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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,
    2003                                             
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission file number 0-29993

IntraBiotics
Pharmaceuticals, Inc.


(Exact name of Registrant as specified in its
charter)


|                                                                   |  |                                      
|------------------------------------------------------------------ |  | -------------------------------------
|Delaware                                                           |  | 94-3200380                           
|(State or Other Jurisdiction of
    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 30, 2003 as reported by the Nasdaq National Market was
approximately $10,632,000. The determination of affiliate status
for the purposes of this calculation is not necessarily a
conclusive determination for other purposes. The calculation
excludes approximately 613,000 shares held by directors,
officers and stockholders whose ownership exceeds five percent
of the Registrants outstanding common stock as of
June 30, 2003. 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 February 27, 2004 was
5,310,661 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 10, 2004 are
incorporated by reference into Part III of this report.
Except as expressly incorporated by reference, the
Registrants proxy statement shall not be deemed to be a
part of this report.



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TABLE OF CONTENTS

|             |  |                                                                                           |  |      |    |  |  | 
|------------ |  | ----------------------------------------------------------------------------------------- |  | ---- | -- |  |  | 
|             |  |                                                                                           |  | Page
|             |  |                                                                                           |  |     
|PART I      
|Item 1.      |  | Business                                                                                  |  |      | 2  | 
|Item 2.      |  | Properties                                                                                |  |      | 8  | 
|Item 3.      |  | Legal Proceedings                                                                         |  |      | 8  | 
|Item 4.      |  | Submission of Matters to a
    Vote of Security Holders                                   |  |      | 8  | 
|PART II     
|Item 5.      |  | Market for Registrants
    Common Equity and Related Stockholder Matters                 |  |      | 9  | 
|Item 6.      |  | Selected Financial Data                                                                   |  |      | 11 | 
|Item 7.      |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |  |      | 12 | 
|Item 7A.     |  | Quantitative and Qualitative
    Disclosure About Market Risk                             |  |      | 26 | 
|Item 8.      |  | Financial Statements and
    Supplementary Data                                           |  |      | 27 | 
|Item 9.      |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |  |      | 49 | 
|Item 9A.     |  | Controls and Procedures                                                                   |  |      | 49 | 
|PART III    
|Item 10.     |  | Directors and Executive
    Officers of the Registrant                                    |  |      | 49 | 
|Item 11.     |  | Executive Compensation                                                                    |  |      | 49 | 
|Item 12.     |  | Security Ownership of
    Certain Beneficial Owners and Management                        |  |      | 49 | 
|Item 13.     |  | Certain Relationships and
    Related Transactions                                        |  |      | 49 | 
|Item 14.     |  | Principal Accountant Fees
    and Services                                                |  |      | 49 | 
|PART IV     
|Item 15.     |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                       |  |      | 50 | 
|EXHIBIT 23.1
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1



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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 risks 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,
Factors That Could Affect Future Results and
Managements Discussion and Analysis of Financial
Condition 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

Overview

Our strategy is to develop novel
biopharmaceutical products for the management of serious
infections, including those involving multi-drug-resistant
organisms. We are currently developing an oral solution of
iseganan hydrochloride (iseganan HCl), an antimicrobial drug,
for the prevention of ventilator-associated pneumonia (VAP). VAP
is a bacterial pneumonia that can develop in patients receiving
mechanical (artificial) ventilation and is the most common
infection occurring in patients in the intensive care unit. One
potential benefit of preventing VAP would be to reduce the need
for antibiotics and subsequent emergence of antibiotic
resistance. There are no products approved by health authorities
for the prevention of VAP. In addition, we intend to pursue
additional indications for iseganan HCl, including treatment of
infections in patients with cystic fibrosis. We own worldwide
rights to iseganan HCl for all indications.

In September 2003 we launched the first of two
pivotal trials of iseganan HCl oral solution for the prevention
of VAP. The U.S. Food and Drug Administration
(FDA) have granted Fast-Track designation status and a
Special Protocol Assessment agreement (SPA) on the design
of the two pivotal efficacy trials for this indication. In
addition, the FDA accepted the program for inclusion in its
Continuous Marketing Application (CMA) Pilot 2 Program. The
Fast-Track designation is intended to facilitate the development
and expedite the review of a new drug that is intended to treat
a serious or life-threatening condition, and that demonstrates
the potential to address an unmet medical need. The SPA
agreement specifies in writing the pivotal clinical trial
requirements for registration of iseganan HCl for the prevention
of VAP. The objective of the CMA Pilot 2 program is to
evaluate the costs and benefits of enhanced sponsor access to
guidance and feedback from the FDA during the Investigational
New Drug (IND) phase of new drug development of Fast-Track
products.

Under our SPA agreement with the FDA, we are
required to conduct two identical pivotal, randomized,
double-blind, placebo-controlled, multinational clinical trials.
The pivotal trials are designed to assess the safety and
efficacy of iseganan HCl and to demonstrate iseganan HC1s
ability to reduce the incidence of VAP in patients who are
undergoing mechanical ventilation and survive fourteen days. In
each trial, approximately 900 patients will be enrolled and
will be randomized to receive either iseganan HCl or placebo six
times per day for up to 14 days, while being mechanically
ventilated. We expect to announce results of the first pivotal
trial by the end of 2004. If this trial is successful, we will
then conduct the second pivotal trial to support registration of
iseganan HCl. We cannot be certain that the first pivotal trial
results will be available before the end of 2004, or whether
this trial will be successful. In addition, prior to the
submission of a New Drug

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Application (NDA) with the FDA, we must
satisfy FDA requirements for all other scientific data elements,
such as supportive toxicology studies, and validation of the
process in which iseganan HCl is manufactured.


On December 31, 2003 we had cash, cash
equivalents, restricted cash and short-term investments totaling
$26.6 million, which we currently anticipate to be
sufficient to fund operations for at least the next
12 months. We will need to raise substantial additional
funds to continue our operations, complete the second pivotal
efficacy trial of iseganan HCl for VAP if the first trial is
successful, complete the FDA approval process, and commence
commercialization if FDA approval is received.

Our Strategy

Our goal is to build a biopharmaceutical company
with a portfolio of products for the management of serious
infections including those involving multi-drug-resistant
organisms. The key elements of our strategy are to:



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | Complete the clinical development of iseganan HCl
    for the prevention of VAP;                                           
|
| |  | Pursue additional indications for iseganan HCl,
    including treatment of infections in patients with cystic
    fibrosis;
|
| |  | Opportunistically evaluate and acquire additional
    products that are consistent with our strategy, and;                 
|
| |  | Leverage and expand our management, clinical and
    regulatory expertise in anti-infective therapeutics.                  

Clinical Pipeline



| |             
| | ------------
| | Iseganan HCl

Iseganan HCl belongs to a novel class of
naturally-occurring antimicrobial peptides known as Protegrins.
Protegrins were originally isolated from mammalian blood cells
and are part of the bodys first line of biological defense
against invading bacteria and fungi. Iseganan HCl is the
companys first product candidate. It is a synthetic
version of naturally-occurring Protegrins and has shown potent
and broad-spectrum antimicrobial properties, and is therefore
believed to have great potential in fighting
multi-drug-resistant bacteria and fungi that cannot be killed
using conventional antibiotics.

We have been developing iseganan HCl in the
clinical setting since 1997. In 2002, we completed two
phase III trials of iseganan HCl for the prevention of
ulcerative oral mucositis, a complication that develops in
cancer patients receiving chemotherapy or radiation therapy that
results in painful ulcer-like sores in the mouth and throat. We
were evaluating whether an infectious component of oral
mucositis could be prevented or reduced by this drug candidate.
We concluded two large studies, one in patients receiving
radiation therapy to the head and neck, and a second in patients
undergoing aggressive chemotherapy. In the radiation therapy
study, there was no difference between iseganan HCl and placebo,
and in the chemotherapy study, differences in favor of iseganan
HCl were insufficient to achieve statistical significance.
Iseganan HCl appears to be safe when applied to the oral cavity.
We ceased further development of iseganan HCl for oral mucositis
in 2002, and are currently not performing any drug research
activities. We are now focused on developing iseganan HCl to
prevent VAP, as well as evaluating its potential use in other
applications.



| |                                                     
| | ----------------------------------------------------
| | Iseganan HCl Oral Solution for Prevention
    of VAP

Iseganan HCl oral solution is currently in the
first of two pivotal clinical trials for the prevention of VAP.
VAP is the most common infection in the hospital intensive care
unit (ICU). An important risk factor for the development of
pneumonia in artificially-ventilated patients is the duration of
mechanical ventilation. More than 1 million critically-ill
patients in North America, Western Europe, and Japan receive
life support via a mechanical ventilator for more than
48 hours. These patients are particularly vulnerable to
developing VAP. Up to one in three patients ventilated for at
least 48 hours will develop VAP. VAP arises following
aspiration of the patients bacteria-laden saliva around
the ventilator tube, which acts like a wick in the otherwise
sterile lower airway. Introduction of bacteria into the lungs
then increases the propensity for infection and pneumonia. VAP
is associated with a high rate of morbidity, leading to
prolonged dependence on artificial ventilation and extended
hospital stays. The current treatment for VAP is broad-spectrum
antibiotic therapy,

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which may account for increased incidence of
bacterial resistance to antibiotics and a resultant decreased
ability to fight infections.


Prevention may be an effective means by which to
reduce VAP and its associated morbidity. Effective prevention
will reduce the morbidity in mechanically-ventilated patients,
and may shorten the length of time patients require mechanical
ventilation. Reduction of VAP may also decrease associated
costs, as well as lessen the use of antibiotics to treat
infections. It has been shown that other, conventional
antibiotics can be used to prevent VAP and associated clinical
complications, however, such antibiotics are known to cause
overgrowth and resistance, thus reducing available treatment
options. Currently no pharmaceutical product has been approved
by health authorities for the prevention of VAP.

A phase I/ IIa trial of iseganan HCl oral
solution evaluating safety and antimicrobial activity in
mechanically-ventilated patients was completed in February 2001.
A phase I/ IIa trial attempts to obtain preliminary indicators
of safety and efficacy of a drug candidate in a smaller patient
population than a phase II or phase III trial. In the
phase I/ IIa trial, we administered iseganan HCl to patients for
up to five days and demonstrated that the oral solution was well
tolerated and provided a significant antimicrobial effect in
mechanically-ventilated patients. The trial demonstrated that
single doses of iseganan HCl reduced the level of bacteria in
the oral cavity by more than 100-fold compared to pre-treatment
baseline levels in patients who required mechanical ventilation.
In this study, we also selected the optimal formulation and
dosage strength of iseganan HCl, and demonstrated that
administration every four hours progressively reduced the level
of bacteria in the oral cavity. We believe these results support
further development of iseganan HCl oral solution for the
prevention of VAP.



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | Iseganan HCl Oral Solution for Treatment of
    Respiratory Infections in Cystic Fibrosis Patients

We believe iseganan HCl may be effective in
treating respiratory infections in cystic fibrosis
(CF) patients. CF is the most common, lethal inherited
abnormality in Caucasians. As a result of inheritance of an
abnormal gene from each parent, CF patients produce a thick,
sticky mucous from their lungs, and recurrent infection of the
airway occurs. Patients require antibiotic therapy, delivered
either by inhalation or intravenously, from early in life.
Eventually, bacteria become resistant to the antibiotics used
and alternative antibiotics must be used. In spite of the use of
antibiotics, airway infection persists and progressive
destruction of lung function ensues. Patients usually succumb to
their progressive pulmonary infection, and the median survival
is only 34 years of age.

We have shown that iseganan HCl is active in
killing the predominant pathogens involved in infections
experienced by patients suffering from CF, including those
pathogens that are resistant to todays antibiotics.
Because iseganan HCl is active against a wider range of
pathogens and is unlikely to generate antibiotic resistance, we
believe iseganan HCl may offer significant advantages over
current therapy and other antibiotics in development. We have
shown that iseganan HCl reduces lung infection in an animal
model when delivered by aerosol, suggesting that iseganan HCl
may offer patients a new alternative. Iseganan HCl has not been
observed to cause resistance to other micro-organisms, or to
itself.

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.

Clinical Supplies and Manufacturing

We currently have sufficient quantities of
iseganan HCl to complete the planned pivotal clinical trials for
the prevention of VAP, but further quantities will be required
to validate the manufacturing process and for commercial use if
we successfully obtain FDA registration for this indication. We
intend to use contract manufacturers for the supply of our
clinical and commercial product needs. To date, we have relied
on a single

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contract manufacturer, PolyPeptide Laboratories
A/ S (PolyPeptide), to manufacture the iseganan HCl bulk drug
substance for our pivotal clinical trials. Although we presently
have no supply agreement with this supplier, we are in active
discussions with PolyPeptide and other potential suppliers
regarding future supply arrangements. We also rely on a single
third party supplier, Patheon, Inc., to produce iseganan
HCl formulated drug product for use in our pivotal clinical
trials. A related discussion of the risks and uncertainties
associated with the manufacture of drug substance and drug
product is set forth in the Factors that could affect
future results, under the heading We will be
dependent on third party contract manufacturers for the future
production of iseganan HCl and for producing information
required to register iseganan HCl with the FDA if our trials are
successful. If our manufacturing partners fail to manufacture
iseganan HCl in accordance with set specifications or fail to
produce the necessary information, our operations and related
results could be adversely affected.


Commercialization Strategy

We own worldwide rights to iseganan HCl, and are
currently evaluating our alternatives for commercialization of
iseganan HCl. We may choose to form a partnership with an
established pharmaceutical company for commercialization
worldwide. Alternatively, we may pursue a hybrid strategy of
establishing a partnership covering commercialization outside of
the U.S., while retaining commercial rights for ourselves in the
U.S. We cannot guarantee that we will successfully develop
or commercialize our product candidate, establish a successful
partnership, achieve significant market penetration, or generate
any revenues from our product.

Competition

We are not aware of any products that compete
with iseganan HCl for the prevention of VAP. However,
pharmaceutical companies and biotechnology companies may develop
products in the future that compete with iseganan HCl for the
prevention of VAP. Many of these companies have substantially
greater experience, financial 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, ease of administration and side-effect
profile. We cannot give any assurances that we can effectively
compete with these other pharmaceutical and biotechnology
companies.

Intellectual Property

In April 1994, we entered into a license
agreement with The Regents of the University of California,
under which we have exclusive rights to develop and
commercialize Protegrin-based products, such as iseganan HCl. To
date, we have paid a $50,000 licensing fee, $25,000 upon the
filing of an Investigational New Drug application and $50,000
upon the initiation of a phase III trial. We are obligated
to bear all patent costs and submit semi-annual progress reports
to the Regents until the first commercial sale. Subsequent to
this sale, we are obligated to provide quarterly royalty reports
and make quarterly royalty payments to the Regents. The Regents
have the right to inspect our royalty records at any time.

We may terminate the agreement upon prior written
notice, which shall be effective 90 days after the date of
such notice. The Regents may provide a notice of default if any
of the following occur: we fail to use diligent efforts to
develop and commercialize Protegrin-based products, we are
unable to meet certain targets for raising capital or expending
resources for the development and commercialization of
Protegrin-based products, or we cannot achieve the
commercialization milestones stated in a development plan that
we presented to the Regents. Upon receipt of the notice of
default, we have 90 days to cure the default. If we do not
cure the default, the agreement automatically terminates. The
agreement is effective for the life of the Regents patent
rights, unless all patent applications are abandoned or no
patents are issued, or for 17 years from the first
commercial sale of the licensed product, whichever comes first.

We own one U.S. patent which contains claims
covering, among other antimicrobial peptides, iseganan HCl, and
methods of making and using these antimicrobial peptides. We
also own another U.S. patent that contains claims covering
pharmaceutical compositions of antimicrobial peptides, including
iseganan HCl, and

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methods of using these antimicrobial peptides.
These patents expire no earlier than 2016. In addition, we are
either the owner or exclusive licensee from The Regents of the
University of California of five other U.S. patents
covering related antimicrobial peptides and/or their uses. We
also own two U.S. patents and have two pending
U.S. applications with claims covering related
antimicrobial peptides. In addition, we have one pending
U.S. application with claims directed to methods of using
iseganan HCl or pharmaceutical compositions thereof to prevent
VAP.


Applications covering iseganan HCl and the
related antimicrobial peptides, as well as their uses, are
either pending or have issued in major foreign jurisdictions.
Australia has issued patents covering iseganan HCl and the
related antimicrobial peptides, as well as their uses. Such
patents expire no earlier than 2016. In addition, patent
applications covering iseganan HCl and the related antimicrobial
peptides, as well as their uses and/or pharmaceutical
compositions, are pending in Japan, Canada, Hong Kong, and
Israel, and are pending or granted in Europe. Currently the most
important patents in the portfolio are the issued patents
covering iseganan HCl and pharmaceutical compositions thereof
and the pending patents covering the use of iseganan HCl to
prevent VAP.

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 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.

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. A
phase I or phase II trial attempts to obtain
preliminary indicators of safety and efficacy of a drug
candidate in a smaller patient population. Phase II/ III or
phase III trials that are suitable for FDA

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registration, often referred to as
pivotal 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 any of these trials we undertake will be completed
successfully within any specified period of time, or at all.
Furthermore, we, or the 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 February 27, 2004, we had ten
full-time employees, five of whom are engaged in product
development activities and five of whom are engaged in general
and administrative activities. We also make extensive use of
consultants and other third party clinical service providers in
the execution of our strategy. Our employees are not represented
by a collective bargaining agreement. We believe that we have
good relations with our employees.

Available Information

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.






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

We are currently leasing one facility at 2483
East Bayshore Road, Suite 100, in Palo Alto, California.
The facility provides approximately 3,600 square feet of
office space. The lease expires on May 31, 2004 and
includes an option to extend until November 30, 2004. We
believe that we will need to add additional facilities to allow
for growth in headcount within the next year.






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

(a) We are not a party to any material legal
proceedings.

(b) No legal proceedings were terminated in
the fourth quarter.






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

No matters were submitted to the vote of
stockholders through the solicitation of proxies or otherwise
during the three-month period ended December 31, 2003.

8



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##### Table of Contents






PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for 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. We effected a 1:12 stock split on
April 10, 2003. The table below sets forth the high and low
bid prices for our common stock for the periods indicated:

|                                     |  |      |       |     |  |    |       | 
|------------------------------------ |  | ---- | ----- | --- |  | -- | ----- | 
|                                     |  | High |       | Low
|                                     |  |      |       |    
|1st Quarter ended March 31, 2002     |  | *$   | 55.32 |     |  | *$ | 27.84 | 
|2nd Quarter ended June 30, 2002      |  | *$   | 59.52 |     |  | *$ | 11.04 | 
|3rd Quarter ended September 30, 2002 |  | *$   | 28.20 |     |  | *$ | 3.96  | 
|4th Quarter ended December 31, 2002  |  | *$   | 7.68  |     |  | *$ | 3.00  | 
|1st Quarter ended March 31, 2003     |  | *$   | 4.08  |     |  | *$ | 1.56  | 
|2nd Quarter ended June 30, 2003      |  | $    | 6.48  |     |  | *$ | 2.28  | 
|3rd Quarter ended September 30, 2003 |  | $    | 15.60 |     |  | $  | 3.08  | 
|4th Quarter ended December 31, 2003  |  | $    | 17.50 |     |  | $  | 10.50 | 



---



|  |                                                                                      
|- | -------------------------------------------------------------------------------------
|* | Bid price is adjusted to reflect the 1:12 stock
    split effected on April 10, 2003.

As of February 27, 2004, there were 137
holders of record of common stock. We estimate that included
within the holders of record are approximately 3,000 beneficial
owners of common stock. As of February 27, 2004, the
closing price for our common stock was $18.00.

Recent Sales of Unregistered
Securities

On May 1, 2003, in a private placement
transaction, the Company sold 350 shares of a newly created
Series A convertible preferred stock (the Preferred
Stock), $0.001 par value, and issued warrants to
purchase 920,699 shares of the Companys common stock,
resulting in net cash proceeds of $3.2 million. The primary
purpose of completing the private placement was to provide funds
for a clinical trial of iseganan HCl for the prevention of
ventilator-associated pneumonia (VAP), as well as for other
general corporate purposes and working capital. The foregoing
purchases and sales were exempt from registration under the
Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof, on the basis that the transaction did
not involve a public offering.

On October 10, 2003, in a private placement
transaction, the Company sold 1,774,000 shares of newly
issued common stock, $0.001 par value, and issued warrants
to purchase 354,800 shares of the Companys common
stock, resulting in net cash proceeds of $18.5 million. The
primary purpose of completing the private placement was to
provide additional funding for the two pivotal trials of
iseganan HCl for the prevention of VAP, as well as for other
general corporate purposes and working capital. The foregoing
purchases and sales were exempt from registration under the
Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof, on the basis that the transaction did
not involve a 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.

9



---



##### Table of Contents



Equity Compensation Plan Information

The following table provides certain information
with respect to all equity compensation plans in effect as of
December 31, 2003.

|                                                               |                                                |                      |         |                   |  |                          |      |      |  |  |         |         |    
|-------------------------------------------------------------- | ---------------------------------------------- | -------------------- | ------- | ----------------- |  | ------------------------ | ---- | ---- |  |  | ------- | ------- | ---
|                                                               |                                                |                      |         |                   |  | Number of Securities    
|                                                               |                                                | Number of Securities |         | Weighted-average  |  | Remaining Available for 
|                                                               |                                                | to Be Issued Upon    |         | Exercise Price of |  | Issuance Under Equity   
|                                                               |                                                | Exercise of          |         | Outstanding       |  | Compensation Plans      
|                                                               |                                                | Outstanding Options, |         | Options, Warrants |  | (Excluding Securities   
|                                                               |                                                | Warrants and Rights  |         | and Rights        |  | Reflected in Column (a))
|Plan Category                                                  |                                                | (a)                  |         | (b)               |  | (c)                     
|                                                               |                                                |                      |         |                   |  |                         
|Equity compensation plans approved by security
    holders     |                                                |                      |         |                   |  |                          |      |      |  |  |         |        
|                                                               | Amended and Restated 1995 Stock Option Plan(1) |                      |         | 14,375            |  |                          | $    | 5.97 |  |  |         |        |    
|                                                               | 2000 Employee Stock Purchase Plan(2)           |                      |         |                  |  |                          |      |     |  |  |         |        |    
|                                                               | 2000 Equity Incentive Plan                     |                      |         | 628,065           |  |                          | $    | 3.65 |  |  |         | 229,608 | (3)
|                                                               |                                                |                      |         |                   |  |                          |      |      |  |  |         |        
|Equity compensation plans not approved by
    security holders |                                                |                      |         |                   |  |                          |      |      |  |  |         |        
|                                                               | 2002 Non-Officer Equity Incentive Plan         |                      |         | 180,541           |  |                          | $    | 3.82 |  |  |         | 10,424  |    
|                                                               |                                                |                      |         |                   |  |                          |      |      |  |  |         |        
|Total                                                          |                                                |                      | 822,981 |                   |  | $                        | 3.73 |      |  |  | 240,032 |        
|                                                               |                                                |                      |         |                   |  |                          |      |      |  |  |         |        



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | No new stock awards may be granted under the
    Amended and Restated 1995 Stock Option Plan.                                                                                                                                                                                                                                                                                                                                               
|   
|(2) | Generally, on each December 31, the 2000
    Employee Stock Purchase Plan share reserve will increase
    automatically by the lesser of (i) 1% of the outstanding
    Common Stock, (ii) 41,666 shares, or (iii) a
    lesser amount determined by the Board. However, this plan was
    suspended in March 2003, and consequently there are currently no
    securities reserved for issuance under this plan.                            
|   
|(3) | On each December 31, the 2000 Equity
    Incentive Plan share reserve will increase automatically by the
    lesser of (i) 5% of the outstanding shares of Common Stock
    on a fully diluted basis, (ii) 166,666 shares, or
    (iii) a lesser amount determined by the Board. An
    additional increase in the reserve of 158,333 shares was
    approved by the stockholders of IntraBiotics in a special
    meeting on April 3, 2003.

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

2002 Non-Officer Equity Incentive
Plan

Our 2002 Non-Officer Equity Incentive Plan
provides for stock awards (grants of non-statutory 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 190,965 shares of common stock have been
reserved for issuance under this plan. As of December 31,
2003, options to purchase 180,541 shares were outstanding
and 10,424 shares remained available for grant. 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 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.

10



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##### 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,                 
|                                                                                                  |                                  |                                         
|                                                                                                  |                                  | 2003                                     |         | 2002  |  | 2001 |         | 2000   |   | 1999
|                                                                                                  |                                  |                                          |         |       |  |      |         |        |   |     
|                                                                                                  |                                  |                                         
|                                                                                                  |                                  | (In thousands, except per share amounts)
|Statement of Operations Data:                                                                     |                                  |                                          |         |       |  |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Contract revenue                                                                                  |                                  | $                                        |        |       |  | $    |        |        |   | $    |        |        |   | $ |        |        |   | $ | 7,863   |       
|                                                                                                  |                                  |                                          |         |       |  |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Operating expenses:                                                                               |                                  |                                          |         |       |  |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|                                                                                                  | Research and development         |                                          |         | 7,727 |  |      |         | 23,053 |   |      |         | 38,034 |   |   |         | 39,152 |   |   |         | 26,102 |  
|                                                                                                  | General and administrative       |                                          |         | 5,782 |  |      |         | 8,617  |   |      |         | 9,202  |   |   |         | 11,560 |   |   |         | 6,082  |  
|                                                                                                  | Restructuring and other charges  |                                          |         |      |  |      |         | 6,118  |   |      |         | 21,956 |   |   |         |       |   |   |         |       |  
|                                                                                                  | Arbitration settlement           |                                          |         |      |  |      |         | (3,600 | ) |      |         |       |   |   |         |       |   |   |         |       |  
|                                                                                                  | Impairment of acquired workforce |                                          |         |      |  |      |         | 1,365  |   |      |         |       |   |   |         |       |   |   |         |       |  
|                                                                                                  |                                  |                                          |         |       |  |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Total operating expenses                                                                          |                                  |                                          | 13,509  |       |  |      | 35,553  |        |   |      | 69,192  |        |   |   | 50,712  |        |   |   | 32,184  |       
|                                                                                                  |                                  |                                          |         |       |  |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Operating loss                                                                                    |                                  |                                          | (13,509 | )     |  |      | (35,553 | )      |   |      | (69,192 | )      |   |   | (50,712 | )      |   |   | (24,321 | )     
|                                                                                                  | Interest income                  |                                          |         | 166   |  |      |         | 703    |   |      |         | 2,843  |   |   |         | 5,699  |   |   |         | 1,372  |  
|                                                                                                  | Interest expense                 |                                          |         |      |  |      |         | (459   | ) |      |         | (1,110 | ) |   |         | (563   | ) |   |         | (166   | )
|                                                                                                  | Other income, net                |                                          |         | 31    |  |      |         | 856    |   |      |         | 93     |   |   |         |       |   |   |         |       |  
|                                                                                                  |                                  |                                          |         |       |  |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Net loss                                                                                          |                                  |                                          | (13,312 | )     |  |      | (34,453 | )      |   |      | (67,366 | )      |   |   | (45,576 | )      |   |   | (23,115 | )     
|Non-cash deemed dividend related to beneficial
    conversion feature of Series A preferred stock |                                  |                                          | (1,436  | )     |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|Non-cash dividends on Series A preferred
    stock                                                |                                  |                                          | (182    | )     |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|                                                                                                  |                                  |                                          |         |       |  |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Net loss applicable to common stockholders                                                        |                                  | $                                        | (14,930 | )     |  | $    | (34,453 | )      |   | $    | (67,366 | )      |   | $ | (45,576 | )      |   | $ | (23,115 | )     
|                                                                                                  |                                  |                                          |         |       |  |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Basic and diluted net loss per share applicable
    to common stockholders                        |                                  | $                                        | (4.01   | )     |  | $    | (11.25  | )      |   | $    | (27.47  | )      |   | $ | (24.29  | )      |   | $ | (259.48 | )     
|                                                                                                  |                                  |                                          |         |       |  |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Shares used to compute basic and diluted net loss
    per share applicable to common stockholders |                                  |                                          | 3,720   |       |  |      | 3,064   |        |   |      | 2,453   |        |   |   | 1,876   |        |   |   | 89      |       
|                                                                                                  |                                  |                                          |         |       |  |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       

|                                                                                |  |                    |          |      |  |      |          |      |  |      |          |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------- |  | ------------------ | -------- | ---- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                |  |                   
|                                                                                |  | As of December 31,
|                                                                                |  |                   
|                                                                                |  | 2003               |          | 2002 |  | 2001 |          | 2000 |  | 1999
|                                                                                |  |                    |          |      |  |      |          |      |  |     
|                                                                                |  |                   
|                                                                                |  | (In thousands)    
|Balance Sheet Data:                                                             |  |                    |          |      |  |      |          |      |  |      |          |   |  |   |         |   |  |   |         |  
|Cash, cash equivalents, restricted cash deposits
    and short-term investments |  | $                  | 26,644   |      |  | $    | 13,315   |      |  | $    | 35,470   |   |  | $ | 86,065  |   |  | $ | 31,429  |  
|Working capital                                                                 |  |                    | 25,424   |      |  |      | 15,191   |      |  |      | 29,629   |   |  |   | 86,142  |   |  |   | 25,743  |  
|Total assets                                                                    |  |                    | 27,326   |      |  |      | 16,226   |      |  |      | 42,465   |   |  |   | 108,288 |   |  |   | 35,958  |  
|Long term obligations, less current portion                                     |  |                    |         |      |  |      |         |      |  |      | 5,000    |   |  |   | 8,309   |   |  |   | 1,725   |  
|Accumulated deficit                                                             |  |                    | (215,199 | )    |  |      | (200,269 | )    |  |      | (165,816 | ) |  |   | (98,450 | ) |  |   | (52,874 | )
|Total stockholders equity                                                      |  |                    | 25,628   |      |  |      | 15,480   |      |  |      | 26,212   |   |  |   | 89,955  |   |  |   | 27,914  |  

11



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 Factors That Could Affect
Future Results. 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 currently focused on the development
of an oral solution of iseganan hydrochloride (iseganan HCl), an
antimicrobial drug, for the prevention of ventilator-associated
pneumonia (VAP). VAP is a bacterial pneumonia that can develop
in patients receiving mechanical (artificial) ventilation
and is the most common infection occurring in patients in
intensive care units.

In September 2003, we launched the first of two
pivotal trials of iseganan HC1 oral solution for the prevention
of VAP. The U.S. Food and Drug Administration
(FDA) have granted Fast-Track designation status and a
Special Protocol Assessment agreement (SPA) on the design
of the two pivotal efficacy trials for this indication. The
Fast-Track designation is intended to facilitate the development
and expedite the review of a new drug that is intended to treat
a serious or life-threatening condition, and that demonstrates
the potential to address an unmet medical need. The SPA
agreement specifies in writing the pivotal clinical trial
requirements for registration of iseganan HCl for the prevention
of VAP. Under our SPA, we are required to conduct two identical
pivotal, randomized, double-blind, placebo-controlled,
multinational clinical trials. We expect to announce the results
of the first pivotal trial by the end of 2004. Our research and
development expenses are expected to at least double in 2004 as
compared to 2003, primarily as a result of the costs associated
with the first pivotal trial. If this trial is successful, we
will then conduct the second pivotal trial to support
registration of iseganan HCl.

A products completion date and completion
costs are difficult to predict, and delays may be caused 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; the
failure by contract research organizations to appropriately
manage clinical trials, or unforeseen safety issues. As a
result, our research and development expenses may fluctuate
significantly, and past trends are not indicative of future
spending.

We will need to raise substantial additional
funds to continue our operations, complete the second pivotal
efficacy trial of iseganan HCl for VAP, complete the FDA
approval process, and commence commercialization. We cannot be
certain that the results of either of the two pivotal trials for
VAP or trials for other indications will be successful, and
product revenues may only be generated if we receive the
required regulatory approvals and can successfully commercialize
a product.

Our cash, cash equivalents, restricted cash and
short-term investments totaled $26.6 million as of
December 31, 2003, including the proceeds of two private
placements during 2003. In May 2003 we completed a preferred
stock placement resulting in net cash proceeds of
$3.2 million, and in October 2003 we completed a common
stock placement resulting in net cash proceeds of
$18.5 million. The primary purpose of the financings was to
provide additional funding for the two pivotal trials of
iseganan HCl for the prevention of VAP, as well as for other
general corporate purposes and working capital.

As of December 31, 2003, the Company has
received and accepted over eight kilograms of finished iseganan
HCl drug substance, which was booked to research and development
expense in 2002 in accordance with our standard accounting
practices. The quantity is sufficient to complete the two
pivotal clinical trials of

12



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##### Table of Contents



iseganan HCl for the prevention of VAP, but
further quantities will be required to validate the
manufacturing process, and for commercial use if we successfully
obtain FDA registration for this indication.


In 2003, we wrote-off $2.4 million of
prepaid iseganan HC1 drug substance to research and development
expense, relating to an order of seven kilograms of drug
substance that was expected to be delivered in 2003, but that we
have not yet been satisfied was manufactured in accordance with
a validation plan or that related documentation is adequate. We
are currently discussing this matter with our contract
manufacturer, and the write-off was recorded due to significant
uncertainty over the timing and outcome of these discussions.

In 2003, we recorded non-cash stock compensation
expense of approximately $1.0 million for 308,835
unexercised stock options that were cancelled and re-granted in
a one-for-one exchange and 12,500 options that were re-granted
in connection with the cancellation of 54,166 unexercised stock
options in February 2003, upon approval by the Board of
Directors. The re-granted options have an exercise price equal
to the closing price of the Companys common stock on the
Nasdaq National Market on February 5, 2003, or
$2.76 per share. The options generally vest over a
four-year period and will expire in February 2008 if not
previously exercised. Variable accounting is being applied to
the re-granted options throughout their term. The related
compensation expense depends on both the cumulative vesting of
outstanding options and the price of the Companys common
stock at each quarter end, and therefore may have a significant
impact on the Companys future results of operations.

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

We intend that the following discussion of our
financial condition and results of operations will provide
information to assist in the understanding of our financial
statements, the changes in certain key items in those financial
statements from year to year, and the primary factors that
accounted for those changes, as well as how certain accounting
principles, policies and estimates affect our financial
statements.

Critical Accounting Policies and
Estimates



| |        
| | -------
| | General

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 ongoing basis, we evaluate these
estimates, including those related to clinical trial 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 could therefore differ materially from those
estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if
it requires an accounting estimate to be made based on
assumptions about matters that are highly uncertain at the time
the estimate is made, and if different estimates that reasonably
could have been used, or changes in the accounting estimates
that are reasonably likely to occur periodically, could
materially impact the financial statements. Management believes
the following critical accounting policies reflect its more
significant estimates and assumptions used in the preparation of
the financial statements.



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

The Companys accrued costs for clinical
trial activities are based upon estimates of the services
received and related expenses incurred that have yet to be
invoiced by the contract research organizations (CROs),
investigators, drug processors, laboratories, consultants, or
other clinical trial service providers that perform the
activities. Related contracts vary significantly in length, and
may be for a fixed amount, a variable amount

13



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##### Table of Contents



based on actual costs incurred, capped at a
certain limit, or for a combination of these elements. Activity
levels are monitored through close communication with the
service provider, including detailed invoice and task completion
review, analysis of expenses against budgeted amounts, and
pre-approval of any changes in scope of the services to be
performed. Each CRO provides an estimate of costs incurred but
not invoiced at the end of each period for each individual
trial. The estimates are reviewed and discussed with the CRO as
necessary, and included in research and development expenses for
the related period. For investigator study grants, which are
paid quarterly on a per-patient basis to the institutions
performing the clinical study, the Company accrues an estimated
amount based on patient enrollment in each quarter. All
estimates may differ significantly from the actual amount
subsequently invoiced. No adjustments for material changes in
estimates have been recognized in any period presented.




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

In February 2003, the Board of Directors approved
a cancellation and re-grant of 308,835 unexercised stock options
held by existing employees and directors of the Company in a
one-for-one exchange and 12,500 options that were re-granted in
connection with the cancellation of 54,166 unexercised stock
options held by a director of the Company. The options generally
vest over a four-year period and will expire in February 2008 if
not previously exercised. Variable accounting is being applied
to the re-granted options throughout their term. The related
compensation expense depends on both the cumulative vesting of
outstanding options and the price of the Companys common
stock at each quarter end, and therefore may have a significant
impact on the Companys future results of operations. No
adjustments for material changes in estimates have been
recognized in any period presented.

As permitted by Statement of Financial Accounting
Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation,as
amended by Statement of Financial Standards No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure,the Company has elected to
follow APB 25 and related interpretations in accounting for
stock-based employee compensation. Under APB 25, if the
exercise price of an employee or director stock option is set
equal or in excess of the fair market value of the underlying
stock on the date of grant, no compensation expense is
recognized. In February 2003, certain employee and director
stock options for which the exercise prices had originally been
set at less than the fair market value of the underlying stock
on the grant date, were cancelled and re-granted in a
one-for-one exchange. The Company had recorded deferred
compensation for the difference between the original exercise
price and the fair market value of the underlying stock on the
grant date as a component of stockholders equity, and the
total was being amortized on a straight-line basis over the
vesting period of the original awards, ranging from four to six
years. The related re-granted options all vest over a four-year
period, and the remaining unamortized deferred compensation as
of the re-grant date is now being amortized over the new
four-year vesting schedule, commencing at the date of re-grant.
The amount of deferred stock compensation expense to be recorded
in future periods could decrease if options, for which accrued
but unvested compensation has been recognized, are forfeited
prior to vesting. No adjustments for material changes in
estimates have been recognized in any period presented.

Options or stock awards issued to non-employees
are recorded at their fair value as determined in accordance
with SFAS 123 and the FASBs Emerging Issues Task
Force issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services, and are recognized over the related service
period and are periodically re-measured as the underlying
options vest. The fair values are estimated using the
Black-Scholes option pricing model, and are periodically
re-measured as the underlying options vest. The option pricing
model is dependent on a number of inputs, which may change over
time. Other option pricing models may produce fair values that
are substantially different from the Black-Scholes model. No
adjustments for material changes in estimates have been
recognized in any period presented.

14



---



##### Table of Contents



Results of Operations



| |                                                               
| | --------------------------------------------------------------
| | Comparison of Years Ended December 31,
    2003, 2002 and 2001



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

IntraBiotics had no product sales or contract
revenue for the years ended December 31, 2003, 2002 and
2001. We do not anticipate any product revenues until we obtain
FDA approval for, and commence commercialization of, any product
candidate.



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



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

|                         |  |                |       |        |  |      |       |        |  |      |        |  |  |  |       |    |  |   |        | 
|------------------------ |  | -------------- | ----- | ------ |  | ---- | ----- | ------ |  | ---- | ------ |  |  |  | ----- | -- |  | - | ------ | 
|                         |  | 2003           |       | Change |  | 2002 |       | Change |  | 2001
|                         |  |                |       |        |  |      |       |        |  |     
|                         |  |               
|                         |  | (In thousands)
|Research and development |  | $              | 7,727 |        |  |      | (66.5 | )%     |  | $    | 23,053 |  |  |  | (39.4 | )% |  | $ | 38,034 | 

Research and development expenses primarily
include clinical trial expenses, research and development
payroll expense, drug substance expense, allocated facilities
costs and non-cash stock compensation charges. Research and
development expenses decreased in 2003 by $15.3 million
from 2002, primarily due to a $9.3 million reduction in
clinical trial expenses and a $3.2 million reduction in
research and development payroll expense, allocated facilities
costs and non-cash stock compensation charges as a result of
restructuring activities in 2002. The clinical trial expenses of
$4.3 million in 2003 relate to the first pivotal trial of
iseganan HC1 for the prevention of VAP, which commenced in
September 2003. In 2002 and 2001, clinical trial expenses of
$13.6 million and $20.0 million, respectively,
primarily related to studies of iseganan HCl for oral mucositis,
an indication that we are no longer pursuing. Research and
development expenses decreased in 2002 by $15.0 million
from 2001, primarily due to reductions of $5.1 million in
research and development payroll expense, $6.7 million in
outside services related to clinical trials and
$2.1 million in license fees.

In 2003, research and development expenses
include a write-off of $2.4 million for prepaid iseganan
HC1 drug substance, relating to an order of seven kilograms of
iseganan HCl bulk drug substance that was expected to be
delivered in 2003. We have not yet been satisfied that the lot
was manufactured in accordance with a validation plan or that
related documentation is adequate, and we are currently
discussing this with our contract manufacturer. Due to
significant uncertainty over the timing and outcome of these
discussions, the entire $2.4 million prepaid amount was
written off in September 2003. In 2002, research and development
expenses included a $4.8 million charge in relation to the
delivery of certain other lots of iseganan HCl bulk drug
substance as a result of the termination of a supply agreement
with the same contract manufacturer. A discussion of the risks
and uncertainties associated with the manufacture of drug
substance and drug product is set forth in the Factors
that could affect future results, under the heading
We will be dependent on third party contract
manufacturers for the future production of iseganan HCl and for
producing information required to register iseganan HCl with the
FDA if our trials are successful. If our manufacturing partners
fail to manufacture iseganan HCl in accordance with set
specifications or fail to produce the necessary information, our
operations and related results could be adversely
affected.

Non-cash stock compensation charges were $59,000,
$656,000 and $1.5 million for the years ended
December 31, 2003, 2002 and 2001, respectively. The
decreases between each period are primarily due to the
cancellation of options for terminated employees and consultants.

We expect research and development expenses to at
least double in 2004 compared to 2003 as patients continue to be
enrolled in the first pivotal trial of iseganan HCl for the
prevention of VAP, which is currently our primarily focus.

Drug development in the United States is a
process that includes several steps defined by the FDA. The
process begins with the filing of an Investigational New Drug
(IND) application that, if successful, allows clinical
study of the potential new drug. Clinical development typically
involves three phases of study: phase I, II and III.
Pivotal trials are trials that are suitable for submission to
the FDA for regulatory approval, and generally comprise either
phase II/ III or phase III trials. The most
significant costs associated with

15



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##### Table of Contents



clinical development are for phase III
trials, as they tend to be the longest and largest studies
conducted during the drug development process. After completion
of clinical trials, a new drug application (NDA) may be
filed with the FDA. In responding to an NDA, the FDA may grant
marketing approval, request additional information or deny the
application if it determines that the application does not
provide an adequate basis for approval. The lengthy process of
seeking regulatory approvals, and the subsequent compliance with
applicable statutes and regulations, require the expenditure of
substantial resources. Any failure by us to obtain, or any delay
in obtaining, regulatory approvals could have a material adverse
effect on our results of operations. A discussion of the related
risks and uncertainties are set forth in the Factors
that could affect future results under the heading
If we fail to complete any clinical trial, or fail to
obtain FDA approval for any product candidate that we develop,
acquire or license, we may never achieve profitability and we
may have to cease operations.




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

|                           |  |                |       |        |  |      |       |        |  |      |       |  |  |  |      |    |  |   |       | 
|-------------------------- |  | -------------- | ----- | ------ |  | ---- | ----- | ------ |  | ---- | ----- |  |  |  | ---- | -- |  | - | ----- | 
|                           |  | 2003           |       | Change |  | 2002 |       | Change |  | 2001
|                           |  |                |       |        |  |      |       |        |  |     
|                           |  |               
|                           |  | (In thousands)
|General and administrative |  | $              | 5,782 |        |  |      | (32.9 | )%     |  | $    | 8,617 |  |  |  | (6.4 | )% |  | $ | 9,202 | 

General and administrative expenses in 2003
decreased by $2.8 million from 2002, primarily due to
reduced headcount and facility-related costs as a result of a
restructuring in October 2002. The decrease in 2002 of $585,000
from 2001 was primarily attributed to the reduction in headcount
as a result of a restructuring implemented in May 2001,
partially offset by the acquisition of Apothogen in April 2002,
which increased general and administrative headcount, and a
$344,000 charge in conjunction with the termination of two
property leases in the fourth quarter of 2002. We expect total
general and administrative expenses to be similar in 2004
compared to 2003, although a number of factors may significantly
impact the total expense in 2004, including the impact of
changes in our stock price on non-cash stock compensation
charges. A discussion of the related risks and uncertainties are
set forth in the Factors that could affect future
results under the heading The change in our
stock price over time may significantly impact our results of
operations through certain stock compensation charges that
depend upon our closing stock price at the end of each
quarter.

General and administrative costs primarily
include administrative payroll expense, outside contractors,
legal and accounting fees, insurance, non-cash stock
compensation charges, facilities, travel and other general
administrative expenses. Non-cash stock compensation charges
were $1.3 million, $1.7 million and $1.4 million
for the years ended December 31, 2003, 2002 and 2001,
respectively.



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

|                                |  |                |   |        |  |      |        |        |  |      |       |  |  |  |       |    |  |   |        | 
|------------------------------- |  | -------------- | - | ------ |  | ---- | ------ | ------ |  | ---- | ----- |  |  |  | ----- | -- |  | - | ------ | 
|                                |  | 2003           |   | Change |  | 2002 |        | Change |  | 2001
|                                |  |                |   |        |  |      |        |        |  |     
|                                |  |               
|                                |  | (In thousands)
|Restructuring and other charges |  | $              |  |        |  |      | (100.0 | )%     |  | $    | 6,118 |  |  |  | (72.1 | )% |  | $ | 21,956 | 

There were no restructurings during 2003. In
2002, restructuring expenses were primarily comprised of
$5.2 million as a result of a facilities lease termination
agreement and $848,000 of severance costs as a result of a
restructuring in October 2002 due to the failure of two
phase III clinical trials. The restructuring reduced our
headcount to 11 as of December 31, 2002 from 37 as of
December 31, 2001. The $5.2 million lease termination
expense included cash payments, the issuance of common stock and
the write-off of a deferred rent balance. Of the $848,000
severance costs, $784,000 was paid in 2002 and the remaining
$64,000 was paid in January 2003.

Restructuring charges of $22.0 million were
recorded in 2001 resulting from a restructuring plan implemented
in May 2001 in order to conserve capital and focus resources on
the development of iseganan HCl. The restructuring charges
included asset write down charges of $11.8 million, costs
related to work force reduction of $2.9 million,
termination costs for collaboration agreements of
$4.1 million and facilities consolidation costs of
$3.2 million.

16



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##### Table of Contents



The workforce reduction comprised 90 employees,
who were all terminated in 2001, representing a 71% reduction in
force. The estimated cost of terminating the collaboration
agreements was increased by $483,000 in the fourth quarter of
2001 and $166,000 in 2002.

The facilities consolidation costs related to the
vacating of three facilities in Mountain View, California,
totaling 142,000 square feet. One of the vacated facilities
was subleased during 2001, the second was terminated in October
2001 and the third in January 2003. In 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,
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 2002 was
$5.2 million and included cash payments, the issuance of
common stock and the write-off of a deferred rent balance.

Additionally as a part of the May 2001
restructuring 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. As a result, we recognized a gain of
$2.2 million that offset restructuring and other charges in
the statement of operations for 2001.



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

During the year ended December 31, 2002, we
received $3.6 million from a contract vendor as a result of
an arbitration settlement relating to a drug dispensing error in
a phase III trial of iseganan HCl for oral mucositis. We
had no comparable item in 2003 or 2001.



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

|                 |  |                |     |        |  |      |        |        |  |      |      |   |  |  |       |    |  |   |        |  
|---------------- |  | -------------- | --- | ------ |  | ---- | ------ | ------ |  | ---- | ---- | - |  |  | ----- | -- |  | - | ------ | -
|                 |  | 2003           |     | Change |  | 2002 |        | Change |  | 2001
|                 |  |                |     |        |  |      |        |        |  |     
|                 |  |               
|                 |  | (In thousands)
|Interest income  |  | $              | 166 |        |  |      | (76.4  | )%     |  | $    | 703  |   |  |  | (75.3 | )% |  | $ | 2,843  |  
|Interest expense |  | $              |    |        |  |      | (100.0 | )      |  |      | (459 | ) |  |  | (58.7 | )  |  |   | (1,110 | )

Interest income decreased in both 2003 and 2002,
primarily resulting from decreases in average interest earning
investment balances and lower interest rates in each year.

Interest expense decreased to zero in 2003 due to
the repayment of our line of credit and bank loan in October
2002. The decrease in 2002 from 2001 was primarily attributed to
a reduction in the average balance of our line of credit and a
reduction in applicable interest rates.



| |                  
| | -----------------
| | Other Income, net

|                  |  |                |    |        |  |      |       |        |  |      |     |  |  |  |       |   |  |   |    | 
|----------------- |  | -------------- | -- | ------ |  | ---- | ----- | ------ |  | ---- | --- |  |  |  | ----- | - |  | - | -- | 
|                  |  | 2003           |    | Change |  | 2002 |       | Change |  | 2001
|                  |  |                |    |        |  |      |       |        |  |     
|                  |  |               
|                  |  | (In thousands)
|Other income, net |  | $              | 31 |        |  |      | (96.4 | )%     |  | $    | 856 |  |  |  | 820.4 | % |  | $ | 93 | 

Other income, net in 2002 includes $975,000 from
the sale of two pre-clinical anti-infective programs to
Micrologix Biotech Inc., a Canadian company, in May 2002, for
$400,000 in cash and 750,000 shares of Series A
preferred stock of Micrologix. The shares are redeemable at
$1 per share or convertible into common stock at the
election of Micrologix upon the occurrence of certain time and
achievement milestones as follows: (1) shares converted
into common stock with a value of $400,000 upon the four month
anniversary of the effective date of the agreement;
(2) shares will convert into common stock with a value of
$100,000 upon commencement of certain toxicology studies; and
(3) shares will convert into common stock with a value of
$250,000 upon filing for marketing approval for certain drugs in
certain countries. Other income of $775,000 was recognized in
the second quarter of 2002 upon receipt of the $400,000 in cash
and the 750,000 shares, and other income of $200,000 was
recognized in the third quarter of 2002 upon redemption of
400,000 of the

17



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##### Table of Contents



shares at $1 per share, which was triggered
by the first milestone set forth above. No other income was
recorded in either 2003 or 2001 as a result of this transaction.


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,
2003, we had net operating loss carryforwards for federal and
state income tax purposes of approximately $192.0 million
and $44.0 million, respectively. We also had federal and
state research and development tax credits each of approximately
$3.3 million. If not utilized, the net operating losses and
credits will expire in the years 2004 through 2023. 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 11 of the Notes to the
Financial Statements included in Item 8 of this
Form 10-K for further information.

Liquidity and Capital Resources

|                                                                       |  |                |        |        |  |      |       |        |  |      |        |  |  |  |       |    |  |   |        | 
|---------------------------------------------------------------------- |  | -------------- | ------ | ------ |  | ---- | ----- | ------ |  | ---- | ------ |  |  |  | ----- | -- |  | - | ------ | 
|                                                                       |  | 2003           |        | Change |  | 2002 |       | Change |  | 2001
|                                                                       |  |                |        |        |  |      |       |        |  |     
|                                                                       |  |               
|                                                                       |  | (In thousands)
|Cash, cash equivalents, restricted cash and
    short-term investments |  | $              | 26,644 |        |  |      | 100.1 | %      |  | $    | 13,315 |  |  |  | (62.5 | )% |  | $ | 35,470 | 

At December 31, 2003, we had cash and cash
equivalents of $14.3 million, representing an increase of
$4.1 million from December 31, 2002. Short-term
investments were $12.1 million in 2003 as compared to
$2.9 million in 2002, and restricted cash remained at
$250,000. We had no debt outstanding as of December 31,
2003. We invest excess funds in short-term money market funds
and securities pursuant to our investment policy guidelines. The
following is an analysis of changes in our cash and cash
equivalents in each respective year.

|                                                         |  |                |        |      |  |      |         |   |  |   |         |  
|-------------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                         |  | 2003           |        | 2002 |  | 2001
|                                                         |  |                |        |      |  |     
|                                                         |  |               
|                                                         |  | (In thousands)
|Net cash used in operating activities                    |  | $              | (8,823 | )    |  | $    | (26,347 | ) |  | $ | (53,602 | )
|Net cash provided by (used in) investing
    activities  |  |                | (9,211 | )    |  |      | (1,552  | ) |  |   | 44,693  |  
|Net cash provided by (used in) financing
    activities  |  |                | 22,150 |      |  |      | 10,087  |   |  |   | (2,092  | )
|                                                         |  |                |        |      |  |      |         |   |  |   |         |  
|Net increase (decrease) in cash and cash
    equivalents |  | $              | 4,116  |      |  | $    | (17,812 | ) |  | $ | (11,001 | )
|                                                         |  |                |        |      |  |      |         |   |  |   |         |  

The net cash used in operating activities
decreased in 2003 from 2002, primarily due to a reduction in the
net loss from $34.5 million to $13.3 million, which
primarily resulted from lower clinical trial expenses between
the respective years and restructuring actions taken in 2002.
The decrease from 2001 to 2002 was primarily due to a reduction
in net loss from $67.4 million to $34.5 million, which
primarily resulted from $22.0 million of restructuring
expenses in 2001, and related reductions in operating cash
outflows as a result of lower clinical trial activity and
internal operating costs in 2002.

The net cash used in investing activities in 2003
relates to the purchase of $12.1 million of short-term
investments, partially offset by the maturity of short-term
investments of $2.9 million. In 2002, the cash used
primarily relates to the purchase of $2.9 million of
short-term investments, partially offset by the proceeds from
the sale of two pre-clinical programs to Micrologix for
$800,000. The change from 2001 to 2002 was primarily due to the
maturities of short-term investments totaling $51.8 million
in 2001.

The cash provided by financing activities in 2003
primarily related to two private placement transactions. In May
2003, the Company sold 350 shares of a newly created
Series A convertible preferred stock and issued warrants to
purchase 920,699 shares of common stock, resulting in net
cash proceeds of $3.2 million, and in October 2003, the
Company sold 1,774,000 shares of newly issued common stock
and issued warrants to purchase 354,800 shares of common
stock, resulting in net cash proceeds of $18.5 million.
Cash provided by

18



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##### Table of Contents



financing activities in 2002 was primarily due to
net proceeds of approximately $14.0 million and
$5.0 million from two private placements of common stock,
partially offset by $9.4 million in payments on financing
obligations to a bank. The cash used in financing activities in
2001 was primarily due to payments on financing obligations of
$13.8 million, partially offset by proceeds from financing
obligations of $11.2 million.




| |                        
| | -----------------------
| | Contractual Obligations

The impact that our contractual obligations as of
December 31, 2003 are expected to have on our liquidity and
cash flow in future periods is as follows, (in thousands):

|                              |  |                        |     |        |  |           |     |           |  |         |     |  |  |   |    |  |  |   |   | 
|----------------------------- |  | ---------------------- | --- | ------ |  | --------- | --- | --------- |  | ------- | --- |  |  | - | -- |  |  | - | - | 
|                              |  |                       
|                              |  | Payments Due by Period
|                              |  |                       
|                              |  |                        |     | Less   |  |           |     | More     
|                              |  |                        |     | Than   |  | Between   |     | Between   |  | Than   
|                              |  | Total                  |     | 1 Year |  | 1-3 Years |     | 3-5 Years |  | 5 Years
|                              |  |                        |     |        |  |           |     |           |  |        
|Drug substance(1)             |  | $                      | 450 |        |  | $         | 300 |           |  | $       | 100 |  |  | $ | 50 |  |  | $ | 0 | 
|Operating leases(2)           |  |                        | 43  |        |  |           | 43  |           |  |         |    |  |  |   |   |  |  |   |  | 
|                              |  |                        |     |        |  |           |     |           |  |         |     |  |  |   |    |  |  |   |   | 
|Total contractual commitments |  | $                      | 493 |        |  | $         | 343 |           |  | $       | 100 |  |  | $ | 50 |  |  | $ | 0 | 
|                              |  |                        |     |        |  |           |     |           |  |         |     |  |  |   |    |  |  |   |   | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Drug substance commitments are to the same
    contract manufacturer to which we prepaid $2.4 million for
    an order of seven kilograms of iseganan HCl bulk drug substance.
    In 2004, the commitment represents the potential payment of
    $250,000 upon acceptance of this order, when and if this occurs,
    and $50,000 in fees for storage of iseganan HC1. The remaining
    $150,000 represents storage fees for iseganan HC1 through 2007.
|   
|(2) | Operating leases relate to the lease for our
    facility in Palo Alto, California, which expires on May 31,
    2004, and includes an option to extend until November 30,
    2004. Under the terms of the lease we have committed to pay
    $43,000 in 2004.                                                                                                                                                                                           

There were no purchase obligations as of
December 31, 2003 that included material penalties for
cancellation and were enforceable and legally binding.



| |                                   
| | ----------------------------------
| | Off-Balance Sheet
    Arrangements

We do not have any off-balance sheet arrangements
(as that term is defined in Rule 303 of
Regulation S-K) that are reasonably likely to have a
current or future material effect on our financial condition,
results of operations, liquidity, capital expenditures or
capital resources.



| |                 
| | ----------------
| | Indemnifications

In the ordinary course of business, we enter into
contractual arrangements under which we may agree to indemnify
the third party to such arrangement from any losses incurred
relating to the services they perform on behalf of IntraBiotics
or for losses arising from certain events as defined within the
particular contract, which may include, for example, litigation
or claims relating to past performance. Such indemnification
obligations may not be subject to maximum loss clauses.
Historically, payments made related to these indemnifications
have been immaterial. In addition, we have entered into
indemnity agreements with each of our directors and executive
officers. Such indemnity agreements contain provisions which are
in some respects broader than the specific indemnification
provisions contained in Delaware law. We also maintain an
insurance policy for our directors and executive officers
insuring against certain liabilities arising in their capacities
as such.



| |                            
| | ---------------------------
| | Future Capital Requirements

We expect to continue to incur substantial
operating losses and will not receive any product revenues until
a product candidate has been approved by the FDA and
successfully commercialized. We currently anticipate our cash,
cash equivalents and investments to be sufficient to fund
operations for at least the next 12 months. We expect,
however, that we will need to raise significant additional funds
to continue our operations,

19



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##### Table of Contents



complete the second pivotal efficacy trial of
iseganan HCl for VAP if the first trial is successful, and for
the FDA approval process and commercialization if FDA approval
is received.


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 may also
generate cash through collaboration or licensing arrangements,
although no such transactions are currently under negotiation.
We intend to raise additional capital in 2004 in one or more
transactions. We cannot be certain, however, that additional
funding will be available when needed or on favorable terms. If
additional funding is not available, we may need to delay or
curtail our development and clinical trial activities to a
significant extent, or we may be forced to cease operations.

Recent Accounting Pronouncements

See Note 2 of the financial statements for a
full description of recent accounting pronouncements including
the respective effects on the Companys financial
condition, results of operations and disclosure.

Factors That Could Affect Future
Results

Our future financial condition results of
operations and disclosures could be materially affected by the
risks and uncertainties discussed below, or otherwise, and
historic trends should not be used to anticipate results or
trends in future periods.



| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If either of our two pivotal clinical
    trials of iseganan HCl for the prevention of VAP or any future
    clinical trials of iseganan HCl for other indications are
    unsuccessful, we may be forced to cease
    operations.

We currently have only one product candidate,
iseganan HCl. In 2002, we completed two Phase III clinical
trials of iseganan HCl for the prevention of ulcerative oral
mucositis, a complication that develops in certain cancer
patients receiving chemotherapy or radiation therapy that
results in painful ulcer-like sores in the mouth and throat.
Both of these clinical trials failed to meet their primary
endpoints and we are no longer pursuing iseganan HCl for the
prevention of ulcerative oral mucositis. We are currently
pursuing iseganan HCl for the prevention of VAP. Enrollment in
the first of two pivotal trials commenced in September 2003, and
we expect to announce its results by the end of 2004. The
failure of either of the two pivotal trials in meeting their
primary endpoint, or of any other future clinical trials of
iseganan HCl for alternative indications, will negatively impact
our future operating results and may force us to cease
operations.



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to complete any clinical trial,
    or fail to obtain FDA approval for any product candidate that we
    develop, acquire or license, we may never achieve profitability
    and we may have to cease operations.

We do not have a drug approved for sale in the
United States or any foreign market and we do not know whether
we will be successful in developing iseganan HCl for the
prevention of VAP or other indications, or in developing,
acquiring or licensing any other products and successfully
obtaining FDA or foreign approvals for them. We must
successfully complete clinical trials and demonstrate
manufacturing capability before we can file with the FDA for
approval to sell any product in the United States or with
foreign regulatory authorities in

20



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##### Table of Contents



order to sell to other countries. The FDA could
require us to repeat or perform amended clinical trials as a
result of their regulatory review, and there is no guarantee
that foreign regulatory authorities will acknowledge approvals
by the FDA, and we may be required to perform additional
clinical trials before being approved to sell in foreign
markets. Delays in obtaining or failure to obtain regulatory
approvals may:




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

The regulatory review and approval process is
lengthy, expensive and uncertain. Extensive pre-clinical and
clinical data and supporting information must be submitted to
the FDA for each indication to establish safety and
effectiveness in order to secure FDA approval. A number of new
drugs for certain indications, iseganan HCl for the prevention
of oral mucositis included, have shown promising results in
early clinical trials, but subsequently failed to establish
sufficient safety and efficacy data to obtain necessary
regulatory approvals. A number of companies have also suffered
significant setbacks in advanced clinical trials, including
issues related to the design or conduct of those trials. We have
had to re-perform a phase III clinical trial in the past,
following a drug dispensing error by a contract vendor. We have
limited experience in obtaining drug approvals, and cannot be
certain when, if ever, we will receive these regulatory
approvals. If we are unable to demonstrate the safety and
efficacy of any drug candidate, we will be unable to obtain the
required regulatory approvals and we will be unable to
commercialize a drug candidate and generate product revenue.

In addition to initial regulatory approval, any
drug 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, and failure to
comply with these requirements may subject us to stringent
penalties.



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

We expect, that we will need to raise significant
additional funds to complete the second pivotal efficacy trial
of iseganan HCl for VAP if the first trial is successful, and
for the FDA approval process and commercialization if FDA
approval is received. We also believe that additional financing
will be required in the future to fund our operations, to
conduct any trials of iseganan HC1 for other indications, to
acquire or license any other products, or to commercialize any
other product candidates. We do not know whether additional
financing will be available when needed or on acceptable terms,
if at all. If we are unable to raise additional financing when
necessary, we may have to delay our product development efforts
or any product acquisitions or be forced to cease operations Our
future liquidity and capital requirements will also depend on
many other factors, including the timing, cost, and progress of
our current VAP trial, the cost to obtain regulatory approval
for any product in the United States and other countries, and
decisions with respect to strategic alternatives.



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

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

21



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We will be dependent on third party
    contract manufacturers for the future production of iseganan HCl
    and for producing information required to register iseganan HCl
    with the FDA if our trials are successful. If our manufacturing
    partners fail to manufacture iseganan HCl in accordance with set
    specifications or fail to produce the necessary information, our
    operations and related results could be adversely
    affected.

We have relied on a single contract manufacturer
to manufacture the iseganan HCl bulk drug substance for our
pivotal clinical trials. We currently maintain a sufficient
inventory of iseganan HCl to complete planned clinical trials.
However, if no alternate sources of supply are developed, we
will depend on this manufacturer to produce iseganan HCl and
information required for FDA registration and to produce
iseganan HCl for future commercial use if our pivotal trials are
successful. In 2003 we received a lot from this contract
manufacturer that we have not yet been satisfied was
manufactured in accordance with a validation plan or that
related documentation is adequate. Although the product is not
expected to be required for our pivotal clinical trials, it is
expected to be used to validate the manufacturing process. If
the manufacturer is unable to validate the manufacturing
process, or to produce iseganan HCl and the required information
for FDA registration, or to produce iseganan HCl for future
commercial use on a timely basis and in accordance with set
specifications, or we experience similar issues to those
experienced on this order, we may not have sufficient quantities
of iseganan HCl and sufficient information to meet registration
requirements or sufficient quantities of iseganan HCl for future
commercial use.

We also rely on a single third party supplier to
produce iseganan HCl formulated drug product for use in our
clinical trials. If this supplier is unable or fails to produce
the required quantities of iseganan HCl formulated drug product
for clinical use or commercial sale on a timely basis, at
commercially reasonable prices, and with sufficient purity, we
will not have sufficient quantities to complete current and
future clinical trials, or to meet commercial demand.



| |                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our contract research organizations
    assisting in our clinical trials fail to appropriately manage
    our clinical trials, the trials could be delayed or could fail
    and our results of operations and financial condition would
    suffer.

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



| |                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Development and commercialization of
    competitive products or new technologies could reduce or prevent
    sales of any future products that we develop, acquire or
    license, and our results of operations would
    suffer.

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

We are not aware of any products that compete
with iseganan HCl for the prevention of VAP. However,
pharmaceutical companies and biotechnology companies may develop
products in the future that compete with iseganan HCl for the
prevention of VAP. Many of these companies have substantially
greater experience, financial resources and larger research and
development staffs than we do. In addition, many of these
companies, either alone or together with their collaborative
partners, have significantly greater experience than we do in
developing drugs, obtaining regulatory approvals and
manufacturing and marketing products. We also compete with these
organizations and other companies for in-licensing opportunities
for future drug candidates, and for attracting scientific and
management personnel.

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

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



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

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

We expect to protect our proprietary position by
filing U.S. and foreign patent applications related to our
proprietary technology, inventions and improvements that are
important to the development of our business. For example, we
own or have rights to ten patents and four pending patent
applications in the United States. However, the patent position
of biopharmaceutical companies involves complex legal and
factual questions. We cannot predict the enforceability or scope
of any issued patents or those that may issue in the future.
Patents, if issued, may be challenged, invalidated or
circumvented. Consequently, if any patents that we own or
license from third parties do not provide sufficient protection,
our competitive position would be weakened. Furthermore, others
may 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 and would
    affect our results of operations and financial
    condition.

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

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##### Table of Contents





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

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



| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | demonstration of clinical efficacy and safety;                                                              
|
| |  | cost-effectiveness, in particular with iseganan
    HCls anticipated application for the prevention of VAP;
|
| |  | convenience and ease of administration;                                                                     
|
| |  | potential advantage over alternative treatment
    methods; and                                             
|
| |  | marketing and distribution support.                                                                         

Physicians will not recommend our products until
such time as clinical data or other factors demonstrate the
safety and efficacy of our drugs as compared to other
treatments. In practice, competitors may be more effective in
marketing their drugs. Even if the clinical safety and efficacy
of our product is established, physicians may elect not to
recommend its use. For example, physicians may be reluctant to
prescribe widespread use of our product because of concern about
developing bacterial strains that are resistant to our drugs, or
because of the cost of our drug.



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | The failure to recruit and retain key
    personnel may delay our ability to execute our business plan and
    our results of operations could suffer.

We are highly dependent on our management and
technical staff. Competition for personnel is intense. If we
lose the services of any of our senior management or technical
staff, we may be unable to successfully complete our planned
clinical trials for VAP. In particular, the loss of the services
of Henry J. Fuchs, our President and Chief Executive Officer, or
Steven Ketchum, our Vice President, Regulatory Affairs, could
significantly impede our research and development efforts, our
relations with potential collaborators and completion of our
planned clinical trials for VAP. We do not have employment
agreements with Mr. Fuchs or Mr. Ketchum. We do not
maintain key person life insurance and do not have employment
agreements with our other members of management and technical
staff. In October 2002, we completed a restructuring that
included a reduction in force of approximately 70% of our
workforce. As of December 31, 2003, we had nine full-time
employees. 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.
These consultants may have commitments to, or relationships
with, other entities that may limit their availability to us.
The loss of the services of these personnel may delay our
research and development efforts.



| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Directors, executive officers, principal
    stockholders and affiliated entities beneficially own
    approximately 53% of our capital stock and may be able to exert
    control over our activities, and our results of operations and
    financial condition may suffer.

As of December 31, 2003, our directors,
executive officers, principal stockholders and affiliated
entities beneficially own, in the aggregate, approximately 53%
of our outstanding common stock. These stockholders, if acting
together, will be able to control the outcome of any matter
requiring approval by our stockholders, including the election
of directors and the approval of mergers or other business
combination transactions.

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##### Table of Contents





| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | Anti-takeover provisions in our charter
    documents and under Delaware law may make an acquisition of us
    more difficult.

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



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

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



| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The change in our stock price over time may
    significantly impact our results of operations through certain
    stock compensation charges that depend upon our closing stock
    price at the end of each quarter.

Market prices for securities of biotechnology
companies are general highly volatile and our stock may be
subject to such volatility. Our non-cash variable stock
compensation expense in relation to 308,835 stock options
that were cancelled and re-granted in a one-for-one exchange and
12,500 options that were re-granted in connection with the
cancellation of 54,166 unexercised stock options in February
2003 is dependent upon the price of our common stock at each
quarter end. In 2003, we recorded non-cash variable stock
compensation expense of approximately $1.0 million in
relation to these options. These expenses will be incurred
through the five year term of the options, unless previously
forfeited or exercised. Future changes in the Companys
stock price may therefore have a significant impact on the
Companys future results of operations as a result of this
dependency.



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

After accounting for the effect of our 1-for-12
reverse stock split in April 2003, during 2002 our closing stock
prices ranged from a low of $3.24 to a high of $57.60, and in
2003 ranged from a low of $1.71 to a high of $16.95. 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;                                                                                                                

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##### Table of Contents





| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | economic and other external factors; and                                                            
|
| |  | period-to-period fluctuations in our financial
    results and changes in analysts recommendations.






|         |                                                              
|-------- | -------------------------------------------------------------
|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. As of December 31, 2003, we own financial instruments
that are sensitive to market risk as part of our investment
portfolio. To minimize this risk, in accordance with our
investment policy guidelines, we place investments with high
credit quality issuers and limit the amount of credit exposure
to any one issuer. The average duration of our investment
portfolio in 2003 and 2002 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, 2003 and 2002. 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, 2003, 2002 and
2001 (in thousands).

|                        |  |            |        |             |  |               |        |  |  |  |      |  
|----------------------- |  | ---------- | ------ | ----------- |  | ------------- | ------ |  |  |  | ---- | -
|                        |  |            |        | Fair Market |  | Average      
|Short-term investments: |  | Total Cost |        | Value       |  | Interest Rate
|                        |  |            |        |             |  |              
|December 31, 2003       |  | $          | 12,106 |             |  | $             | 12,108 |  |  |  | 1.36 | %
|December 31, 2002       |  | $          | 2,895  |             |  | $             | 2,895  |  |  |  | 1.83 | %
|December 31, 2001       |  | $          |       |             |  | $             |       |  |  |  |     |  

26



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##### Table of Contents








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

INTRABIOTICS
PHARMACEUTICALS, INC.

INDEX TO FINANCIAL STATEMENTS

|                                                      |  |  |    | 
|----------------------------------------------------- |  |  | -- | 
|Report of Ernst & Young
    LLP, Independent Auditors |  |  | 28 | 
|Balance Sheets                                        |  |  | 29 | 
|Statements of Operations                              |  |  | 30 | 
|Statement of Stockholders Equity                     |  |  | 31 | 
|Statements of Cash Flows                              |  |  | 33 | 
|Notes to Financial Statements                         |  |  | 34 | 

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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, 2003 and 2002, and the related statements of
operations, stockholders equity, and cash flows for each
of the three years in the period ended December 31, 2003.
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, 2003 and 2002, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States.



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

Palo Alto, California

February 6, 2004


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INTRABIOTICS
PHARMACEUTICALS, INC.

BALANCE SHEETS

|                                                                                                                                                                                                                                                                                                   |                               |                                            |          |        |        |  |          |        |        | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | ------------------------------------------ | -------- | ------ | ------ |  | -------- | ------ | ------ | 
|                                                                                                                                                                                                                                                                                                   |                               |                                           
|                                                                                                                                                                                                                                                                                                   |                               | ?December 31,                             
|                                                                                                                                                                                                                                                                                                   |                               |                                           
|                                                                                                                                                                                                                                                                                                   |                               | 2003                                       |          | 2002  
|                                                                                                                                                                                                                                                                                                   |                               |                                            |          |       
|                                                                                                                                                                                                                                                                                                   |                               |                                           
|                                                                                                                                                                                                                                                                                                   |                               | (In thousands, except share               
|                                                                                                                                                                                                                                                                                                   |                               | and per share amounts)                    
|ASSETS                                                                                                                                                                                                                                                                                            
|Current assets:                                                                                                                                                                                                                                                                                    |                               |                                            |          |        |        |  |          |       
|                                                                                                                                                                                                                                                                                                   | Cash and cash equivalents     |                                            | $        | 14,286 |        |  | $        | 10,170 |       
|                                                                                                                                                                                                                                                                                                   | Restricted cash               |                                            |          | 250    |        |  |          | 250    |       
|                                                                                                                                                                                                                                                                                                   | Short-term investments        |                                            |          | 12,108 |        |  |          | 2,895  |       
|                                                                                                                                                                                                                                                                                                   | Prepaid drug substance        |                                            |          |       |        |  |          | 2,375  |       
|                                                                                                                                                                                                                                                                                                   | Prepaid expenses              |                                            |          | 478    |        |  |          | 247    |       
|                                                                                                                                                                                                                                                                                                   |                               |                                            |          |        |        |  |          |       
|                                                                                                                                                                                                                                                                                                   |                               | Total current assets                       |          |        | 27,122 |  |          |        | 15,937 | 
|Property and equipment, net                                                                                                                                                                                                                                                                        |                               |                                            | 20       |        |        |  | 112      |       
|Other assets                                                                                                                                                                                                                                                                                       |                               |                                            | 184      |        |        |  | 177      |       
|                                                                                                                                                                                                                                                                                                   |                               |                                            |          |        |        |  |          |       
|                                                                                                                                                                                                                                                                                                   |                               | Total assets                               |          | $      | 27,326 |  |          | $      | 16,226 | 
|                                                                                                                                                                                                                                                                                                   |                               |                                            |          |        |        |  |          |       
|                                                                                                                                                                                                                                                                                                  
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                                                                                                                                                                          
|Current liabilities:                                                                                                                                                                                                                                                                               |                               |                                            |          |        |        |  |          |       
|                                                                                                                                                                                                                                                                                                   | Accounts payable              |                                            | $        | 141    |        |  | $        | 345    |       
|                                                                                                                                                                                                                                                                                                   | Accrued clinical liabilities  |                                            |          | 1,046  |        |  |          |       |       
|                                                                                                                                                                                                                                                                                                   | Accrued employee liabilities  |                                            |          | 101    |        |  |          | 135    |       
|                                                                                                                                                                                                                                                                                                   | Accrued restructuring charges |                                            |          |       |        |  |          | 64     |       
|                                                                                                                                                                                                                                                                                                   | Other accrued liabilities     |                                            |          | 410    |        |  |          | 202    |       
|                                                                                                                                                                                                                                                                                                   |                               |                                            |          |        |        |  |          |       
|                                                                                                                                                                                                                                                                                                   |                               | Total current liabilities                  |          |        | 1,698  |  |          |        | 746    | 
|Commitments                                                                                                                                                                                                                                                                                        |                               |                                            |          |        |        |  |          |       
|Stockholders equity:                                                                                                                                                                                                                                                                              |                               |                                            |          |        |        |  |          |       
|Convertible preferred stock, $0.001 par
    value:
    5,000,000 shares authorized at December 31, 2003 and
    2002; 325 and 0 shares outstanding at December 31,
    2003 and 2002, respectively; $3,250 and $0 aggregate liquidation
    preference at December 31, 2003 and 2002, respectively |                               |                                            | 1,771    |        |        |  |         |       
|Common stock, $0.001 par value:
    70,000,000 and 50,000,000 shares authorized at
    December 31, 2003 and 2002, respectively; 5,298,206 and
    3,268,819 shares outstanding at December 31, 2003 and
    2002, respectively                                                                    |                               |                                            | 5        |        |        |  | 3        |       
|Additional paid-in capital                                                                                                                                                                                                                                                                         |                               |                                            | 239,237  |        |        |  | 216,466  |       
|Deferred stock compensation                                                                                                                                                                                                                                                                        |                               |                                            | (188     | )      |        |  | (720     | )     
|Accumulated other comprehensive income                                                                                                                                                                                                                                                             |                               |                                            | 2        |        |        |  |         |       
|Accumulated deficit                                                                                                                                                                                                                                                                                |                               |                                            | (215,199 | )      |        |  | (200,269 | )     
|                                                                                                                                                                                                                                                                                                   |                               |                                            |          |        |        |  |          |       
|                                                                                                                                                                                                                                                                                                   |                               | Total stockholders equity                 |          |        | 25,628 |  |          |        | 15,480 | 
|                                                                                                                                                                                                                                                                                                   |                               |                                            |          |        |        |  |          |       
|                                                                                                                                                                                                                                                                                                   |                               | Total liabilities and stockholders equity |          | $      | 27,326 |  |          | $      | 16,226 | 
|                                                                                                                                                                                                                                                                                                   |                               |                                            |          |        |        |  |          |       

See accompanying notes.

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INTRABIOTICS
PHARMACEUTICALS, INC.

STATEMENTS OF OPERATIONS

|                                                                                                  |                                  |                                 |         |       |         |      |         |        |         |   |         |        |         |  
|------------------------------------------------------------------------------------------------- | -------------------------------- | ------------------------------- | ------- | ----- | ------- | ---- | ------- | ------ | ------- | - | ------- | ------ | ------- | -
|                                                                                                  |                                  |                                
|                                                                                                  |                                  | Year Ended December 31,        
|                                                                                                  |                                  |                                
|                                                                                                  |                                  | 2003                            |         | 2002  |         | 2001
|                                                                                                  |                                  |                                 |         |       |         |     
|                                                                                                  |                                  |                                
|                                                                                                  |                                  | (In thousands, except per share
|                                                                                                  |                                  | amounts)                       
|Operating expenses:                                                                               |                                  |                                 |         |       |         |      |         |        |         |   |         |       
|                                                                                                  | Research and development         |                                 | $       | 7,727 |         |      | $       | 23,053 |         |   | $       | 38,034 |        
|                                                                                                  | General and administrative       |                                 |         | 5,782 |         |      |         | 8,617  |         |   |         | 9,202  |        
|                                                                                                  | Restructuring and other charges  |                                 |         |      |         |      |         | 6,118  |         |   |         | 21,956 |        
|                                                                                                  | Arbitration settlement           |                                 |         |      |         |      |         | (3,600 | )       |   |         |       |        
|                                                                                                  | Impairment of acquired workforce |                                 |         |      |         |      |         | 1,365  |         |   |         |       |        
|                                                                                                  |                                  |                                 |         |       |         |      |         |        |         |   |         |       
|                                                                                                  |                                  | Total operating expenses        |         |       | 13,509  |      |         |        | 35,553  |   |         |        | 69,192  |  
|                                                                                                  |                                  |                                 |         |       |         |      |         |        |         |   |         |       
|                                                                                                  |                                  | Operating loss                  |         |       | (13,509 | )    |         |        | (35,553 | ) |         |        | (69,192 | )
|                                                                                                  | Interest income                  |                                 |         | 166   |         |      |         | 703    |         |   |         | 2,843  |        
|                                                                                                  | Interest expense                 |                                 |         |      |         |      |         | (459   | )       |   |         | (1,110 | )      
|                                                                                                  | Other income, net                |                                 |         | 31    |         |      |         | 856    |         |   |         | 93     |        
|                                                                                                  |                                  |                                 |         |       |         |      |         |        |         |   |         |       
|Net loss                                                                                          |                                  |                                 | (13,312 | )     |         |      | (34,453 | )      |         |   | (67,366 | )     
|Non-cash deemed dividend related to beneficial
    conversion feature of Series A preferred stock |                                  |                                 | (1,436  | )     |         |      |        |        |         |   |        |       
|Non-cash dividends on Series A preferred
    stock                                                |                                  |                                 | (182    | )     |         |      |        |        |         |   |        |       
|                                                                                                  |                                  |                                 |         |       |         |      |         |        |         |   |         |       
|Net loss applicable to common stockholders                                                        |                                  | $                               | (14,930 | )     |         | $    | (34,453 | )      |         | $ | (67,366 | )     
|                                                                                                  |                                  |                                 |         |       |         |      |         |        |         |   |         |       
|Basic and diluted net loss per share applicable
    to common stockholders                        |                                  | $                               | (4.01   | )     |         | $    | (11.25  | )      |         | $ | (27.47  | )     
|                                                                                                  |                                  |                                 |         |       |         |      |         |        |         |   |         |       
|Shares used to compute basic and diluted net loss
    per share applicable to common stockholders |                                  |                                 | 3,720   |       |         |      | 3,064   |        |         |   | 2,453   |       
|                                                                                                  |                                  |                                 |         |       |         |      |         |        |         |   |         |       

See accompanying notes.

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##### Table of Contents



INTRABIOTICS
PHARMACEUTICALS, INC.

STATEMENT OF STOCKHOLDERS
EQUITY

|                                                                           |                                      |                 |   |              |  |            |   |          |  |               |       |              |  |               |   |         |  |        |         |   |  |   |         |   |  |   |     |      |   |   |          |         |   |   |         |         |  
|-------------------------------------------------------------------------- | ------------------------------------ | --------------- | - | ------------ |  | ---------- | - | -------- |  | ------------- | ----- | ------------ |  | ------------- | - | ------- |  | ------ | ------- | - |  | - | ------- | - |  | - | --- | ---- | - | - | -------- | ------- | - | - | ------- | ------- | -
|                                                                           |                                      |                 |   |              |  |            |   |          |  |               |       |              |  |               |   |        
|                                                                           |                                      | Convertible     |   |              |  |            |   |          |  | Accumulated   |       |              |  |              
|                                                                           |                                      | Preferred Stock |   | Common Stock |  | Additional |   | Deferred |  | Other         |       |              |  | Total        
|                                                                           |                                      |                 |   |              |  | Paid-In    |   | Stock    |  | Comprehensive |       | Accumulated  |  | Stockholders
|                                                                           |                                      | Shares          |   | Amount       |  | Shares     |   | Amount   |  | Capital       |       | Compensation |  | Income (Loss) |   | Deficit |  | Equity
|                                                                           |                                      |                 |   |              |  |            |   |          |  |               |       |              |  |               |   |         |  |       
|                                                                           |                                      |                
|                                                                           |                                      | (In thousands) 
|Balances at December 31, 2000                                              |                                      |                 |  |              |  | $          |  |          |  |               | 2,433 |              |  | $             | 2 |         |  | $      | 198,415 |   |  | $ | (10,198 | ) |  | $ | 186 |      |   | $ | (98,450  | )       |   | $ | 89,955  |        
|Issuance of common stock upon exercise of options
    for cash             |                                      |                 |  |              |  |            |  |          |  |               | 45    |              |  |               |  |         |  |        | 435     |   |  |   |        |   |  |   |    |      |   |   |         |         |   |   | 435     |        
|Stock compensation for consultant services                                 |                                      |                 |  |              |  |            |  |          |  |               |      |              |  |               |  |         |  |        | 5       |   |  |   |        |   |  |   |    |      |   |   |         |         |   |   | 5       |        
|Issuance of common stock for the employee stock
    purchase plan for cash |                                      |                 |  |              |  |            |  |          |  |               | 3     |              |  |               |  |         |  |        | 36      |   |  |   |        |   |  |   |    |      |   |   |         |         |   |   | 36      |        
|Issuance of warrants to purchase 58 shares
    of common stock             |                                      |                 |  |              |  |            |  |          |  |               |      |              |  |               |  |         |  |        | 560     |   |  |   |        |   |  |   |    |      |   |   |         |         |   |   | 560     |        
|Issuance of common stock for employee services                             |                                      |                 |  |              |  |            |  |          |  |               | 2     |              |  |               |  |         |  |        | 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 (loss) on securities |                 |   |             |  |            |   |         |  |               |       |             |  |               |   |        |  |        |         |  |  |   |         |  |  |   |     | (186 | ) |   |          |        |   |   |         | (186    | )
|                                                                           |                                      |                 |   |              |  |            |   |          |  |               |       |              |  |               |   |         |  |        |         |   |  |   |         |   |  |   |     |      |   |   |          |         |   |   |         |        
|Comprehensive loss                                                         |                                      |                 |   |              |  |            |   |          |  |               |       |              |  |               |   |         |  |        |         |   |  |   |         |   |  |   |     |      |   |   |          |         |   |   | (67,552 | )      
|                                                                           |                                      |                 |   |              |  |            |   |          |  |               |       |              |  |               |   |         |  |        |         |   |  |   |         |   |  |   |     |      |   |   |          |         |   |   |         |        
|Balances at December 31, 2001                                              |                                      |                 |  |              |  |            |  |          |  |               | 2,483 |              |  |               | 2 |         |  |        | 196,603 |   |  |   | (4,577  | ) |  |   |    |      |   |   | (165,816 | )       |   |   | 26,212  |        
|Issuance of common stock upon exercise of options
    for cash             |                                      |                 |  |              |  |            |  |          |  |               | 29    |              |  |               |  |         |  |        | 471     |   |  |   |        |   |  |   |    |      |   |   |         |         |   |   | 471     |        
|Issuance of common stock on private placement for
    cash                 |                                      |                 |  |              |  |            |  |          |  |               | 596   |              |  |               | 1 |         |  |        | 18,980  |   |  |   |        |   |  |   |    |      |   |   |         |         |   |   | 18,981  |        
|Issuance of common stock on acquisition of
    Apothogen Inc.              |                                      |                 |  |              |  |            |  |          |  |               | 37    |              |  |               |  |         |  |        | 1,924   |   |  |   |        |   |  |   |    |      |   |   |         |         |   |   | 1,924   |        
|Stock compensation for consultant services                                 |                                      |                 |  |              |  |            |  |          |  |               |      |              |  |               |  |         |  |        | 512     |   |  |   |        |   |  |   |    |      |   |   |         |         |   |   | 512     |        
|Issuance of common stock for the employee stock
    purchase plan for cash |                                      |                 |  |              |  |            |  |          |  |               | 1     |              |  |               |  |         |  |        | 10      |   |  |   |        |   |  |   |    |      |   |   |         |         |   |   | 10      |        
|Issuance of warrants to purchase 4 shares of
    common stock              |                                      |                 |  |              |  |            |  |          |  |               |      |              |  |               |  |         |  |        | 7       |   |  |   |        |   |  |   |    |      |   |   |         |         |   |   | 7       |        
|Issuance of common stock for employee services                             |                                      |                 |  |              |  |            |  |          |  |               | 123   |              |  |               |  |         |  |        | 545     |   |  |   |        |   |  |   |    |      |   |   |         |         |   |   | 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 | )      
|                                                                           |                                      |                 |   |              |  |            |   |          |  |               |       |              |  |               |   |         |  |        |         |   |  |   |         |   |  |   |     |      |   |   |          |         |   |   |         |        

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##### Table of Contents



INTRABIOTICS
PHARMACEUTICALS, INC.


STATEMENT OF STOCKHOLDERS
EQUITY  (Continued)

|                                                                                                                        |                               |                 |   |              |  |            |       |          |  |               |       |              |  |               |   |         |  |        |         |   |  |   |      |   |  |   |   |   |  |   |          |         |   |   |         |         |  
|----------------------------------------------------------------------------------------------------------------------- | ----------------------------- | --------------- | - | ------------ |  | ---------- | ----- | -------- |  | ------------- | ----- | ------------ |  | ------------- | - | ------- |  | ------ | ------- | - |  | - | ---- | - |  | - | - | - |  | - | -------- | ------- | - | - | ------- | ------- | -
|                                                                                                                        |                               |                 |   |              |  |            |       |          |  |               |       |              |  |               |   |        
|                                                                                                                        |                               | Convertible     |   |              |  |            |       |          |  | Accumulated   |       |              |  |              
|                                                                                                                        |                               | Preferred Stock |   | Common Stock |  | Additional |       | Deferred |  | Other         |       |              |  | Total        
|                                                                                                                        |                               |                 |   |              |  | Paid-In    |       | Stock    |  | Comprehensive |       | Accumulated  |  | Stockholders
|                                                                                                                        |                               | Shares          |   | Amount       |  | Shares     |       | Amount   |  | Capital       |       | Compensation |  | Income (Loss) |   | Deficit |  | Equity
|                                                                                                                        |                               |                 |   |              |  |            |       |          |  |               |       |              |  |               |   |         |  |       
|                                                                                                                        |                               |                
|                                                                                                                        |                               | (In thousands) 
|Balances at December 31, 2002                                                                                           |                               |                 |  |              |  |            |      |          |  |               | 3,269 |              |  |               | 3 |         |  |        | 216,466 |   |  |   | (720 | ) |  |   |  |   |  |   | (200,269 | )       |   |   | 15,480  |        
|Issuance of common stock upon exercise of options
    for cash                                                          |                               |                 |  |              |  |            |      |          |  |               | 50    |              |  |               |  |         |  |        | 380     |   |  |   |     |   |  |   |  |   |  |   |         |         |   |   | 380     |        
|Issuance of common stock and warrants on private
    placement, net of $710 issuance costs                              |                               |                 |  |              |  |            |      |          |  |               | 1,774 |              |  |               | 2 |         |  |        | 18,536  |   |  |   |     |   |  |   |  |   |  |   |         |         |   |   | 18,538  |        
|Issuance of Series A preferred stock and
    common stock warrants on private placement, net of $268 issuance
    costs |                               |                 |  |              |  |            | 1,906 |          |  |               |      |              |  |               |  |         |  |        | 1,326   |   |  |   |     |   |  |   |  |   |  |   |         |         |   |   | 3,232   |        
|Beneficial conversion feature on Series A
    preferred stock                                                           |                               |                 |  |              |  |            |      |          |  |               |      |              |  |               |  |         |  |        | 1,436   |   |  |   |     |   |  |   |  |   |  |   | (1,436   | )       |   |   |        |        
|Issuance of common stock upon conversion of
    Series A preferred stock                                                |                               |                 |  |              |  |            | (135  | )        |  |               | 132   |              |  |               |  |         |  |        | 135     |   |  |   |     |   |  |   |  |   |  |   |         |         |   |   |        |        
|Issuance of common stock as dividend on series A
    preferred stock                                                    |                               |                 |  |              |  |            |      |          |  |               | 18    |              |  |               |  |         |  |        | 117     |   |  |   |     |   |  |   |  |   |  |   | (182     | )       |   |   | (65     | )      
|Issuance of common stock upon exercise of warrants                                                                      |                               |                 |  |              |  |            |      |          |  |               | 55    |              |  |               |  |         |  |        |        |   |  |   |     |   |  |   |  |   |  |   |         |         |   |   |        |        
|Amortization of deferred stock compensation                                                                             |                               |                 |  |              |  |            |      |          |  |               |      |              |  |               |  |         |  |        |        |   |  |   | 126  |   |  |   |  |   |  |   |         |         |   |   | 126     |        
|Stock compensation for variable option awards                                                                           |                               |                 |  |              |  |            |      |          |  |               |      |              |  |               |  |         |  |        | 993     |   |  |   |     |   |  |   |  |   |  |   |         |         |   |   | 993     |        
|Stock compensation for consultant services                                                                              |                               |                 |  |              |  |            |      |          |  |               |      |              |  |               |  |         |  |        | 254     |   |  |   |     |   |  |   |  |   |  |   |         |         |   |   | 254     |        
|Cancellation of stock options related to employee
    terminations                                                      |                               |                 |  |              |  |            |      |          |  |               |      |              |  |               |  |         |  |        | (406    | ) |  |   | 406  |   |  |   |  |   |  |   |         |         |   |   |        |        
|Comprehensive loss:                                                                                                     |                               |                 |   |              |  |            |       |          |  |               |       |              |  |               |   |         |  |        |         |   |  |   |      |   |  |   |   |   |  |   |          |         |   |   |         |        
|                                                                                                                        | Net loss                      |                 |   |             |  |            |       |         |  |               |       |             |  |               |   |        |  |        |         |  |  |   |      |  |  |   |   |  |  |   |          | (13,312 | ) |   |         | (13,312 | )
|                                                                                                                        | Unrealized gain on securities |                 |   |             |  |            |       |         |  |               |       |             |  |               |   |        |  |        |         |  |  |   |      |  |  |   |   | 2 |  |   |          |        |   |   |         | 2       |  
|                                                                                                                        |                               |                 |   |              |  |            |       |          |  |               |       |              |  |               |   |         |  |        |         |   |  |   |      |   |  |   |   |   |  |   |          |         |   |   |         |        
|Comprehensive loss                                                                                                      |                               |                 |   |              |  |            |       |          |  |               |       |              |  |               |   |         |  |        |         |   |  |   |      |   |  |   |   |   |  |   |          |         |   |   | (13,310 | )      
|                                                                                                                        |                               |                 |   |              |  |            |       |          |  |               |       |              |  |               |   |         |  |        |         |   |  |   |      |   |  |   |   |   |  |   |          |         |   |   |         |        
|Balances at December 31, 2003                                                                                           |                               |                 |  |              |  | $          | 1,771 |          |  |               | 5,298 |              |  | $             | 5 |         |  | $      | 239,237 |   |  | $ | (188 | ) |  | $ | 2 |   |  | $ | (215,199 | )       |   | $ | 25,628  |        
|                                                                                                                        |                               |                 |   |              |  |            |       |          |  |               |       |              |  |               |   |         |  |        |         |   |  |   |      |   |  |   |   |   |  |   |          |         |   |   |         |        

See accompanying notes

32



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##### Table of Contents



INTRABIOTICS
PHARMACEUTICALS, INC.

STATEMENTS OF CASH FLOWS

|                                                                                |                                                                                  |                               |         |         |       |      |         |        |        |   |         |         |        |  
|------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ----------------------------- | ------- | ------- | ----- | ---- | ------- | ------ | ------ | - | ------- | ------- | ------ | -
|                                                                                |                                                                                  |                              
|                                                                                |                                                                                  | Year Ended December 31,      
|                                                                                |                                                                                  |                              
|                                                                                |                                                                                  | 2003                          |         | 2002    |       | 2001
|                                                                                |                                                                                  |                               |         |         |       |     
|                                                                                |                                                                                  |                              
|                                                                                |                                                                                  | (In thousands)               
|Operating activities                                                            |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|Net loss                                                                        |                                                                                  | $                             | (13,312 | )       |       | $    | (34,453 | )      |        | $ | (67,366 | )      
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|                                                                                | Amortization of deferred stock compensation                                      |                               |         | 126     |       |      |         | 1,271  |        |   |         | 2,734   |       
|                                                                                | Stock compensation expense                                                       |                               |         | 1,247   |       |      |         | 1,057  |        |   |         | 44      |       
|                                                                                | Depreciation and amortization                                                    |                               |         | 92      |       |      |         | 725    |        |   |         | 1,690   |       
|                                                                                | Write down of property and equipment                                             |                               |         |        |       |      |         | 274    |        |   |         | 9,658   |       
|                                                                                | Acquired workforce write down and amortization                                   |                               |         |        |       |      |         | 1,694  |        |   |         |        |       
|                                                                                | Gain on sale of pre-clinical programs                                            |                               |         |        |       |      |         | (975   | )      |   |         |        |       
|                                                                                | Fair value of warrants issued                                                    |                               |         |        |       |      |         | 7      |        |   |         | 560     |       
|                                                                                | Change in assets and liabilities:                                                |                               |         |         |       |      |         |        |        |   |         |         |       
|                                                                                |                                                                                  | Restricted cash               |         |         |      |      |         |        | 7,238  |   |         |         | (6,117 | )
|                                                                                |                                                                                  | Prepaid expenses              |         |         | 2,144 |      |         |        | 3,087  |   |         |         | 4,689  |  
|                                                                                |                                                                                  | Other assets                  |         |         | (7    | )    |         |        | 41     |   |         |         | 23     |  
|                                                                                |                                                                                  | Accounts payable              |         |         | (204  | )    |         |        | (245   | ) |         |         | (1,341 | )
|                                                                                |                                                                                  | Accrued clinical liabilities  |         |         | 1,046 |      |         |        | (1,663 | ) |         |         | (1,573 | )
|                                                                                |                                                                                  | Accrued employee liabilities  |         |         | (34   | )    |         |        | (475   | ) |         |         | (46    | )
|                                                                                |                                                                                  | Accrued restructuring charges |         |         | (64   | )    |         |        | (2,797 | ) |         |         | 2,861  |  
|                                                                                |                                                                                  | Deferred rent                 |         |         |      |      |         |        | (618   | ) |         |         | 384    |  
|                                                                                |                                                                                  | Other accrued liabilities     |         |         | 143   |      |         |        | (515   | ) |         |         | 198    |  
|                                                                                |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|Net cash used in operating activities                                           |                                                                                  |                               | (8,823  | )       |       |      | (26,347 | )      |        |   | (53,602 | )      
|Investing activities                                                            |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|                                                                                | Capital expenditures                                                             |                               |         |        |       |      |         | (41    | )      |   |         | (3,665  | )     
|                                                                                | Proceeds from sale of property and equipment                                     |                               |         |        |       |      |         | 526    |        |   |         | 2,833   |       
|                                                                                | Proceeds from sale of pre-clinical programs                                      |                               |         |        |       |      |         | 800    |        |   |         |        |       
|                                                                                | Purchase of short term investments                                               |                               |         | (12,106 | )     |      |         | (2,895 | )      |   |         | (6,296  | )     
|                                                                                | Proceeds from sale or maturity of short-term
    investments                     |                               |         | 2,895   |       |      |         |       |        |   |         | 51,821  |       
|                                                                                | Cash received in acquisition of subsidiary                                       |                               |         |        |       |      |         | 58     |        |   |         |        |       
|                                                                                |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|Net cash provided by (used in) investing
    activities                         |                                                                                  |                               | (9,211  | )       |       |      | (1,552  | )      |        |   | 44,693  |        
|Financing activities                                                            |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|                                                                                | Proceeds from issuance of Series A preferred
    stock in private placement, net |                               |         | 3,232   |       |      |         |       |        |   |         |        |       
|                                                                                | Proceeds from issuance of common stock in private
    placements, net            |                               |         | 18,538  |       |      |         | 18,981 |        |   |         |        |       
|                                                                                | Proceeds from issuance of common stock upon
    exercise of options              |                               |         | 380     |       |      |         | 481    |        |   |         | 471     |       
|                                                                                | Proceeds from financing obligations                                              |                               |         |        |       |      |         |       |        |   |         | 11,209  |       
|                                                                                | Payments on financing obligations                                                |                               |         |        |       |      |         | (9,375 | )      |   |         | (13,772 | )     
|                                                                                |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|Net cash provided by (used in) financing
    activities                         |                                                                                  |                               | 22,150  |         |       |      | 10,087  |        |        |   | (2,092  | )      
|                                                                                |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|Net increase (decrease) in cash and cash
    equivalents                        |                                                                                  |                               | 4,116   |         |       |      | (17,812 | )      |        |   | (11,001 | )      
|Cash and cash equivalents at beginning of period                                |                                                                                  |                               | 10,170  |         |       |      | 27,982  |        |        |   | 38,983  |        
|                                                                                |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|Cash and cash equivalents at end of period                                      |                                                                                  | $                             | 14,286  |         |       | $    | 10,170  |        |        | $ | 27,982  |        
|                                                                                |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|Supplemental disclosure of cash flow information:                               |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|                                                                                | Interest paid                                                                    |                               | $       |        |       |      | $       | 459    |        |   | $       | 1,110   |       
|                                                                                |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|Supplemental disclosure of non-cash information:                                |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|                                                                                | Net deferred stock compensation (cancellations
    due to employee termination)  |                               | $       | (406    | )     |      | $       | (2,586 | )      |   | $       | (2,887  | )     
|                                                                                |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|                                                                                | Beneficial conversion feature on Series A
    preferred stock                    |                               | $       | (1,436  | )     |      | $       |       |        |   | $       |        |       
|                                                                                |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|                                                                                | Issuance of common stock dividend on
    Series A preferred stock                |                               | $       | (182    | )     |      | $       |       |        |   | $       |        |       
|                                                                                |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|                                                                                | Issuance of common stock upon conversion of
    Series A preferred stock         |                               | $       | (135    | )     |      | $       |       |        |   | $       |        |       
|                                                                                |                                                                                  |                               |         |         |       |      |         |        |        |   |         |        
|                                                                                | 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.

33



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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 currently 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 its initial public offering of common stock in March
2000, the private sale of equity securities, funds received from
a terminated collaboration agreement, the proceeds of equipment
financing arrangements and the sale of two pre-clinical
anti-infective programs. The Company expects that its available
cash, cash equivalents, restricted cash and short-term
investments of $26.6 million at December 31, 2003 will
be adequate to fund operations through at least
December 31, 2004.

We will need to raise substantial additional
funds to continue our operations, complete the second pivotal
efficacy trial of iseganan HCl for VAP, complete the FDA
approval process, and commence commercialization. Management
plans to continue to finance the Companys operations
through private and public financings, including equity
financings, or through collaboration or licensing arrangements.
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. 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.



|   |                                               
|-- | ----------------------------------------------
|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 and stock-based compensation.

The Companys estimate of 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

Cash equivalents are comprised of money market
funds and debt securities with original maturities of less than
90 days. Short-term investments include securities with
maturities of less than one year from the balance sheet date, or
securities with maturities of greater than one year that are
specifically identified to fund current operations. All cash
equivalents and short-term investments are classified as
available-for-sale. The Companys investment securities are
recorded at their fair market value, based on quoted market
prices. The cost of securities when sold is based upon the
specific identification method. Any unrealized gains and losses
are recorded as other comprehensive income and included as a
separate component of stockholders equity. Realized gains
and losses and declines in value judged to be other than
temporary on available-for-sale investments are included in
other income, net in the statements of operations.



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

The fair value of financial instruments,
including cash, cash equivalents, short-term investments,
accounts payable and accrued liabilities approximate their
carrying value.

34



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS   (Continued)




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

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



| |                                    
| | -----------------------------------
| | 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 and Concentrations
    of Risk

Research and development expenditures are charged
to operations as incurred, and include fees paid to contract
research organizations and other clinical service providers,
payroll expense, drug substance expense, allocated facilities
costs and non-cash stock compensation charges.

The Company has relied on a single contract
manufacturer to manufacture bulk drug substance for the current
pivotal clinical trials, although it currently maintains a
sufficient inventory to complete these trials. If no alternate
sources of supply are developed, the Company will depend on this
manufacturer to produce bulk drug substance and information
required for FDA registration of the related drug, and to
produce the drug for future commercial use if the trials are
successful. The Company also relies on a single third party
supplier to produce the formulated drug product for use in the
current clinical trials.



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

The Companys accrued costs for clinical
trial activities are based upon estimates of the services
received and related expenses incurred that have yet to be
invoiced by the contract research organizations (CROs),
investigators, drug processors, laboratories, consultants, or
other clinical trial service providers that perform the
activities. Related contracts vary significantly in length, and
may be for a fixed amount, a variable amount based on actual
costs incurred, capped at a certain limit, or for a combination
of these elements. Activity levels are monitored through close
communication with the service provider, including detailed
invoice and task completion review, analysis of expenses against
budgeted amounts, and pre-approval of any changes in scope of
the services to be performed. Each CRO provides an estimate of
costs incurred but not invoiced at the end of each period for
each individual trial. The estimates are reviewed and discussed
with the CRO as necessary, and included in research and
development expenses for the related quarter. For investigator
study grants, which are paid quarterly on a per-patient basis to
the institutions performing the clinical study, the Company
accrues an estimated amount based on patient enrollment in each
quarter.



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

In February 2003, the Board of Directors approved
a cancellation and re-grant of 308,835 unexercised stock options
held by existing employees and directors of the Company in a
one-for-one exchange and 12,500 options that were re-granted in
connection with the cancellation of 54,166 unexercised stock
options held by a director of the Company. The newly-granted
options have an exercise price equal to the closing price of the
Companys common stock on the Nasdaq National Market on
February 5, 2003, or $2.76 per share. These options
generally vest over a four-year period and will expire in
February 2008 if not previously exercised. Variable accounting
is being applied to the newly-granted options throughout their
term.

35



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS   (Continued)


As permitted by Statement of Financial Accounting
Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation,as
amended by Statement of Financial Standards No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure,the Company has elected to
follow APB 25 and related interpretations in accounting for
stock-based employee compensation. Under APB 25, if the
exercise price of an employee or director stock option is set
equal or in excess of the fair market value of the underlying
stock on the date of grant, no compensation expense is
recognized. In February 2003, certain stock options for which
the exercise prices had originally been set at less than the
fair market value of the underlying stock on the grant date,
were cancelled and re-granted in a one-for-one exchange. The
Company had recorded deferred compensation for the difference
between the original exercise price and the fair market value of
the underlying stock on the grant date as a component of
stockholders equity, and the total was being amortized on
a straight-line basis over the vesting period of the original
awards, ranging from four to six years. The related re-granted
options all vest over a four-year period, and the remaining
unamortized deferred compensation as of the re-grant date is now
being amortized over the new four-year vesting schedule,
commencing at the date of re-grant.

Options or stock awards issued to non-employees
are recorded at their fair value as determined in accordance
with SFAS 123 and the FASBs Emerging Issues Task
Force issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services, and are recognized over the related service
period and are periodically re-measured as the underlying
options vest.

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

|                                                                                                                    |                                 |                         |         |       |   |      |         |        |   |   |         |        |  
|------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ----------------------- | ------- | ----- | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                                                                                                    |                                 |                        
|                                                                                                                    |                                 | Year Ended December 31,
|                                                                                                                    |                                 |                        
|                                                                                                                    |                                 | 2003                    |         | 2002  |   | 2001
|                                                                                                                    |                                 |                         |         |       |   |     
|Net loss applicable to common stockholders, as
    reported                                                         |                                 | $                       | (14,930 | )     |   | $    | (34,453 | )      |   | $ | (67,366 | )     
|Add: Stock-based employee compensation expense
    included in reported net loss applicable to common stockholders  |                                 |                         | 1,119   |       |   |      | 1,271   |        |   |   | 2,734   |       
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards |                                 |                         | (1,577  | )     |   |      | (6,084  | )      |   |   | (5,895  | )     
|                                                                                                                    |                                 |                         |         |       |   |      |         |        |   |   |         |       
|Net loss applicable to common stockholders, pro
    forma                                                           |                                 | $                       | (15,388 | )     |   | $    | (39,266 | )      |   | $ | (70,527 | )     
|                                                                                                                    |                                 |                         |         |       |   |      |         |        |   |   |         |       
|Net loss per share applicable to common
    stockholders:                                                           |                                 |                         |         |       |   |      |         |        |   |   |         |       
|                                                                                                                    | Basic and diluted  as reported |                         | $       | (4.01 | ) |      | $       | (11.25 | ) |   | $       | (27.47 | )
|                                                                                                                    |                                 |                         |         |       |   |      |         |        |   |   |         |       
|                                                                                                                    | Basic and diluted  pro forma   |                         | $       | (4.14 | ) |      | $       | (12.82 | ) |   | $       | (28.76 | )
|                                                                                                                    |                                 |                         |         |       |   |      |         |        |   |   |         |       

The fair value for the Companys options was
estimated at the date of the grant using the Black-Scholes
option pricing model with the following weighted-average
assumptions:

|                        |  |                         |          |      |  |      |          |   |  |  |          |  
|----------------------- |  | ----------------------- | -------- | ---- |  | ---- | -------- | - |  |  | -------- | -
|                        |  |                        
|                        |  | Year Ended December 31,
|                        |  |                        
|                        |  | 2003                    |          | 2002 |  | 2001
|                        |  |                         |          |      |  |     
|Risk-free interest rate |  |                         | 2.92     | %    |  |      | 2.89     | % |  |  | 3.75     | %
|Volatility              |  |                         | 1.00     |      |  |      | 1.00     |   |  |  | 0.75     |  
|Dividend yield          |  |                         |         |      |  |      |         |   |  |  |         |  
|Expected life of option |  |                         | 5  years |      |  |      | 5  years |   |  |  | 5  years |  

The fair value of the employees purchase
rights under the Companys Employee Stock Purchase Plan,
which was suspended in March 2003 (see Note 9), was
estimated using the Black-Scholes option pricing model with the
above weighted average assumptions for volatility and dividend
yield, expected lives of

36



---



##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS   (Continued)


6 months, and risk free interest rates of
1.26% in 2002 and 3.75% in 2001. The weighted-average fair value
for rights issued under the Purchase Plan for 2002 and 2001 was
$5.40 and $32.40, respectively.



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

The components of comprehensive loss in each year
presented are as follows:

|                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|----------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                            |  |                        
|                                                            |  | Year Ended December 31,
|                                                            |  |                        
|                                                            |  | 2003                    |         | 2002 |  | 2001
|                                                            |  |                         |         |      |  |     
|Net loss                                                    |  | $                       | (13,312 | )    |  | $    | (34,453 | ) |  | $ | (67,366 | )
|Unrealized gain (loss) on available-for-sale
    securities |  |                         | 2       |      |  |      |        |   |  |   | (186    | )
|                                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Comprehensive loss                                          |  | $                       | (13,310 | )    |  | $    | (34,453 | ) |  | $ | (67,552 | )
|                                                            |  |                         |         |      |  |      |         |   |  |   |         |  



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

Basic and diluted net loss per share applicable
to common stockholders is presented in accordance with Financial
Accounting Standards Board Statement No. 128,
Earnings Per Share,and is calculated using
the weighted-average number of shares of common stock
outstanding during the period. Diluted net loss per share
applicable to common stockholders includes the impact of
potentially dilutive securities (stock options, warrants and
convertible preferred stock). As the Companys potentially
dilutive securities were anti-dilutive for all periods
presented, they are not included in the calculations of diluted
net loss per share applicable to common stockholders. The total
number of shares underlying the stock options, warrants and
convertible preferred stock excluded from the calculations of
net loss per share applicable to common stockholders was
3,297,363, 693,845 and 370,704 for the years ended
December 31, 2003, 2002 and 2001, respectively.



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

Certain reclassifications of prior year amounts
have been made to conform to current year classifications.
Reclassifications related to cash proceeds from option exercises
in 2002 and 2001 have been made in the Statement of Cash Flows
to conform to current year classifications.



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

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

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. FIN 46, as
amended, requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics
of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1,
2003, the provisions of FIN 46, as amended, must be applied
for the first interim or annual period ending after
March 15, 2004. The adoption of FIN 46 is not expected
to have any impact on the Companys financial position,
results of operations or disclosure.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity. SFAS No. 150 requires that
certain financial instruments,

37



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS   (Continued)


which under previous guidance were accounted for
as equity, must now be accounted for as liabilities. The
financial instruments affected include stock with mandatory
redemption, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange
for cash or other assets and certain obligations that can be
settled with shares of stock. The provisions of
SFAS No. 150 are generally effective for all financial
instruments entered into or modified after May 31, 2003,
except for those provisions relating to non-controlling
interests that have been deferred, and must be applied to the
Companys existing financial instruments effective
July 1, 2003, the beginning of the first fiscal period
after June 15, 2003. The adoption of SFAS No. 150
did not have a material impact on the Companys financial
position, results of operations or disclosure. If the deferred
provisions of SFAS No. 150 are finalized in their
current form, management does not expect adoption to have a
material effect on the Companys financial position,
results of operations or disclosure.



|   |                               
|-- | ------------------------------
|3. | Available-For-Sale Investments

The following is a summary of the Companys
available-for-sale investments as of December 31, 2003 and
2002 (in thousands):

|                         |  |                   |        |            |  |            |   |            |  |   |   |  |  |   |        | 
|------------------------ |  | ----------------- | ------ | ---------- |  | ---------- | - | ---------- |  | - | - |  |  | - | ------ | 
|                         |  |                  
|                         |  | December 31, 2003
|                         |  |                  
|                         |  |                   |        | Gross      |  | Gross      |   |           
|                         |  | Amortized         |        | Unrealized |  | Unrealized |   | Estimated 
|                         |  | Cost              |        | Gains      |  | Losses     |   | Fair Value
|                         |  |                   |        |            |  |            |   |           
|Money market funds       |  | $                 | 13,845 |            |  | $          |  |            |  | $ |  |  |  | $ | 13,845 | 
|Auction rate securities  |  |                   | 8,200  |            |  |            |  |            |  |   |  |  |  |   | 8,200  | 
|U.S. government agencies |  |                   | 3,906  |            |  |            | 2 |            |  |   |  |  |  |   | 3,908  | 
|                         |  |                   |        |            |  |            |   |            |  |   |   |  |  |   |        | 
|                         |  | $                 | 25,951 |            |  | $          | 2 |            |  | $ |  |  |  | $ | 25,953 | 
|                         |  |                   |        |            |  |            |   |            |  |   |   |  |  |   |        | 
|Reported as:             |  |                   |        |            |  |            |   |            |  |   |   |  |  |   |        | 
|Cash equivalents         |  |                   |        |            |  |            |   |            |  |   |   |  |  | $ | 13,845 | 
|Short-term investments   |  |                   |        |            |  |            |   |            |  |   |   |  |  |   | 12,108 | 
|                         |  |                   |        |            |  |            |   |            |  |   |   |  |  |   |        | 
|                         |  |                   |        |            |  |            |   |            |  |   |   |  |  | $ | 25,953 | 
|                         |  |                   |        |            |  |            |   |            |  |   |   |  |  |   |        | 

|                        |  |                   |       |            |  |            |   |            |  |   |   |  |  |   |       | 
|----------------------- |  | ----------------- | ----- | ---------- |  | ---------- | - | ---------- |  | - | - |  |  | - | ----- | 
|                        |  |                  
|                        |  | December 31, 2002
|                        |  |                  
|                        |  |                   |       | Gross      |  | Gross      |   |           
|                        |  | Amortized         |       | Unrealized |  | Unrealized |   | Estimated 
|                        |  | Cost              |       | Gains      |  | Losses     |   | Fair Value
|                        |  |                   |       |            |  |            |   |           
|Money market funds      |  | $                 | 6,775 |            |  | $          |  |            |  | $ |  |  |  | $ | 6,775 | 
|Certificates of deposit |  |                   | 2,895 |            |  |            |  |            |  |   |  |  |  |   | 2,895 | 
|                        |  |                   |       |            |  |            |   |            |  |   |   |  |  |   |       | 
|                        |  | $                 | 9,670 |            |  | $          |  |            |  | $ |  |  |  | $ | 9,670 | 
|                        |  |                   |       |            |  |            |   |            |  |   |   |  |  |   |       | 
|Reported as:            |  |                   |       |            |  |            |   |            |  |   |   |  |  |   |       | 
|Cash equivalents        |  |                   |       |            |  |            |   |            |  |   |   |  |  | $ | 6,775 | 
|Short-term investments  |  |                   |       |            |  |            |   |            |  |   |   |  |  |   | 2,895 | 
|                        |  |                   |       |            |  |            |   |            |  |   |   |  |  |   |       | 
|                        |  |                   |       |            |  |            |   |            |  |   |   |  |  | $ | 9,670 | 
|                        |  |                   |       |            |  |            |   |            |  |   |   |  |  |   |       | 

For the years ended December 31, 2003, 2002
and 2001, there were no gross realized gains or losses on
available-for-sale investments.

38



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS   (Continued)


The following is a summary of amortized cost and
estimated fair value of available-for-sale investments by
contract maturity (in thousands):

|                          |  |                   |        |                   |  |           |        |            |  |   |       |  |  |   |       | 
|------------------------- |  | ----------------- | ------ | ----------------- |  | --------- | ------ | ---------- |  | - | ----- |  |  | - | ----- | 
|                          |  |                   |        |                  
|                          |  | December 31, 2003 |        | December 31, 2002
|                          |  |                   |        |                  
|                          |  | Amortized         |        | Estimated         |  | Amortized |        | Estimated 
|                          |  | Cost              |        | Fair Value        |  | Cost      |        | Fair Value
|                          |  |                   |        |                   |  |           |        |           
|Due in less than one year |  | $                 | 24,201 |                   |  | $         | 24,202 |            |  | $ | 9,670 |  |  | $ | 9,670 | 
|Due in one year or more   |  |                   | 1,750  |                   |  |           | 1,751  |            |  |   |      |  |  |   |      | 
|                          |  |                   |        |                   |  |           |        |            |  |   |       |  |  |   |       | 
|                          |  | $                 | 25,951 |                   |  | $         | 25,953 |            |  | $ | 9,670 |  |  | $ | 9,670 | 
|                          |  |                   |        |                   |  |           |        |            |  |   |       |  |  |   |       | 



|   |                       
|-- | ----------------------
|4. | Property and Equipment

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

|                              |  |              |      |      |  |   |      |  
|----------------------------- |  | ------------ | ---- | ---- |  | - | ---- | -
|                              |  |             
|                              |  | December 31,
|                              |  |             
|                              |  | 2003         |      | 2002
|                              |  |              |      |     
|Machinery and equipment       |  | $            | 328  |      |  | $ | 365  |  
|Leasehold improvements        |  |              |     |      |  |   | 16   |  
|                              |  |              |      |      |  |   |      |  
|                              |  |              | 328  |      |  |   | 381  |  
|Less accumulated depreciation |  |              | (308 | )    |  |   | (269 | )
|                              |  |              |      |      |  |   |      |  
|Property and equipment, net   |  | $            | 20   |      |  | $ | 112  |  
|                              |  |              |      |      |  |   |      |  

Depreciation and amortization expense for
property and equipment totaled $92,000, $725,000 and
$1.7 million for the years ended December 31, 2003,
2002 and 2001, respectively.



|   |                          
|-- | -------------------------
|5. | Other Accrued Liabilities

Other accrued liabilities consist of the
following (in thousands):

|                                |  |              |     |      |  |   |     | 
|------------------------------- |  | ------------ | --- | ---- |  | - | --- | 
|                                |  |             
|                                |  | December 31,
|                                |  |             
|                                |  | 2003         |     | 2002
|                                |  |              |     |     
|Accrued professional fees       |  | $            | 300 |      |  | $ | 202 | 
|Accrued dividends               |  |              | 65  |      |  |   |    | 
|Other accrued liabilities       |  |              | 45  |      |  |   |    | 
|                                |  |              |     |      |  |   |     | 
|Total other accrued liabilities |  | $            | 410 |      |  | $ | 202 | 
|                                |  |              |     |      |  |   |     | 



|   |            
|-- | -----------
|6. | Commitments

At December 31, 2003, the Company has a
total of $450,000 in commitments to its contract manufacturer
for drug substance, representing $250,000 upon acceptance of a
drug order, when and if such acceptance occurs, and $200,000 in
fees for storage of iseganan HC1 until December 2007.

In February 2003, the Company entered into an
operating lease agreement for a facility in Palo Alto,
California. The lease expires in May 2004 and includes an option
to extend until November 30, 2004. Under the terms of the
lease, the Company is committed to pay rent of $43,000 in 2004.
Total rent expense for the years ended December 31, 2003,
2002, and 2001 was approximately $93,000, $3.0 million, and
$5.0 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.

39



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS   (Continued)




|   |                                
|-- | -------------------------------
|7. | Restructuring and Other Charges

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

For the years ended December 31, 2002 and
2001, respectively, $8.6 million and $8.9 million of
the restructuring charges were paid in cash, primarily for
severance costs to terminated employees, termination fees on
collaboration agreements and termination payments for vacated
buildings.

The workforce reduction comprised 90 employees,
who were all terminated in 2001, representing a 71% reduction in
force. The estimated cost of terminating the collaboration
agreements was increased by $483,000 in 2001 and $166,000 in
2002. There were no remaining amounts payable under these
agreements as of December 31, 2002.

The facilities consolidation costs related to the
vacating of three facilities in Mountain View, California,
totaling 142,000 square feet. One of the vacated facilities
was subleased during 2001, the second was terminated in October
2001 and the third in January 2003. In 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, 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 during 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 there were no accrued restructuring
charges related to these facilities.

Additionally as a part of the May 2001
restructuring 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 2001 we received proceeds from the disposition of
certain leasehold improvements and other assets previously
written down in excess of the amounts originally estimated. As a
result, the Company recognized a gain of $2.2 million that
offset restructuring and other charges in the statement of
operations for 2001.

40



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS   (Continued)


The May 2001 restructuring consisted 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 |  | $          |       |               |  | $             |       |       |  | $ |       |   |  | $ |       |  
|                                                       |  |            |        |               |  |               |        |       |  |   |        |   |  |   |        |  

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



|   |            
|-- | -----------
|8. | Acquisition

In April 2002, the Company acquired
Apothogen, Inc., a privately held pharmaceutical
in-licensing company based in North Carolina. The Company issued
37,500 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. Net tangible assets were valued at $300,000 and
consisted primarily of cash, other current assets and fixed
assets. 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.

The Company acquired Apothogen in order to obtain
its workforce, including the services of Dr. Ernest Mario,
to obtain additional seasoned executives who could bring
expertise in the commercialization of

41



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NOTES TO FINANCIAL
STATEMENTS   (Continued)


products, including product launch, and other
strategic relationships. 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 of
$48.12 per share. Dr. Ernest Mario is currently
Chairman of the Companys Board of Directors.



|   |                     
|-- | --------------------
|9. | Stockholders Equity



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

The Company is authorized to issue
5,000,000 shares of preferred stock, of $0.001 par
value. On May 1, 2003, in a private placement transaction,
the Company sold 350 shares of a newly created
Series A convertible preferred stock (the Preferred
Stock), $0.001 par value, and issued warrants to
purchase 920,699 shares of the Companys common stock,
resulting in net cash proceeds of $3.2 million. The primary
purpose of completing the private placement was to provide funds
for a clinical trial of iseganan HCl for the prevention of
ventilator-associated pneumonia (VAP), as well as for other
general corporate purposes and working capital.

The Preferred Stock is convertible into
1,841,404 shares of common stock at any time, at a
conversion price of $1.90 per share, subject to adjustment
upon the occurrence of certain events, such as stock splits,
payment of dividends to common stockholders, reorganizations,
mergers or consolidations. Each share of Preferred Stock
automatically converts into shares of common stock on the tenth
day after the day that the closing sale price of the
Companys common stock on the Nasdaq National Market has
reached at least $8.28 and has remained at such level for 20
consecutive trading days, but only after the earlier to occur of
(1) the unblinding and the public announcement of the
results of the Companys first pivotal clinical trial of
iseganan HCl for the prevention of VAP, or (2) the second
anniversary of the date the Preferred Stock was first issued.
The holders of Preferred Stock are also entitled to receive, but
only out of funds legally available for dividends, cumulative
dividends payable quarterly, at the annual rate of eight percent
of the original issue price of $10,000 on each outstanding share
of Preferred Stock. The dividend will be paid in common stock
based on the average of the closing sales prices of the common
stock on the Nasdaq National Market for the five trading days
immediately preceding and ending on the last trading day prior
to the date the dividends are payable. The dividends are paid in
preference to any other declared dividends. Upon any
liquidation, dissolution or winding up (as such terms are
defined in the Companys Certificate of Designation) of the
Company, before any distribution or payment can be made to the
holders of the Companys common stock, each holder of
Preferred Stock is entitled to receive an amount equal to
$10,000 plus all accrued or declared and unpaid dividends and
such dividends shall be payable in cash. Each share of Preferred
Stock is entitled to a number of votes equal to the number of
shares of common stock issuable based upon a conversion price
equal to the closing sale price, or bid price if no sales were
reported, of the common stock on the Nasdaq National Market on
the date the Preferred Stock and Warrant Purchase Agreement was
signed. The number of votes is not adjustable except upon a
stock split, a reverse stock split, or other similar event
affecting the rights of the Preferred Stock. Holders of
Preferred Stock are also entitled to elect two members of the
Board of Directors, and a majority of the holders of the
Preferred Stock must consent to certain actions prior to the
Company taking them.

In connection with the sale of the Preferred
Stock, the Company issued immediately exercisable warrants to
purchase 920,699 shares of the Companys common stock
to the purchasers of the Preferred Stock, at an exercise price
of $2.07 per share, subject to adjustment upon the
occurrence of certain events, such as stock splits, payment of
dividends to common stockholders, reorganizations, mergers or
consolidations. Additionally, the exercise price of the warrants
will be reduced by 50% if the Companys common stock is
delisted from the Nasdaq National Market. The warrants will
expire on May 1, 2008, if not previously exercised. The
warrants issued to the holders of Preferred Stock were assigned
a value of $1,326,000, which decreased the carrying value of the
Preferred Stock. The warrants were valued using the
Black-Scholes method with the following assumptions: a risk-free
interest rate of 2.52%, an expiration date of May 1, 2008,
a volatility factor of 1.00 and a dividend yield of 0%. In
connection with the issuance of the Preferred Stock and
warrants, the Company recorded $1,436,000 related to the
beneficial conversion feature on the Preferred Stock as a deemed
dividend,

42



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS   (Continued)


which increased the loss applicable to common
stockholders in the calculation of basic and diluted net loss
per share. A beneficial conversion feature is present because
the effective conversion price of the Preferred Stock was less
than the fair value of the common stock on the commitment date.
Pursuant to the terms of the Preferred Stock and Warrant
Purchase Agreement, the Company is subject to certain negative
and restrictive covenants, such as limitations on indebtedness
and the issuance of additional equity securities without
specific approvals by the Board of Directors. The Company is
currently in compliance with each of the covenants.

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

The Company had 325 and zero shares of preferred
stock outstanding as of December 31, 2003 and 2002,
respectively. The Board of Directors may determine the rights,
preferences and privileges of any preferred stock issued in the
future.



| |             
| | ------------
| | Common Stock

On October 10, 2003, in a private placement
transaction, the Company sold 1,774,000 shares of newly
issued common stock, $0.001 par value, at $10.85 per
share, and issued warrants to purchase 354,800 shares of
the Companys common stock, resulting in net cash proceeds
of $18.5 million. The warrants have an exercise price of
$10.85 per share, subject to adjustment upon a subdivision
or combination of the Companys outstanding common stock,
and will expire on October 10, 2008, if not previously
exercised.



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

Shares of common stock reserved for future
issuance at December 31, 2003 were as follows:

|                                     |                                           |  |           |           | 
|------------------------------------ | ----------------------------------------- |  | --------- | --------- | 
|Equity incentive plans               |                                           |  | 1,063,013 |          
|Warrants                             |                                           |  | 1,272,235 |          
|Series A convertible preferred stock |                                           |  | 1,709,875 |          
|                                     |                                           |  |           |          
|                                     | Total shares reserved for future issuance |  |           | 4,045,123 | 
|                                     |                                           |  |           |          



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

In July 2001, the Company issued warrants to
purchase 58,333 shares of the Companys common stock
at an exercise price of $24.00 per share. These warrants
were issued in connection with the termination of the discovery,
development and license agreement with Diversa Corporation. The
warrants will expire on July 27, 2005, if not previously
exercised. The fair value of these warrants was estimated using
the Black-Scholes option pricing model with the following
weighted average assumptions: a risk-free interest rate of 6%, a
contractual life of four years, a volatility factor of 0.75 and
a dividend yield of 0%. The weighted-average fair value of these
warrants was $9.60. 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 warrants to
purchase 4,167 shares of the Companys common stock at
an exercise price of $3.48 per share. These warrants were
issued in connection with the termination of the lease agreement
with the landlord of certain office facilities. The warrants
will expire on December 31, 2007, if not previously
exercised. The fair value of these warrants was estimated using
the Black-Scholes option pricing model with the following
weighted average assumptions: a risk-free interest rate of 1.5%,
a contractual life of five years, a volatility factor of 0.50
and a dividend yield of 0%. The weighted-average fair value of
these warrants was $1.56. The value assigned to these warrants
was $6,500, which was included in General and
administrative as part of the Companys 2002
operating expense.

43



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS   (Continued)




| |                   
| | ------------------
| | 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 either be 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 vest ratably
over a period ranging from four to six years.

The 2000 Equity Incentive Plan (2000 Plan) was
adopted in 2000 and originally allowed for the granting of
options, stock bonuses and rights to acquire restricted stock of
up to 416,666 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:



| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | 5% of the then outstanding shares of common stock
    on a fully diluted basis;
|
| |  | 166,666 shares; or                                                             
|
| |  | a lesser number of shares to be determined by the
    Board of Directors.      

Under this provision, on December 31, 2003,
the Board of Directors increased the number of shares in the
reserve by 166,666 shares, and for the years ended
December 31, 2002 and 2001, determined not to increase the
number of shares in the reserve. The total number of common
stock shares authorized for issuance under the 2000 Plan is
877,885, including an increase of 158,333 shares on
April 3, 2003, as approved by the stockholders of the
Company in a special meeting.

Stock options granted under the 2000 Plan may
either be 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 vest ratably over a period ranging from
18 months to six years.

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
208,333 shares of common stock to employees and consultants
of the Company, following an increase to the reserve of
75,000 shares on February 3, 2003, as approved by the
Board of Directors.

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 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)


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

|                             |           |                     |         |                  |   |   |       |        | 
|---------------------------- | --------- | ------------------- | ------- | ---------------- | - | - | ----- | ------ | 
|                             |           |                    
|                             |           | Options Outstanding
|                             |           |                    
|                             |           | Number of           |         | Weighted-Average
|                             |           | Shares              |         | Exercise Price  
|                             |           |                     |         |                 
|Balance at December 31, 2000 |           |                     | 432,858 |                  |   | $ | 92.76 |       
|                             | Granted   |                     |         | 237,433          |   |   | $     | 61.68  | 
|                             | Exercised |                     |         | (45,283          | ) |   | $     | 10.44  | 
|                             | Cancelled |                     |         | (312,638         | ) |   | $     | 119.52 | 
|                             |           |                     |         |                  |   |   |       |       
|Balance at December 31, 2001 |           |                     | 312,370 |                  |   | $ | 52.08 |       
|                             | Granted   |                     |         | 477,083          |   |   | $     | 34.68  | 
|                             | Exercised |                     |         | (28,924          | ) |   | $     | 15.96  | 
|                             | Cancelled |                     |         | (129,194         | ) |   | $     | 54.12  | 
|                             |           |                     |         |                  |   |   |       |       
|Balance at December 31, 2002 |           |                     | 631,335 |                  |   | $ | 39.24 |       
|                             | Granted   |                     |         | 822,527          |   |   | $     | 2.97   | 
|                             | Exercised |                     |         | (49,863          | ) |   | $     | 7.68   | 
|                             | Cancelled |                     |         | (581,018         | ) |   | $     | 40.93  | 
|                             |           |                     |         |                  |   |   |       |       
|Balance at December 31, 2003 |           |                     | 822,981 |                  |   | $ | 3.73  |       
|                             |           |                     |         |                  |   |   |       |       

At December 31, 2003, 2002, and 2001,
options to purchase 165,187, 211,131 and 109,536 shares of
common stock, respectively, were exercisable. The following
table summarizes information about options outstanding and
exercisable at December 31, 2003:

|                |  |                     |         |                     |         |                  |      |           |      |                  |        |   |      |  |         |  |         |   |        |   |      | 
|--------------- |  | ------------------- | ------- | ------------------- | ------- | ---------------- | ---- | --------- | ---- | ---------------- | ------ | - | ---- |  | ------- |  | ------- | - | ------ | - | ---- | 
|                |  |                     |         |                    
|                |  | Options Outstanding |         | Options Exercisable
|                |  |                     |         |                    
|                |  |                     |         | Weighted-Average    |         |                  |      |          
|Range of        |  | Number of           |         | Remaining           |         | Weighted-Average |      | Number of |      | Weighted-Average
|Exercise Prices |  | Shares              |         | Contractual Life    |         | Exercise Price   |      | Shares    |      | Exercise Price  
|                |  |                     |         |                     |         |                  |      |           |      |                 
|$  1.80-$  2.40 |  |                     | 62,048  |                     |         |                  | 7.95 |           |      | $                | 2.04   |   |      |  | 12,134  |  |         | $ | 2.35   |  
|$  2.76-$  2.76 |  |                     | 692,337 |                     |         |                  | 6.97 |           |      | $                | 2.76   |   |      |  | 132,292 |  |         | $ | 2.76   |  
|$  4.80-$ 10.80 |  |                     | 27,460  |                     |         |                  | 9.34 |           |      | $                | 5.58   |   |      |  | 460     |  |         | $ | 9.33   |  
|$ 13.53-$ 19.80 |  |                     | 36,823  |                     |         |                  | 8.48 |           |      | $                | 16.25  |   |      |  | 17,488  |  |         | $ | 18.62  |  
|$ 35.88-$ 48.60 |  |                     | 3,417   |                     |         |                  | 8.20 |           |      | $                | 43.61  |   |      |  | 2,396   |  |         | $ | 41.61  |  
|$144.00-$187.50 |  |                     | 896     |                     |         |                  | 1.68 |           |      | $                | 147.06 |   |      |  | 417     |  |         | $ | 150.57 |  
|                |  |                     |         |                     |         |                  |      |           |      |                  |        |   |      |  |         |  |         |   |        |   |      | 
|                |  |                     |         |                     | 822,981 |                  |      |           | 7.19 |                  |        | $ | 3.73 |  |         |  | 165,187 |   |        | $ | 5.36 | 
|                |  |                     |         |                     |         |                  |      |           |      |                  |        |   |      |  |         |  |         |   |        |   |      | 

The weighted-average fair value of options
granted during 2003, 2002, and 2001 was $2.24, $25.92 and
$37.80, respectively



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

In January 2000, the Board of Directors adopted
the 2000 Employee Stock Purchase Plan (the Purchase
Plan), which was approved by stockholders in February
2000, authorizing the issuance of 41,666 shares of common
stock pursuant to purchase rights granted to employees. In 2001
and 2002, the Board of Directors determined not to increase the
number of shares in the reserve. In March 2003, the Purchase
Plan was suspended, and the shares reserved for issuance under
this plan were reduced to zero.

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. Prior to its suspension, the Purchase Plan permitted
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%

45



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##### Table of Contents



NOTES TO FINANCIAL
STATEMENTS   (Continued)


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.



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

In February 2003, the Board of Directors approved
a cancellation and re-grant of 308,835 unexercised stock options
held by existing employees and directors of the Company in a
one-for-one exchange and 12,500 options that were re-granted in
connection with the cancellation of 54,166 unexercised stock
options held by a director of the Company. The newly-granted
options have an exercise price equal to the closing price of the
Companys common stock on the Nasdaq National Market on
February 5, 2003, or $2.76 per share. The options
generally vest over a four-year period and will expire in
February 2008 if not previously exercised. Variable accounting
is being applied to the re-granted options throughout their
term. Compensation expense of $993,000 was recorded for these
options during the year ended December 31, 2003.

Deferred compensation in connection with the
grant of certain stock options to employees and officers on or
prior to the Companys initial public offering on
March 20, 2000 and in connection with an agreement to
modify the vesting of one officers unvested stock options
is being amortized to expense on a straight-line basis over the
vesting period of the options, ranging from four to six years.
The vesting schedule of the unexercised portion of the granted
options was changed following their cancellation and re-grant in
February 2003, and consequently the amortization schedule was
also changed to reflect the new four-year vesting schedule.
During the years ended December 31, 2003, 2002, and 2001,
the Company recorded amortization of deferred stock compensation
expense of $126,000, $1.3 million and $2.7 million,
respectively. In connection with the termination of various
employees and cancellation of unvested stock options, the
Company recorded a reduction to deferred stock compensation of
$406,000, $2.6 million and $2.9 million in the years
ended December 31, 2003, 2002 and 2001, respectively.



|    |                                                  
|--- | -------------------------------------------------
|10. | 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
58,333 shares of its common stock at an exercise price of
$24.00 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

46



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NOTES TO FINANCIAL
STATEMENTS   (Continued)


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.

During 1998, the Company recorded
$2.0 million 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
20,833 shares of Series F preferred stock at
$48.00 per share and $1.0 million in cash. In 1998,
the Company paid and recorded a milestone of $2.0 million
for the commencement of the phase II clinical trial. In
2000, the Company paid and recorded a $2.5 million
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.

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 $2.9 million based upon achievement of certain
development milestones. The Company also entered into related
purchase and supply agreements with PolyPeptide. In December
2002, the Company reached an agreement with PolyPeptide
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
PolyPeptide 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 was
expected to pay an additional $250,000 in 2003 upon delivery and
acceptance of a seven kg lot of drug substance (lot I),
which has yet to occur. The $250,000 is secured by a letter of
credit and is recorded as restricted cash on our balance sheets
at December 31, 2003 and 2002. 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 was
expected to be expensed upon delivery of lot I. However,
the Company has not yet been satisfied that the lot was
manufactured in accordance with a validation plan or that
related documentation is adequate, and is currently discussing
this with the contract manufacturer. Due to significant
uncertainty over the timing and outcome of these discussions,
the entire $2.4 million prepaid amount was written off to
research and development expense in 2003.

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 drug approvals and product
sales.

47



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NOTES TO FINANCIAL
STATEMENTS   (Continued)




|    |             
|--- | ------------
|11. | 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,
|                                                  |  |             
|                                                  |  | 2003         |         | 2002
|                                                  |  |              |         |     
|Net operating loss carryforwards                  |  | $            | 67,700  |      |  | $ | 63,700  |  
|Research and development tax credit carryforwards |  |              | 5,500   |      |  |   | 3,000   |  
|Capitalized research and development costs        |  |              | 7,500   |      |  |   | 8,200   |  
|Other, net                                        |  |              |        |      |  |   | 200     |  
|                                                  |  |              |         |      |  |   |         |  
|Total deferred tax assets                         |  |              | 80,700  |      |  |   | 75,100  |  
|Valuation allowance                               |  |              | (80,700 | )    |  |   | (75,100 | )
|                                                  |  |              |         |      |  |   |         |  
|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 $5.6 million, $11.4 million and
$26.2 million during 2003, 2002 and 2001, respectively.

As of December 31, 2003, the Company had net
operating loss carryforwards for federal income tax purposes of
approximately $192.0 million, which expire in the years
2009 through 2023, and federal research and development credits
of approximately $3.3 million, which expire in the years
2009 through 2023. In addition, the Company had net operating
loss carryforwards for state income tax purposes of
approximately $44.0 million, which expire in the years 2004
through 2013 and state research and development tax credits of
approximately $3.3 million, which do not expire.

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.



|    |                                     
|--- | ------------------------------------
|12. | Quarterly Financial Data (Unaudited)

|                                                          |                   |       |        |        |   |                                          |        |        |   |       |        |        |   |       |        |        |   |   |        |       |   |   |        |       |   |   |         |       |   |   |         |       |  
|--------------------------------------------------------- | ----------------- | ----- | ------ | ------ | - | ---------------------------------------- | ------ | ------ | - | ----- | ------ | ------ | - | ----- | ------ | ------ | - | - | ------ | ----- | - | - | ------ | ----- | - | - | ------- | ----- | - | - | ------- | ----- | -
|                                                          |                   |       |        |       
|                                                          |                   | 2003  |        | 2002  
|                                                          |                   |       |        |       
|                                                          |                   | First |        | Second |   | Third                                    |        | Fourth |   | First |        | Second |   | Third |        | Fourth
|                                                          |                   |       |        |        |   |                                          |        |        |   |       |        |        |   |       |        |       
|                                                          |                   |       |        |        |   |                                          |        |        |   |      
|                                                          |                   |       |        |        |   | (In thousands, except per share amounts) |        |        |   |      
|Operating loss                                            |                   | $     | (1,933 | )      |   | $                                        | (2,395 | )      |   | $     | (4,766 | )      |   | $     | (4,415 | )      |   | $ | (4,992 | )     |   | $ | (8,858 | )     |   | $ | (11,483 | )     |   | $ | (10,220 | )    
|Net loss                                                  |                   |       | (1,907 | )      |   |                                          | (2,350 | )      |   |       | (4,738 | )      |   |       | (4,317 | )      |   |   | (4,880 | )     |   |   | (7,972 | )     |   |   | (11,271 | )     |   |   | (10,330 | )    
|Net loss applicable to common stockholders                |                   |       | (1,907 | )      |   |                                          | (3,815 | )      |   |       | (4,808 | )      |   |       | (4,400 | )      |   |   | (4,880 | )     |   |   | (7,972 | )     |   |   | (11,271 | )     |   |   | (10,330 | )    
|Net loss per share applicable to common
    stockholders: |                   |       |        |        |   |                                          |        |        |   |       |        |        |   |       |        |        |   |   |        |       |   |   |        |       |   |   |         |       |   |   |         |      
|                                                          | Basic and diluted |       | $      | (0.58  | ) |                                          | $      | (1.17  | ) |       | $      | (1.46  | ) |       | $      | (0.87  | ) |   | $      | (1.73 | ) |   | $      | (2.58 | ) |   | $       | (3.59 | ) |   | $       | (3.23 | )

48



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##### Table of Contents








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

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of disclosure controls and
procedures:Based on our
managements evaluation (with the participation of our
principal executive officer and principal financial officer), as
of the end of the period covered by this report, our principal
executive officer and principal financial officer have concluded
that our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended, (the Exchange Act)) are
effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules
and forms.

Changes in internal control over financial
reporting:There was no change in our
internal control over financial reporting during our fourth
fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.




PART III

Pursuant to General Instruction G to
Form 10-K, the information required by Items 10,
11,12,13 and 14 of Part III is incorporated by reference
from the Companys definitive Proxy Statement with respect
to its 2004 annual meeting of stockholders, to be filed pursuant
to Regulation 14A within 120 days after
December 31, 2003.

49



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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

The Financial Statements and Report of
Independent Auditors are included in a separate section of this
Annual Report on Form 10-K. See index to Financial
Statements at Item 8 of this Form 10-K.

2. Financial Statement Schedules

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

3. Exhibit Index

See Exhibit Index on page 53 of this
Annual Report on Form 10-K.

(b) Reports on Form 8-K

We filed a report on Form 8-K on
October 9, 2003 concerning the issuance of a press release
relating to (i) our private equity financing and related
agreements, and (ii) a press release relating to the
enrollment of patents in a clinical trial involving our product
candidate, iseganan HCl.

We filed a report on Form 8-K on
October 29, 2003 concerning the issuance of a press release
relating to our third quarter financial results.

(c) Exhibits

See Exhibit Index on page 53 of this
Annual Report on Form 10-K.

(d) Financial Statement Schedules

See (a)(2) above.

50



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15 (d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this
19th day of March 2004.



| |                                   
| | ----------------------------------
| | 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,
jointly and severally, Henry J. Fuchs, M.D. his attorney in
fact, each with the full power of substitution, for such person,
in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K, and to file the same, with
all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all
intents and purposes as he might do or could do in person hereby
ratifying and confirming all that each of said attorneys-in-fact
and agents, or his substitute, may 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 below by the
following persons on behalf of the Registrant in the capacities
and on the dates indicated.

|                                       |  |                                       |  |                |  | 
|-------------------------------------- |  | ------------------------------------- |  | -------------- |  | 
|                                       |  |                                       |  |               
|Signature                              |  | Title                                 |  | Date          
|                                       |  |                                       |  |               
|                                      
|/s/ HENRY J. FUCHSHenry J. Fuchs, M.D. |  | President and Chief Executive Officer |  | March 19, 2004
|                                      
|/s/ DAVID J. TUCKERDavid J. Tucker     |  | Principal Financial Officer           |  | March 19, 2004
|                                      
|/s/ ERNEST MARIOErnest Mario, Ph.D.    |  | Chairman of the Board                 |  | March 19, 2004
|                                      
|/s/ KEVIN C. TANGKevin C. Tang         |  | Director                              |  | March 19, 2004
|                                      
|/s/ MARK L. PERRYMark L. Perry         |  | Director                              |  | March 19, 2004
|                                      
|/s/ GARY A. LYONSGary A. Lyons         |  | Director                              |  | March 19, 2004

51



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##### Table of Contents



|                                       |  |          |  |                |  | 
|-------------------------------------- |  | -------- |  | -------------- |  | 
|                                       |  |          |  |               
|Signature                              |  | Title    |  | Date          
|                                       |  |          |  |               
|                                      
|/s/ JERRY JACKSONJerry Jackson         |  | Director |  | March 19, 2004
|                                      
|/s/ JACK S. REMINGTONJack S. Remington |  | Director |  | March 19, 2004

52



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##### Table of Contents



EXHIBIT INDEX

|        |    |             |  |                                                                                                                                                                                                  
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1          |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation; and Amended and Restated
    Certificate of Incorporation.(12)                                                
|        | 3  | .2          |  | Bylaws.(1)                                                                                                                                                                                       
|        | 3  | .3          |  | Certificate of Amendment to Amended and Restated
    Certificate of Incorporation filed with the Delaware Secretary
    of State on April 10, 2003. (15)                                         
|        | 3  | .4          |  | Certificate of Designation filed with the
    Delaware Secretary of State on May 1, 2003.(15)                                                                                                    
|        | 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)                                                                     
|        | 4  | .3          |  | Form of Preferred Stock and Warrant Purchase
    Agreement, dated February 5, 2003, as amended on
    February 11, 2003.(11)                                                                     
|        | 4  | .4          |  | Form of Second Amendment to Preferred Stock and
    Warrant Purchase Agreement of February 5, 2003, dated
    April 10, 2003.(13)                                                                
|        | 4  | .5          |  | Form of Warrant issued by the Company pursuant to
    Preferred Stock and Warrant Purchase Agreement of
    February 5, 2003, as amended of February 11, 2003 and
    April 10, 2003.(13)        
|        | 4  | .6          |  | Form of Common Stock and Warrant Purchase
    Agreement, dated October 6, 2003.(14)                                                                                                              
|        | 4  | .7          |  | Form of Warrant issued by the Company pursuant to
    the Common Stock and Warrant Purchase Agreement of
    October 6, 2003.(14)                                                                
|        | 10 | .1          |  | Form of Indemnity Agreement.(1)                                                                                                                                                                  
|        | 10 | .2          |  | Amended and Restated 1995 Stock Option Plan, as
    amended on November 16, 2002.(10)(12)                                                                                                        
|        | 10 | .2.2        |  | Amended and Restated Form of Stock Option
    Agreement and Notice of Grant of Stock Options and Option
    Agreement.(1)(10)                                                                    
|        | 10 | .3          |  | 2000 Equity Incentive Plan, as amended on
    February 11, 2003.(10)(12)                                                                                                                         
|        | 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, PolyPeptide Laboratories A/S and Ferring Peptide
    Production AB 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)(10)                                                                                                                              
|        | 10 | .10         |  | Loan and Security Agreement by and between the
    Company and Silicon Valley Bank, dated August 25, 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.) dated
    April 13, 2001.(3)

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|        |    |             |  |                                                                                                                                                                                                                                                                                 
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 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.(8)(10)                                                                                                                                                                                  
|        | 10 | .16         |  | Executive Severance Benefit Plan, as amended and
    restated on August 1, 2002.(8)(10)                                                                                                                                                                                         
|        | 10 | .17         |  | Summary of Officer Incentive Bonus Plan.(3)(10)                                                                                                                                                                                                                                 
|        | 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.(6)                                                                           
|        | 10 | .19         |  | Letter Agreement dated November 28, 2001 by
    and between the Company and Ken Kelley.(5)(10)                                                                                                                                                                                  
|        | 10 | .20         |  | Loan Modification Agreement by and between the
    Company and Silicon Valley Bank, dated April 29, 2002.(7)                                                                                                                                                                    
|        | 10 | .21         |  | Loan Modification Agreement by and between the
    Company and Silicon Valley Bank, dated June 10, 2002.(7)                                                                                                                                                                     
|        | 10 | .22         |  | 2002 Non-Officer Equity Incentive Plan and
    related documents, as amended on February 3, 2003.(12)                                                                                                                                                                           
|        | 10 | .23         |  | Master Services Agreement by and among the
    Company, PPD Development, LP and PPD Global Ltd., dated
    July 29, 2002.(8)                                                                                                                                                    
|        | 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.(9)                                                                                            
|        | 10 | .25         |  | Lease Termination Agreement by and between the
    Company and Bruce H. Carter and Keith M. Carter, dated
    October 31, 2002.(12)                                                                                                                                             
|        | 10 | .26         |  | Sublease Termination Agreement and Sublease by
    and between the Company and ReShape, Inc., dated
    October 31, 2002.(12)                                                                                                                                                   
|        | 10 | .27         |  | Amendment and Assignment of Lease, Release and
    Assumption 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.(12)
|        | 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.(12)                                                                       
|        | 10 | .29         |  | Lease Agreement by and between the Company and
    Embarcadero Corporate Center, dated February 10, 2003.(12)                                                                                                                                                                   
|        | 10 | .30         |  | Common Stock and Warrant Purchase Agreement,
    dated October 6, 2003 (the Purchase Agreement)
    by and among the Company and each Investor as defined
    therein.(14)                                                                                                    
|        | 10 | .31         |  | Form of warrant issued by the Company in favor of
    each Investor, as defined in the Purchase Agreement.(14)                                                                                                                                                                  
|        | 23 | .1          |  | Consent of Ernst & Young
    LLP, Independent Auditors                                                                                                                                                                                                                          
|        | 24 | .1          |  | Power of Attorney. Reference is made to the
    signature page.                                                                                                                                                                                                                 
|        | 31 | .1          |  | Certification required by Rule 13a-14(a) or Rule
    15d-14(a).                                                                                                                                                                                                                 
|        | 31 | .2          |  | Certification required by Rule 13a-14(a) or Rule
    15d-14(a).                                                                                                                                                                                                                 
|        | 32 | .1          |  | Certification by the Chief Executive Officer and
    the Chief Financial Officer of the Company, as required by Rule
    13a-14(b) or Rule 15d-14(b) and Section 1350 of
    Chapter 63 of Title 18 of the United States. Code
    (18 U.S.C. 1350).                            

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##### Table of Contents





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| |    |                                                                                                                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 (File No. 000-29993) filed with the
    Securities and Exchange Commission on May 16, 2001.                                                                       
|
| | (3) | Incorporated by reference to exhibit to our
    Form 10-Q (File No. 000-29993) 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-K (File No. 000-29993) filed with the
    Securities and Exchange Commission on February 15, 2002.                                                                  
|
| | (6) | 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.                                          
|
| | (7) | Incorporated by reference to exhibit to our
    Form 10-Q (File No. 000-29993) filed with the
    Securities and Exchange Commission on August 14, 2002.                                                                    
|
| | (8) | Incorporated by reference to exhibit to our
    Form 10-Q (File No. 000-29993) filed with the
    Securities and Exchange Commission on November 14, 2002.                                                                  
|
| | (9) | Incorporated by reference to exhibit to our
    Form 8-K (File No. 000-29993) filed with the
    Securities and Exchange Commission on November 27, 2002.                                                                   



|     |                                                                                                                                                                                                                       
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Management contract or compensatory plan,
    contract or arrangement.                                                                                                                                                
|    
|(11) | Incorporated by reference to Appendix B to
    the Definitive Proxy Statement for the Special Meeting of
    Stockholders (File No. 000-29993) filed with the Securities
    and Exchange Commission on March 3, 2003.
|    
|(12) | Incorporated by reference to exhibit to our
    Form 10-K (File No. 000-29993) filed with the
    Securities and Exchange Commission on March 31, 2003.                                                               
|    
|(13) | Incorporated by reference to our Form 10-Q
    (File No. 000-29993) filed with the Securities and Exchange
    Commission on May 14, 2003.                                                                            
|    
|(14) | Incorporated by reference to exhibit to our
    Form 8-K (File No. 000-29993) filed with the
    Securities and Exchange Commission on October 9, 2003.                                                               
|    
|(15) | Incorporated by reference to our Form 10-Q
    (File No. 000-29993) filed with the Securities and Exchange
    Commission on November 12, 2003.                                                                       

55