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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For The Quarterly Period Ended March 31, 2003

OR

Commission File Number: 0-19171

ICOS CORPORATION

(425) 485-1900

Not Applicable

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [X]   No [   ]

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

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ICOS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

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PART 1. Financial Information

ITEM 1. Financial Statements

ICOS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

See accompanying notes to condensed consolidated financial statements.

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ICOS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

See accompanying notes to condensed consolidated financial statements.

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ICOS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

See accompanying notes to condensed consolidated financial statements.

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ICOS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands unless otherwise noted)

(unaudited)

1.     Summary of Significant Accounting Policies

     The accompanying condensed consolidated financial statements present the results of operations, financial position and cash flows of ICOS Corporation and its wholly-owned subsidiaries, herein collectively referred to as “ICOS”. All material intercompany transactions and balances between entities consolidated in these financial statements have been eliminated.

     The accompanying condensed consolidated financial statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States. We believe the disclosures made are adequate to make the information presented not misleading. However, you should read these condensed consolidated financial statements in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002.

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

     In our opinion, the accompanying condensed consolidated financial statements include all adjustments, consisting only of normal recurring items, necessary to present fairly our financial position as of March 31, 2003 and December 31, 2002, and our results of operations and cash flows for the three months ended March 31, 2003 and 2002. Interim results are not necessarily indicative of results for a full year.

     Stock Based Compensation

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

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

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     The per share weighted-average grant date fair value of stock options awarded during the three months ended March 31, 2003 and 2002, was $13.79 and $31.60, respectively, using the Black-Scholes option pricing model with the following assumptions:

2.     Revenue from Collaborations and Licenses of Technology, and Equity in Losses of Affiliates

     The following tables summarize our revenue from collaborations with related parties and licenses of technology, and equity in losses of affiliates for the three months ended March 31, 2003 and 2002.

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3.     Affiliate Operating Results

     Lilly ICOS

     Lilly ICOS, our 50/50 owned joint venture with Eli Lilly and Company (“Lilly), began selling its first commercial product, Cialis™ (tadalafil), for the treatment of erectile dysfunction, in the European Union in January 2003. Cialis is currently available, by prescription, in pharmacies across Europe. Cialis is also available outside of North America and the European Union, in which markets Lilly has exclusive rights and pays royalties to Lilly ICOS equal to 20% of net sales.

     The following table summarizes the operating results of Lilly ICOS for the three months ended March 31, 2003 and 2002.

     Suncos

     For the first quarter of 2002, Suncos incurred $16.0 million of operating losses related to the development of Pafase®. In December 2002, the Pafase development program was discontinued after an interim analysis did not demonstrate clinical benefit in a Phase 3 study for severe sepsis. Upon discontinuation of the Pafase program, Suncos accrued estimated close-out costs, primarily associated with the program’s clinical and manufacturing activities. In the first quarter of 2003, no adjustments to those estimated costs were necessary.

     ICOS-TBC

     For the first quarter of 2002, ICOS-TBC incurred $5.0 million of operating losses related to its endothelin receptor antagonist program. All research and development costs of ICOS-TBC were charged to expense as incurred. In January 2003, we announced that joint development of the endothelin receptor antagonist program, through ICOS-TBC, would not continue. Texas Biotechnology Corporation (“Texas Biotechnology”) agreed to be responsible for all costs and expenses of ICOS-TBC incurred subsequent to December 31, 2002. On April 22, 2003, ICOS entered into an agreement whereby Texas Biotechnology acquired all of our interests in ICOS-TBC for $10.0

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million, with $4.0 million paid on that date and the balance payable, with interest, in two installments over an 18-month period. The installment payments and interest are secured by an irrevocable standby letter of credit from a major U.S. bank. In the second quarter of 2003, our results of operations will include a gain of $10.0 million from this transaction.

4.     Income Tax Recovery

     In the first quarter of 2003, we recognized a federal alternative minimum income tax benefit of $0.6 million as a result of filing a refund claim for such taxes paid for the year ended December 31, 1998.

5.     Comprehensive Loss