    related notes.



| |    |              
| | -- | -------------
| | 2. | Exhibit Index

|        |    |             |  |                                                                                                                                                                                                      
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1          |  | Amended and Restated Certificate of Incorporation.                                                                                                                                                   
|        | 3  | .2          |  | Bylaws.(1)                                                                                                                                                                                           
|        | 4  | .1          |  | Amended and Restated Investor Rights Agreement
    dated October 15, 1999.(1)                                                                                                                        
|        | 4  | .2          |  | Form of Stock Purchase Agreement by and between
    the Company and each selling stockholder, dated January 29,
    2002.(4)                                                                         
|        | 10 | .1          |  | Form of Indemnity Agreement.(1)                                                                                                                                                                      
|        | 10 | .2          |  | Amended and Restated 1995 Stock Option Plan, as
    amended on November 16, 2002.(11)                                                                                                                
|        | 10 | .2.2        |  | Amended and Restated Form of Stock Option
    Agreement and Notice of Grant of Stock Options and Option
    Agreement.(1)(11)                                                                        
|        | 10 | .3          |  | 2000 Equity Incentive Plan, as amended on
    February 11, 2003.(11)                                                                                                                                 
|        | 10 | .4        |  | Purchase Supply Agreement by and between the
    Company and Polypeptide Laboratories A/S dated January 3,
    1997.(1)                                                                              
|        | 10 | .5        |  | Development Supply Agreement by and between the
    Company and Polypeptide Laboratories A/S dated January 3,
    1997 and Amendment dated July 1, 1997.(1)                                          
|        | 10 | .6        |  | Second Amendment to the License Agreement by and
    between the Company and The Regents of the University of
    California dated June 12, 1996.(1)                                                 
|        | 10 | .7        |  | Third Amendment to the License Agreement by and
    between the Company and The Regents of the University of
    California dated September 16, 1997.(1)                                             
|        | 10 | .8        |  | License and Supply Agreement by and between the
    Company and Biosearch Italia S.p.A. dated May 8, 1998.(1)                                                                                        
|        | 10 | .9          |  | 2000 Employee Stock Purchase Plan and related
    documents.(1)(11)                                                                                                                                  
|        | 10 | .10         |  | Loan and Security Agreement by and between the
    Company and Silicon Valley Bank, dated August 1999.(1)                                                                                            
|        | 10 | .11       |  | Research and Technology Agreement by and between
    the Company and New Chemical Entities dated January 24,
    2001.(2)                                                                            
|        | 10 | .12       |  | Letter Agreement by and between the Company and
    Biosearch Italia dated May 18, 2001.(3)                                                                                                          
|        | 10 | .13         |  | First Amendment to Research and Technology
    Agreement by and between the Company and Albany Molecular
    Research Inc. (successor to New Chemical Entities Inc.).(3)                             
|        | 10 | .14         |  | Letter Agreement by and between the Company and
    Albany Molecular Research Inc. (successor to New Chemical
    Entities Inc.) dated June 21, 2001.(3)                                             
|        | 10 | .15         |  | Senior Executive Severance Benefit Plan, as
    amended and restated on August 1, 2002.(9)(11)                                                                                                       
|        | 10 | .16         |  | Executive Severance Benefit Plan, as amended and
    restated on August 1, 2002.(9)(11)                                                                                                              
|        | 10 | .17         |  | Summary of Officer Incentive Bonus Plan.(3)(11)                                                                                                                                                      
|        | 10 | .18       |  | Release Agreement by and between the Company and
    Diversa Corporation dated July 27, 2001, including Warrant
    to Purchase Common Stock of the Company and Registration Rights
    Agreement.(7)
|        | 10 | .19         |  | Letter Agreement dated November 28, 2001 by
    and between the Company and Ken Kelley.(5)(11)                                                                                                       

53



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|        |    |             |  |                                                                                                                                                                                                                                
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .20         |  | Loan Modification Agreement by and between the
    Company and Silicon Valley Bank, dated April 29, 2002.(8)                                                                                                                   
|        | 10 | .21         |  | Loan Modification Agreement by and between the
    Company and Silicon Valley Bank, dated June 10, 2002.(8)                                                                                                                    
|        | 10 | .22         |  | 2002 Non-Officer Equity Incentive Plan and
    related documents, as amended on February 3, 2003.                                                                                                                              
|        | 10 | .23         |  | Master Services Agreement by and among the
    Company, PPD Development, LP and PPD Global Ltd., dated
    July 29, 2002.(9)                                                                                                   
|        | 10 | .24         |  | Lease Termination Agreement by and between the
    Company and EOP-Shoreline Technology Park, L.L.C., dated
    November 22, 2002, including Common Stock Purchase
    Agreement.(10)                                          
|        | 10 | .25         |  | Lease Termination Agreement by and between the
    Company and Bruce H. Carter and Keith M. Carter, dated
    October 31, 2002.                                                                                                
|        | 10 | .26         |  | Sublease Termination Agreement and Sublease by
    and between the Company and ReShape, Inc., dated
    October 31, 2002.                                                                                                      
|        | 10 | .27         |  | Lease Assignment Agreement by and among the
    Company, PolyFuel, Inc. and 1245 Terra Bella Partners, LLC,
    dated December 20, 2002, including Warrant to Purchase
    Common Stock of the Company dated December 31, 2002.
|        | 10 | .28         |  | Termination of Development Supply Agreement and
    Purchase/ Supply Agreement by and among the Company, Polypeptide
    Laboratories A/S and Polypeptide Laboratories AB, dated
    December 6, 2002.                         
|        | 10 | .29         |  | Lease Agreement by and between the Company and
    Embarcadero Corporate Center, dated February 10, 2003.                                                                                                                      
|        | 23 | .1          |  | Consent of Ernst & Young LLP,
    Independent Auditors                                                                                                                                                                         
|        | 24 | .1          |  | Power of Attorney. Reference is made to the
    signature page.                                                                                                                                                                
|        | 99 | .1          |  | Certifications                                                                                                                                                                                                                 



---



|   |                                                                                                                                                                                                       
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Confidential treatment request has been granted
    with respect to certain portions of this exhibit. Omitted
    portions have been filed separately with the Securities and
    Exchange Commission.



|    |                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to exhibit to our
    Registration Statement on Form S-1 (File
    No. 333-95461) initially filed with the Securities and
    Exchange Commission on January 27, 2000 as subsequently
    amended.
|   
|(2) | Incorporated by reference to exhibit to our
    Form 10-Q filed with the Securities and Exchange Commission
    on May 16, 2001.                                                                                            
|   
|(3) | Incorporated by reference to exhibit to our
    Form 10-Q filed with the Securities and Exchange Commission
    on August 14, 2001.                                                                                         
|   
|(4) | Incorporated by reference to exhibit to our
    Registration Statement on Form S-3 (File
    No. 333-82934) filed with the Securities and Exchange
    Commission on February 15, 2002.                                     
|   
|(5) | Incorporated by reference to exhibit to our
    Form 10-Q filed with the Securities and Exchange Commission
    on February 15, 2002.                                                                                       
|   
|(6) | Incorporated by reference to exhibit to our
    Form 10-Q filed with the Securities and Exchange Commission
    on May 15, 2002.                                                                                            
|   
|(7) | Incorporated by reference to exhibit to our
    Registration Statement on Form S-3 (File
    No. 333-89840) filed with the Securities and Exchange
    Commission on June 5, 2002.                                          
|   
|(8) | Incorporated by reference to exhibit to our
    Form 10-Q filed with the Securities and Exchange Commission
    on August 14, 2002.                                                                                         
|   
|(9) | Incorporated by reference to exhibit to our
    Form 10-Q filed with the Securities and Exchange Commission
    on November 14, 2002.                                                                                       

54



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##### Table of Contents





|     |                                                                                                                                     
|---- | ------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to exhibit to our
    Form 8-K filed with the Securities and Exchange Commission
    on November 27, 2002.
|    
|(11) | Management contract or compensatory plan,
    contract or arrangement.                                                              

(b) Reports on Form 8-K

We filed a Current Report on Form 8-K on
October 30, 2002 reporting under Item 5 preliminary
results of the phase III clinical trial of iseganan HCl
oral solution, to treat ulcerative oral mucositis in patients
undergoing high-dose chemotherapy for the treatment of cancer,
with iseganan not meeting the primary endpoint of the trial and
our plans to cease pursuit of the indication. We also reported
the implementation of a restructuring plan, including a
workforce reduction of 70%, intended to reduce our cash
operating expenses.

We filed a Current Report on Form 8-K on
November 27, 2002 reporting under Item 5 that we had
entered into lease termination and settlement agreement.

55



---



##### Table of Contents



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 on this
28th day of March 2002.



| |                                   
| | ----------------------------------
| | INTRABIOTICS PHARMACEUTICALS, INC.



| |    |                         
| | -- | ------------------------
| | By | /s/ HENRY J. FUCHS, M.D.

| |                                          
| | -----------------------------------------
| |                                          
| | Henry J. Fuchs, M.D.                     
| | President and Chief Executive
    Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Henry J. Fuchs, M.D. and Eric H. Bjerkholt, and each or any of
them, as his true and lawful attorneys-in-fact and agents, each
acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any
and all capacities, to sign any or all amendments to the Report
on Form 10-K, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each
acting alone, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof. Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

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 in the capacities
and on the dates indicated.

|                                             |  |                                       |  |                |  | 
|-------------------------------------------- |  | ------------------------------------- |  | -------------- |  | 
|                                             |  |                                       |  |               
|Signature                                    |  | Title                                 |  | Date          
|                                             |  |                                       |  |               
|/s/ HENRY J. FUCHS, M.D.Henry J. Fuchs, M.D. |  | President and Chief Executive Officer |  | March 28, 2003
|                                            
|/s/ ERIC H. BJERKHOLTEric H. Bjerkholt       |  | Chief Financial Officer               |  | March 28, 2003
|                                            
|/s/ ERNST MARIO, PH.D.Ernst Mario, Ph.D.     |  | Chairman of the Board                 |  | March 28, 2003
|                                            
|/s/ MICHAEL BIGHAMMichael Bigham             |  | Director                              |  | March 28, 2003
|                                            
|/s/ KATHLEEN D. LAPORTEKathleen D. LaPorte   |  | Director                              |  | March 28, 2003
|                                            
|Gary A. Lyons                                |  | Director                              |  |               

56



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##### Table of Contents



|                                       |  |          |  |                |  | 
|-------------------------------------- |  | -------- |  | -------------- |  | 
|                                       |  |          |  |               
|Signature                              |  | Title    |  | Date          
|                                       |  |          |  |               
|                                      
|/s/ JERRY JACKSONJerry Jackson         |  | Director |  | March 28, 2003
|                                      
|/s/ JACK S. REMINGTONJack S. Remington |  | Director |  | March 28, 2003

57



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##### Table of Contents



CERTIFICATIONS

I, Henry J. Fuchs M.D., certify that:

1.     I have reviewed
this annual report on Form 10-K of IntraBiotics
Pharmaceuticals, Inc.;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the periods covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:



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

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



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

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



| |                        
| | -----------------------
| | /s/ HENRY J. FUCHS M.D.
| |                        
| | Henry J. Fuchs M.D.    
| | Chief Executive Officer

Date: March 28, 2003

58



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##### Table of Contents



I, Eric H. Bjerkholt, certify that:

1.     I have reviewed
this annual report on Form 10-K of IntraBiotics
Pharmaceuticals, Inc.;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the periods covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:



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

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



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

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



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

Date: March 28, 2003

59



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##### Table of Contents



EXHIBIT INDEX

|        |    |             |  |                                                                                                                                                                                                      
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1          |  | Amended and Restated Certificate of Incorporation.                                                                                                                                                   
|        | 3  | .2          |  | Bylaws.(1)                                                                                                                                                                                           
|        | 4  | .1          |  | Amended and Restated Investor Rights Agreement
    dated October 15, 1999.(1)                                                                                                                        
|        | 4  | .2          |  | Form of Stock Purchase Agreement by and between
    the Company and each selling stockholder, dated January 29,
    2002.(4)                                                                         
|        | 10 | .1          |  | Form of Indemnity Agreement.(1)                                                                                                                                                                      
|        | 10 | .2          |  | Amended and Restated 1995 Stock Option Plan, as
    amended on November 16, 2002.(11)                                                                                                                
|        | 10 | .2.2        |  | Amended and Restated Form of Stock Option
    Agreement and Notice of Grant of Stock Options and Option
    Agreement.(1)(11)                                                                        
|        | 10 | .3          |  | 2000 Equity Incentive Plan, as amended on
    February 11, 2003.(11)                                                                                                                                 
|        | 10 | .4        |  | Purchase Supply Agreement by and between the
    Company and Polypeptide Laboratories A/S dated January 3,
    1997.(1)                                                                              
|        | 10 | .5        |  | Development Supply Agreement by and between the
    Company and Polypeptide Laboratories A/S dated January 3,
    1997 and Amendment dated July 1, 1997.(1)                                          
|        | 10 | .6        |  | Second Amendment to the License Agreement by and
    between the Company and The Regents of the University of
    California dated June 12, 1996.(1)                                                 
|        | 10 | .7        |  | Third Amendment to the License Agreement by and
    between the Company and The Regents of the University of
    California dated September 16, 1997.(1)                                             
|        | 10 | .8        |  | License and Supply Agreement by and between the
    Company and Biosearch Italia S.p.A. dated May 8, 1998.(1)                                                                                        
|        | 10 | .9          |  | 2000 Employee Stock Purchase Plan and related
    documents.(1)(11)                                                                                                                                  
|        | 10 | .10         |  | Loan and Security Agreement by and between the
    Company and Silicon Valley Bank, dated August 1999.(1)                                                                                            
|        | 10 | .11       |  | Research and Technology Agreement by and between
    the Company and New Chemical Entities dated January 24,
    2001.(2)                                                                            
|        | 10 | .12       |  | Letter Agreement by and between the Company and
    Biosearch Italia dated May 18, 2001.(3)                                                                                                          
|        | 10 | .13         |  | First Amendment to Research and Technology
    Agreement by and between the Company and Albany Molecular
    Research Inc. (successor to New Chemical Entities Inc.).(3)                             
|        | 10 | .14         |  | Letter Agreement by and between the Company and
    Albany Molecular Research Inc. (successor to New Chemical
    Entities Inc.) dated June 21, 2001.(3)                                             
|        | 10 | .15         |  | Senior Executive Severance Benefit Plan, as
    amended and restated on August 1, 2002.(9)(11)                                                                                                       
|        | 10 | .16         |  | Executive Severance Benefit Plan, as amended and
    restated on August 1, 2002.(9)(11)                                                                                                              
|        | 10 | .17         |  | Summary of Officer Incentive Bonus Plan.(3)(11)                                                                                                                                                      
|        | 10 | .18       |  | Release Agreement by and between the Company and
    Diversa Corporation dated July 27, 2001, including Warrant
    to Purchase Common Stock of the Company and Registration Rights
    Agreement.(7)
|        | 10 | .19         |  | Letter Agreement dated November 28, 2001 by
    and between the Company and Ken Kelley.(5)(11)                                                                                                       
|        | 10 | .20         |  | Loan Modification Agreement by and between the
    Company and Silicon Valley Bank, dated April 29, 2002.(8)                                                                                         
|        | 10 | .21         |  | Loan Modification Agreement by and between the
    Company and Silicon Valley Bank, dated June 10, 2002.(8)                                                                                          
|        | 10 | .22         |  | 2002 Non-Officer Equity Incentive Plan and
    related documents, as amended on February 3, 2003.                                                                                                    
|        | 10 | .23         |  | Master Services Agreement by and among the
    Company, PPD Development, LP and PPD Global Ltd., dated
    July 29, 2002.(9)                                                                         
|        | 10 | .24         |  | Lease Termination Agreement by and between the
    Company and EOP-Shoreline Technology Park, L.L.C., dated
    November 22, 2002, including Common Stock Purchase
    Agreement.(10)                



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .25         |  | Lease Termination Agreement by and between the
    Company and Bruce H. Carter and Keith M. Carter, dated
    October 31, 2002.                                                                                                
|        | 10 | .26         |  | Sublease Termination Agreement and Sublease by
    and between the Company and ReShape, Inc., dated
    October 31, 2002.                                                                                                      
|        | 10 | .27         |  | Lease Assignment Agreement by and among the
    Company, PolyFuel, Inc. and 1245 Terra Bella Partners, LLC,
    dated December 20, 2002, including Warrant to Purchase
    Common Stock of the Company dated December 31, 2002.
|        | 10 | .28         |  | Termination of Development Supply Agreement and
    Purchase/ Supply Agreement by and among the Company, Polypeptide
    Laboratories A/S and Polypeptide Laboratories AB, dated
    December 6, 2002.                         
|        | 10 | .29         |  | Lease Agreement by and between the Company and
    Embarcadero Corporate Center, dated February 10, 2003.                                                                                                                      
|        | 23 | .1          |  | Consent of Ernst & Young LLP, Independent
    Auditors                                                                                                                                                                         
|        | 24 | .1          |  | Power of Attorney. Reference is made to the
    signature page.                                                                                                                                                                
|        | 99 | .1          |  | Certifications                                                                                                                                                                                                                 



---



|   |                                                                                                                                                                                                       
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Confidential treatment request has been granted
    with respect to certain portions of this exhibit. Omitted
    portions have been filed separately with the Securities and
    Exchange Commission.



|    |                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to exhibit to our
    Registration Statement on Form S-1 (File
    No. 333-95461) initially filed with the Securities and
    Exchange Commission on January 27, 2000 as subsequently
    amended.
|   
|(2) | Incorporated by reference to exhibit to our
    Form 10-Q filed with the Securities and Exchange Commission
    on May 16, 2001.                                                                                            
|   
|(3) | Incorporated by reference to exhibit to our
    Form 10-Q filed with the Securities and Exchange Commission
    on August 14, 2001.                                                                                         
|   
|(4) | Incorporated by reference to exhibit to our
    Registration Statement on Form S-3 (File
    No. 333-82934) filed with the Securities and Exchange
    Commission on February 15, 2002.                                     
|   
|(5) | Incorporated by reference to exhibit to our
    Form 10-Q filed with the Securities and Exchange Commission
    on February 15, 2002.                                                                                       
|   
|(6) | Incorporated by reference to exhibit to our
    Form 10-Q filed with the Securities and Exchange Commission
    on May 15, 2002.                                                                                            
|   
|(7) | Incorporated by reference to exhibit to our
    Registration Statement on Form S-3 (File
    No. 333-89840) filed with the Securities and Exchange
    Commission on June 5, 2002.                                          
|   
|(8) | Incorporated by reference to exhibit to our
    Form 10-Q filed with the Securities and Exchange Commission
    on August 14, 2002.                                                                                         
|   
|(9) | Incorporated by reference to exhibit to our
    Form 10-Q filed with the Securities and Exchange Commission
    on November 14, 2002.                                                                                       



|     |                                                                                                                                     
|---- | ------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to exhibit to our
    Form 8-K filed with the Securities and Exchange Commission
    on November 27, 2002.
|    
|(11) | Management contract or compensatory plan,
    contract or arrangement.