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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

Commission file number 0-19125

Isis Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)

        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.

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

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

ISIS PHARMACEUTICALS, INC.
FORM 10-Q

INDEX

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ISIS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share data)

Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date.

See accompanying notes

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ISIS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(Unaudited)

See accompanying notes

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ISIS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

See accompanying notes

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ISIS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)

1. Basis of Presentation

        The unaudited interim financial statements for the three-month periods ended March 31, 2003 and 2002 have been prepared on the same basis as the Company's audited financial statements for the year ended December 31, 2002. The financial statements include all adjustments (consisting only of normal recurring adjustments), which the Company considers necessary for a fair presentation of the financial position at such dates and the operating results and cash flows for those periods. Results for the interim periods are not necessarily indicative of the results for the entire year. For more complete financial information, these financial statements, and notes thereto, should be read in conjunction with the audited financial statements for the year ended December 31, 2002 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission.

2. Significant Accounting Policies

Revenue Recognition

        The Company recognizes revenue when all contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured.

Research and development revenue under collaborative agreements

        The Company recognizes research and development revenue under collaborative agreements as it incurs the related expenses, up to contractual limits. The Company defers payments received under these agreements that are related to future performance and records revenue as it is earned over the specified future performance period. The Company recognizes revenue that relates to nonrefundable, upfront fees over the period of the contractual arrangements as it satisfies its performance obligations. The Company recognizes revenue that relates to milestones, under existing arrangements, upon completion of the milestone's performance requirement. The Company records revenue from federal research grants during the period in which it incurs the related expenditures. The Company recognizes revenue from product sales as it ships the products.

        As part of the Company's alliance with Eli Lilly and Company, Lilly provided Isis a $100.0 million interest free loan to fund the research collaboration. As of March 31, 2003, the Company had drawn down $55.0 million on the $100.0 million loan. The Company discounted the $55.0 million to its net present value by imputing interest on the amount at 20%, which represented market conditions in place at the time Isis entered into the loan. Isis accretes the loan up to its face value over its term by recording interest expense. The difference between the cash received and the present value of the loan represents value Lilly gave to Isis to help fund the research collaboration. The Company accounts for this value as deferred revenue and recognizes it as revenue over the period of performance.

Research and development revenue from affiliates

        The Company recognized research and development revenue from affiliates as it incurred the related expenses, up to contractual limits. The Company recognized revenue related to milestones upon completion of the milestone's performance requirement.

Licensing and royalty revenue

        The Company recognizes licensing and royalty revenue immediately, if collectibility is reasonably assured, for arrangements in which the Company is not required to provide services in the future.

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Concentration of Credit Risk

        Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments and receivables. The Company places its cash equivalents and certain of its short-term investments with high credit-quality financial institutions. The Company invests its excess cash primarily in auction and money market instruments, and municipal and floating rate bonds. The Company established guidelines relative to credit ratings, diversification and maturities that seek to maintain safety and liquidity.

Cash, Cash Equivalents and Short-Term Investments

        The Company considers all liquid investments with maturities of ninety days or less when purchased to be cash equivalents. The Company's short-term investments have initial maturities of greater than ninety days from date of purchase. The Company classifies its securities as "available-for-sale" in accordance with SFAS 115, Accounting for Certain Investment in Debt and Equity Securities. The Company carries these investments at fair market value with any unrealized gains and losses recorded as a separate component of stockholders' equity. Fair value is based upon market prices quoted on the last day of the fiscal quarter. The cost of debt securities sold is based on the specific identification method. The Company includes gross realized gains and losses in investment income and these amounts have not been material. To date, the Company has not had any material losses related to its cash or cash equivalents. During the first quarter of 2003, the Company recorded a non-cash loss of $2.4 million related to the impairment of its equity investments in Antisense Therapeutics Limited and Hybridon, Inc. This charge reflects the current market climate and is associated with the decline in market value of the equity investments from their initial valuations and is determined to be other than temporary.

Inventory Valuation

        The value at which the Company carries its inventory directly impacts the Company's results of operations. The Company's inventory primarily consists of drugs it manufactures for its partners under contractual terms. The Company states its inventories at the lower of cost or market, with cost determined under the first-in, first-out method. The Company reviews inventories periodically and reduces the carrying value of items considered to be slow moving or obsolete to its estimated net realizable value. Inventory includes the following categories as of March 31, 2003 and December 31, 2002, net of reserves (in thousands):

Use of Estimates

        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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Stock-Based Employee Compensation

        The Company has adopted the disclosure-only provision of SFAS 123, Accounting for Stock-Based Compensation. Accordingly, no compensation expense has been recognized for the Company's stock option plans. Had compensation expense been determined consistent with SFAS 123, Isis' net loss and

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basic and diluted net loss per share would have been changed to the following pro forma amounts (in thousands, except per share amounts):

        The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for March 31, 2003 and 2002: 1) a risk-free interest rate of 3.8% each year; 2) a dividend yield of 0% each year; 3) a volatility factor of 82.1% and 78.7%, respectively, and 4) an option life of 5.5 and 5.4 years, respectively. The weighted average fair value of options granted was $6.72 and $20.38 for March 31, 2003 and 2002, respectively.

Impact of Recently Issued Accounting Standards

        In November 2002, the Emerging Issues Task Force issued Issue No. 00-21 (EITF 00-21), Accounting for Revenue Arrangements with Multiple Deliverables. This issue addresses the timing and method of revenue recognition for revenue arrangements that include the delivery of more than one product or service. EITF 00-21 will be effective for revenue arrangements entered into in fiscal quarters beginning after June 15, 2003. The Company is reviewing EITF 00-21 and has not yet determined the impact this issue will have on its operating results and financial position.

        In December 2002, the Financial Accounting Standards Board issued SFAS 148, Accounting for Stock-Based Compensation—Transition and Disclosure, effective for fiscal years ending after December 15, 2002. The rule amends SFAS 123 to provide several alternatives for adopting the stock option expense provisions of SFAS 123, as well as additional required interim financial statement disclosures. SFAS 148 does not require companies to expense stock options in current earnings. The Company has not adopted the provisions of SFAS 123 for expensing stock based compensation; however, the Company has adopted the additional interim disclosure provisions of the statement (see Stock-Based Employee Compensation above). The impact of the new standard is not expected to have a material impact on the results of operations or the financial position of the Company.

3. Strategic Alliances

Affiliates

Orasense

        Due to the significant minority investor rights retained by Elan and its subsidiaries, the Company accounted for its investment in Orasense under the equity method of accounting. Through December 2002, Orasense incurred research and development expenses, performed by Elan and the Company on Orasense's behalf, in the course of its product development. In conjunction with its continuing restructuring efforts, Elan concluded its participation in the Orasense collaboration effective December 31, 2002, and the Company reacquired all rights to ISIS 104838, the compound being developed by the collaboration. The collaboration had no activity during the three months ended

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March 31, 2003. The following table presents summary results of operations for the quarter ended March 31, 2002 for Orasense (in thousands):

HepaSense

        Due to the significant minority investor rights retained by Elan and its subsidiaries, the Company accounted for its investment in HepaSense under the equity method of accounting. At inception, Elan granted to HepaSense a license to its intellectual property for $15.0 million. Through December 2002, HepaSense incurred research and development expenses, performed by Elan and the Company on HepaSense's behalf, in the course of its product development. In conjunction with its continuing restructuring efforts, in 2002, Elan concluded its participation in the HepaSense collaboration and the Company reacquired all rights to ISIS 14803, the compound being developed by the collaboration. The collaboration had no activity during the three months ended March 31, 2003. The following table presents summary results of operations for the quarters ended March 31, 2002 for HepaSense (in thousands):

Amgen

        In February 2003, the Company earned a second research milestone in its drug discovery collaboration with Amgen, which was initiated in December 2001. Amgen and the Company collaborate to discover and develop new antisense drugs utilizing the Company's proprietary second-generation chemistry. Amgen has the right to develop and commercialize antisense drugs resulting from the collaboration.

4. Comprehensive Loss

        SFAS No. 130, Reporting Comprehensive Income, requires the company to report, in addition to net loss, comprehensive loss and its components. A summary follows (in thousands):

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5. Restructuring

        In November 2002, the Company discontinued its GeneTrove database product offering and reorganized the GeneTrove division. As a result, the Company reduced its workforce by approximately 25 people. The restructuring plan also provided for the write-down of certain intellectual property. As a result of this plan, the Company recognized restructuring related charges of approximately $1.4 million as operating expenses in the fourth quarter of 2002. The Company did not recognize any additional restructuring related charges in the first quarter of 2003 and expects to complete utilization of the reserve related to this restructuring by October 2003.

        The following table summarizes the balance of the accrued restructuring reserve, which has been included in accrued liabilities at March 31, 2003 (in thousands):

6. Subsequent Events

        In April 2003, the Company initiated a restructuring in response to disappointing results from the first Phase III trial of Affinitak. As a result, the Company reduced its workforce by 9%, which primarily represented positions that were in support of the commercialization and manufacture of Affinitak. Consequently, the Company will incur a one-time restructuring charge of approximately $1.8 million during the second quarter of 2003 and expects to complete the utilization of the reserve related to this restructuring in the fourth quarter of 2003.

        In April 2003, the Company implemented an employee stock option exchange program to ensure that Isis maintains one of its key assets, its employee base, in a manner that is sensitive to shareholder interests. The program allowed employees, during the offering period beginning on April 8, 2003 through May 8, 2003, to elect to surrender higher-priced options, granted prior to January 5, 2002, in exchange for a lesser number of lower priced options. Employees exchanged 2.2 million options with a weighted average exercise price of $14.89 for 1.0 million options with an exercise price of $5.15. The new options have a three-year vesting period that began on January 1, 2003. In addition, the new options expire on December 31, 2008. The Company will account for the affected options based on changes in the market value of the Company's common stock.

        In April 2003, the Company earned a $1.5 million milestone from Lilly in the development of ISIS 23722, the antisense inhibitor of survivin, as part of its oncology expansion entered into in fiscal year 2002 with Lilly. ISIS 23722 is the first compound from the partnership to be selected for clinical development by Lilly, which resulted in the milestone.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        In addition to historical information contained in this Report, this Report contains forward-looking statements regarding our business and the therapeutic and commercial potential of our technologies and products in development. Any statement describing our goals, expectations, intentions or beliefs is a forward-looking statement and should be considered an at-risk statement. Such statements are subject to certain risks and uncertainties, particularly those risks and uncertainties inherent in the process of discovering, developing and commercializing drugs that can be proven to be safe and effective for use as human therapeutics, in the process of conducting gene functionalization and target validation services, and in the endeavor of building a business around such products and services. Actual results could differ materially from those discussed in this Form 10-Q. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2002, which is on file with the U.S. Securities and Exchange Commission and those identified in the section of Item 2 entitled "Risk Factors" beginning on page 18 of this Report. As a result, you are cautioned not to rely on these forward-looking statements.

        Since our inception in 1989, we have pioneered the science of antisense for the development of a new class of drugs. We design antisense drugs to treat a wide variety of diseases. Due to their gene selectivity, antisense drugs have the potential to be highly effective and less toxic than traditional drugs. We have made significant progress in understanding the capabilities of antisense drugs in treating disease. We have developed new chemistries and novel formulations to enhance the potency and utility of antisense drugs, and we have successfully turned our expertise into a broad pipeline of 13 antisense products currently in all phases of clinical development. Our drugs in development treat a variety of health conditions, including inflammatory, viral, metabolic and dermatological diseases, and cancer, and we are studying these drugs in intravenous, subcutaneous, topical cream, enema and oral formulations. We achieved marketing clearance for the world's first antisense drug Vitravene® (fomivirsen) in 1998.

        Affinitak, formerly LY900003 or ISIS 3521, is our most advanced product in development. We recently announced the results of our Phase III clinical trial of Affinitak to treat patients with non-small cell lung cancer. In this 616-patient trial, we observed no difference in overall survival of those patients who received Affinitak plus the chemotherapy regimen of carboplatin and paclitaxel compared to those patients who received the chemotherapy alone. Survival was the primary endpoint. The median survival for the Affinitak treated patients was ten months, compared to 9.7 months for those patients treated with the chemotherapy alone. Additional analyses of the data, however, suggest that Affinitak was active in this trial. For example, using an alternative statistical analysis of all 616 patients, which considered predefined variables, including duration of treatment, survival of the Affinitak treated patients was greater than that of patients in the control group. This result was statistically significant. Lilly and we are performing an analysis of the data and expect to submit the complete findings from this trial for scientific presentation at an appropriate medical meeting later this year. In a second Phase III study, Lilly is continuing to follow patients currently enrolled, but has suspended further enrollment in this study and other studies of Affinitak. Pending a review upon completion of the second Phase III trial, Lilly and we will make a decision about the future development of Affinitak.

        We currently have two on-going Phase III clinical trials for another product, ISIS 2302, or alicaforsen, in an inflammatory bowel disease known as Crohn's disease. These trials are being conducted in North America and Europe. We have five additional products undergoing Phase II clinical trials.

        Our GeneTrove division uses our antisense technology as a tool to provide important information about the function of genes. We use this information to direct our own drug discovery research and that of our antisense drug discovery partners, such as Lilly and Amgen. We generate this information

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rapidly and efficiently using the same proprietary methods and systems that we developed to create antisense drugs. We offer antisense-based gene function information and license our antisense based functional genomics patents to pharmaceutical company partners that are evaluating the genes as targets for their own drug discovery programs. We currently collaborate with 7 major pharmaceutical partners, including Amgen Inc.; Celera Genomics Group; Chiron Corporation; Eli Lilly and Company; GlaxoSmithKline plc; Merck & Co., Inc. and Pharmacia Corporation. We also license our technology to our partners to support their use of antisense, independent of a collaboration with us. Sequitur, Pfizer and atugen AG are examples of such licensees.

        In November 2002, we announced the termination of GeneTrove's subscription database product originally added in August 2001. This resulted in a reorganization of the GeneTrove division. Our GeneTrove division continues to generate near-term revenue while enhancing our own antisense drug discovery efforts and our patent portfolio.

        Our Ibis division has invented platform technology that has the potential to revolutionize the detection and treatment of infectious disease. We are creating a sensor that can detect known and unknown infectious agents, and are working to discover small molecule drugs that work by binding to RNA. Our scientists have invented methods of identifying common binding sites in RNA that facilitate the identification of organisms or serve as targets for drug binding. We have also invented mass spectrometry-based screening methods for both diagnostic and drug discovery applications.

        In a program called Triangulation Identification for Genetic Evaluation of Risks, or TIGER, we apply our Ibis technology to develop a sensor to detect infectious agents that could be used in biological warfare attacks. We collaborate with San Diego-based Science Applications International Corporation, or SAIC, on this multi-year program funded by the Defense Advanced Research Projects Agency, or DARPA. Ibis expects to receive funding of up to $11.7 million for its efforts related to TIGER, which has been increased by $2.8 million over the original contract of October 2001.

        Since the division's inception, Ibis has received significant financial support from various government agencies to use its technology to develop broad-spectrum anti-infective drugs that we believe will have usefulness in national defense. In early 2002, Ibis received a three-year contract to continue its drug discovery program with the U.S. Army Medical Research Institute of Infectious Diseases, or USAMRIID. The contract provides for funding of up to $2.4 million.

        In addition to DARPA and USAMRIID, Ibis also has research relationships with several other government entities including the United States Navy, the Federal Bureau of Investigation and the Center for Disease Control and Prevention.

Critical Accounting Policies

        We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable, based upon the information available to us. These estimates and assumptions affect the reported balances and amounts within our financial statements and supporting notes. The significant accounting policies, which we believe are the most critical to aid in fully understanding and evaluating our reported financial results, include the following:

Revenue Recognition

        We generally recognize revenue when we have satisfied all contractual obligations and we are reasonably assured of collecting the resulting receivable. We often enter into collaborations where we receive nonrefundable up-front payments for prior or future expenditures. In compliance with current accounting rules, we recognize revenue related to up-front payments over the period of the contractual arrangements as we satisfy our performance obligations. Occasionally, we are required to estimate the

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period of a contractual arrangement or our performance obligation when the information is not clearly defined in the agreements we enter into. Should different estimates prevail, revenue recognized could be materially different. Agreements where we have made estimates of our continuing obligations include our collaborations with Antisense Therapeutics Limited, Amgen, Chiron, Lilly, Merck and Pfizer. As of March 31, 2003, we evaluated our estimates for the periods of contractual arrangements and determined that our estimates are appropriate.

        We recognize revenue related to milestones upon completion of the milestone's performance requirement. During the first quarter 2003, we earned a milestone through our research collaboration with Amgen. In addition, in April 2003, we earned a $1.5 million milestone from Lilly in the development of ISIS 23722, the antisense inhibitor of survivin, as part of our oncology expansion entered into in 2002 with Lilly. ISIS 23722 is the first compound from the partnership to be selected for clinical development by Lilly, which resulted in the milestone.

        In November 2002, the Emerging Issues Task Force issued Issue No. 00-21 (EITF 00-21), Accounting for Revenue Arrangements with Multiple Deliverables. This issue addresses the timing and method of revenue recognition for revenue arrangements that include the delivery of more than one product or service. EITF 00-21 will be effective for revenue arrangements entered into in fiscal quarters beginning after June 15, 2003. We are reviewing EITF 00-21 and have not yet determined the impact this issue will have on our operating results and financial positions.

        We generally recognize revenue related to the sale of our inventory as we ship or deliver drugs to our partners. Occasionally, we complete the manufacturing of drugs, but our partners ask us to deliver the drug on a later date. Under these circumstances, we ensure that our obligation is complete under the terms of the manufacturing agreement in place and title has transferred to the customer before we recognize the related revenue.

        As part of our Lilly alliance, Lilly provided us a $100.0 million interest free loan to fund the research collaboration. As of March 31, 2003, we had drawn down $55.0 million on the $100.0 million loan. We discounted the $55.0 million that had been drawn on the loan as of March 31, 2003 to its net present value by imputing interest on the amount at 20%, which represented market conditions in place at the time we entered into the loan. We are accreting the loan up to its face value over its term by recording interest expense. The difference between the cash received and the present value of the loan represents value Lilly gave to us to help fund the research collaboration, and is accounted for as deferred revenue and is recognized as revenue over the period of performance.

        Additionally, we recognize as revenue immediately those licensing and royalty agreements we enter into for which we have no future performance obligations and are reasonably assured of collecting the resulting receivable.

Inventory Valuation

        The value at which we carry our inventory directly impacts our results of operations. Our inventories primarily consist of drugs we manufacture for our partners under contractual terms. Our inventories are stated at the lower of cost or market, cost being determined under the first-in, first-out method. We review inventories periodically and reduce our carrying value of items considered to be slow moving or obsolete to its estimated net realizable value.

Valuation of Intellectual Property

        We evaluate our licenses and patent assets for impairment on a quarterly basis, and whenever indicators of impairment exist. During this process, we review our portfolio of pending domestic and international patent applications, domestic and international issued patents, and licenses we have acquired from other parties. To determine if any impairment is present, we consider challenges or

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potential challenges to our existing patents, the likelihood of applications being issued, the scope of our issued patents and our experience. In the event that we determine that an impairment exists where we had previously determined that one did not exist, it may result in a material adjustment to our financial statements.

Valuation of Short-Term Investments

        We primarily invest our excess cash in U.S. Government securities and debt instruments of financial institutions and corporations with strong credit ratings. We have established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends and interest rates. In determining if and when a decline in market value below amortized cost is other-than-temporary, we, together with our external portfolio managers, evaluate the market conditions, offering prices, trends of earnings, price multiples, and other key measures for our investments in debt instruments. To date, we have not had any material losses related to our cash or cash equivalents.

        We also have equity investments in biotech companies where we have an ownership interest of less than 20%. In determining if and when a decrease in market value below our cost is other-than-temporary in our equity positions, we examine historical trends in stock price, the financial condition and near term prospects of the issuer, and our current need for cash. When such a decline in value is deemed to be other-than-temporary, we recognize an impairment loss in the period operating results to the extent of the decline. During the first quarter of 2003, we recorded a non-cash loss of $2.4 million related to the impairment of our equity investments in ATL and Hybridon, Inc. This charge reflects the current market climate and is associated with the decline in market value of the equity investments from their initial valuations and is determined to be other than temporary.

Use of Estimates

        In preparing our financial statements to conform with accounting principles generally accepted in the United States, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. These estimates include useful lives for fixed assets for depreciation calculations, useful lives for intellectual property for amortization calculations, estimated lives for license agreements related to deferred revenue, valuation of inventory, and assumptions for valuing stock options. Actual results could differ from these estimates.

Results of Operations

Revenue

        Our total revenue was $14.0 million for the three months ended March 31, 2003, compared with $18.0 million for the same period in 2002. In 2002, Isis reacquired product rights to ISIS 14803 for hepatitis C and an oral formulation of ISIS 104838 as a result of Elan Corporation's conclusion of its participation in the HepaSense and Orasense joint ventures. As a result, we did not earn revenue from these affiliates in the first quarter of 2003. This was the primary reason for the $4.0 million decrease in total revenue in the first quarter of 2003 compared to the same period of 2002.

        Under the category of research and development revenue under collaborative agreements for the quarter ended March 31, 2003, we reported $13.8 million, compared to $14.7 million for the same period in 2002. The decrease of $0.9 million was primarily a result of drug shipments occurring in the first quarter of 2002 that were absent in the same quarter of 2003.

        Research and development revenue from affiliates for the quarter ended March 31, 2002 consisted of revenue associated with our two joint ventures with Elan, Orasense and HepaSense. For the three months ended March 31, 2002, we recognized $1.6 million and $1.4 million from Orasense and

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HepaSense, respectively, as revenue. During the same period in 2003, we did not earn revenue from these affiliates as Elan concluded its participation in the joint ventures in 2002.

        Our revenue from licensing activities and royalties was $0.2 million for the periods ended March 31, 2003 and March 31, 2002.

Operating Expenses

        Total operating expenses for the quarter ended March 31, 2003 totaled $32.9 million, compared to $27.7 million for the same period of 2002. The increase of $5.2 million was primarily the result of a $3.3 million increase in research and development expenses and a $0.4 million increase in general and administrative expenses. In addition, during the first quarter of 2003, we reported $9,000 in compensation expense related to stock options as a result of options granted to consultants, compared to a $1.5 million compensation benefit recorded for the same period of 2002 related to stock options accounted for as variable stock options.

        Our research and development expenses consist of costs for antisense drug discovery, including GeneTrove, antisense drug development, our Ibis Therapeutics' division and R&D Support costs. For the quarter ended March 31, 2003, we reported total research and development expenditures of $30.3 million, compared to $27.0 million reported in 2002. The $3.3 million increase in 2003 over 2002 was primarily due to an increase in our antisense drug discovery costs and the investment in our 13 products in development, including costs for the Phase III trials for Affinitak and alicaforsen for Crohn's disease.

        Antisense drug discovery costs for the quarter ended March 31, 2003 totaled $10.0 million compared to $8.8 million for the same period of 2002. The increase of $1.2 million was principally a result of increased gene functionalization and target validation activities to support our in-house drug discovery programs and our research collaborations with Lilly, including the expansion into oncology, and with Amgen.

        Antisense drug development expenditures totaled $12.1 million and $11.5 million for the three months ended March 31, 2003 and 2002, respectively. The increase of $0.6 million consists of additional expenses resulting from the advancement of our pipeline, including the increased costs related to the Phase III trial of Affinitak for non-small cell lung cancer and two Phase III trials of alicaforsen for Crohn's disease, with the second trial initiated in June 2002. The increases resulting from our Phase III trials were partially offset by a decrease in expenditures related to our other products in development.

        Expenditures related to Affinitak for the quarter ended March 31, 2003 were $2.9 million, compared to $2.5 million reported for the same period of 2002. The increase of $0.4 million was primarily a result of costs related to our Phase III trial entering its final stage, which included increased expenses related to data analysis. We recently announced the results of Affinitak for the treatment of non-small cell lung cancer. In this trial, we observed no difference in overall survival of those patients who received Affinitak plus a standard chemotherapy regimen compared to those patients who received the standard chemotherapy alone. Survival was the primary endpoint. The median survival for the Affinitak treated patients was ten months, compared to 9.7 months for those patients treated with the standard chemotherapy alone. Based on these results, we will not file an NDA for Affinitak in 2003.

        In April 2003, we initiated a restructuring of the company in response to disappointing results from the first Phase III trial of Affinitak. As a result, we reduced our workforce by 9%, which primarily represented positions that were in support of the commercialization and manufacture of Affinitak. Consequently, we will incur a one-time restructuring charge of approximately $1.8 million during the second quarter of 2003 and we expect to complete the utilization of the reserve related to this restructuring in the fourth quarter of 2003. As a result of disappointing results from the first Phase III

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trial of Affinitak and no NDA filing in 2003, we expect a decrease in total Affinitak related expenses for the 2003 year compared to 2002.

        Our second drug in Phase III clinical trials, alicaforsen for Crohn's disease, had development expenditures totaling $1.8 million for the three months ended March 31, 2003, compared to $1.5 million for the same period of 2002. The increase of $0.3 million is a result of the initiation of our second Phase III trial in June 2002 in Europe, which resulted in additional expenses for the first quarter 2003 over the same period of 2002.

        Expenditures related to our other products in development totaled $4.9 million in the first quarter of 2003, compared to $5.4 million for the same period of 2002. The decrease of $0.5 million was primarily attributed to decreased expenses on our early stage products, including ISIS 107248 and ISIS 112989, as our partners from our drug development collaborations agreed to perform continued development of certain drugs. This decrease was partially offset by increased expenses related to increased enrollment in Phase II trials associated with alicaforsen for ulcerative colitis and ISIS 104838 for rheumatoid arthritis.

        Ibis expenditures for the three months ended March 31, 2003 totaled $2.6 million, compared to $2.0 million in 2002. The increase of $0.6 million was primarily related to Ibis' performance obligations under its multi-year government contracts with DARPA, awarded in October 2001, and USAMRIID, awarded in March 2002.

        R&D Support costs for the three months ended March 31, 2003 totaled $5.6 million, compared to $4.7 million for 2002. The increase of $0.9 million is a direct result of increases in our research and development efforts to prepare for the manufacture and commercialization of Affinitak. While we work to control R&D Support costs, we expect that they will be directly related to fluctuations in our research and development expenses.

        General and administration expenses for the three months ended March 31, 2003 totaled $2.6 million compared to $2.2 million for the same period of 2002. The increase of $0.4 million in 2003 over 2002 was primarily a result of an increase in employees and related benefits.

        Compensation expense related to stock options for the quarter ended March 31, 2003 totaled $9,000. The expense relates to stock options granted to consultants. We account for these options in accordance with EITF 96-18. For the quarter ended March 31, 2002, we reported a benefit of $1.5 million, which represents a reversal of previously recorded compensation expense related to stock options accounted for as variable stock options. This benefit was associated with an option exchange program we offered to non-officer employees in January 2000. As of December 31, 2002, these variable stock options were either exercised or cancelled. These exchanged options were required to be accounted for as variable stock options in accordance with Accounting Principles Board Opinion No. 25 and Financial Accounting Standard Board Interpretation No. 44. Variable stock options can result in significant increases and decreases in compensation expense as a result of the variability in our stock price.

        In April 2003, in response to disappointing results from the first Phase III trial of Affinitak and our subsequent restructuring, we implemented an employee stock option exchange program to ensure that we maintain one of our key assets, our employee base, in a manner that is sensitive to our shareholder interests. The program allowed employees, during the offering period beginning on April 8, 2003 through May 8, 2003, to elect to surrender higher-priced options, granted prior to January 5, 2002, in exchange for a lesser number of lower priced options. Employees exchanged 2.2 million options with a weighted average exercise price of $14.89 for 1.0 million options with an exercise price of $5.15. The new options have a three-year vesting period that began on January 1, 2003. In addition, the new options expire on December 31, 2008. We will account for affected options based on changes in the market value of our common stock.

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