ICOS CORP / DE, 424B1, 1996-05-08

ICOS CORP / DE
424B1, 1996-05-08
PHARMACEUTICAL PREPARATIONS

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<PAGE> 1
Filed Pursuant to
Rule 424(b)(1)
(Registration No. 333-3312)

6,000,000 SHARES

ICOS LOGO

COMMON STOCK

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

All the shares of Common Stock offered hereby are being sold by ICOS
Corporation. Of the 6,000,000 shares of Common Stock offered, 4,800,000 shares
are being offered in the United States (the "U.S. Shares") and 1,200,000 shares
are being offered in a concurrent international offering outside the United
States and Canada (the "International Shares"). The price to the public and
aggregate underwriting discounts and commissions per share are identical for
both offerings. See "Underwriting."

The Common Stock is traded on The Nasdaq Stock Market under the symbol
ICOS. On May 7, 1996, the closing sale price of the Common Stock as reported by
Nasdaq was $7.75 per share. See "Price Range of Common Stock."

THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT PAGE 5.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Per Share...................... $7.625 $0.46 $7.165
- -------------------------------------------------------------------------------------------------
Total.......................... $45,750,000 $2,760,000 $42,990,000
- -------------------------------------------------------------------------------------------------
Total Assuming Full Exercise of
Over-Allotment Option(3)..... $52,612,500 $3,174,000 $49,438,500
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>

(1) See "Underwriting."
(2) Before deducting expenses estimated at $350,000, which are payable by the
Company.
(3) Assuming exercise in full of the 30-day option granted by the Company to the
Underwriters to purchase up to 900,000 additional shares, on the same terms,
solely to cover over-allotments. See "Underwriting."
------------------------

The U.S. Shares are offered by the U.S. Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the U.S. Underwriters, and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made in New York City on or about May 13,
1996.

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

PAINEWEBBER INCORPORATED
LEHMAN BROTHERS
ROBERTSON, STEPHENS & COMPANY
GERARD KLAUER MATTISON & CO., LLC RAGEN MACKENZIE INCORPORATED
------------------------

THE DATE OF THIS PROSPECTUS IS MAY 7, 1996.

<PAGE> 2

THE U.S. SHARES MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, OUTSIDE
THE UNITED STATES OR TO ANY PERSON WHO IS NOT A UNITED STATES PERSON, AS PART OF
THE DISTRIBUTION OF THE U.S. SHARES. FOR A DESCRIPTION OF THIS AND OTHER
RESTRICTIONS ON THE OFFERING AND SALE OF SUCH SHARES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET-MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ
STOCK MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF
1934. SEE "UNDERWRITING."
------------------------

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon such person's written or oral request, a copy
of any or all of the documents incorporated by reference herein (other than
exhibits to such documents, unless such exhibits are specifically incorporated
by reference into the information that this Prospectus incorporates). Requests
should be directed to the Company's principal executive offices: ICOS
Corporation, 22021 20th Avenue S.E., Bothell, Washington 98021, telephone (206)
485-1900, Attention: Investor Relations. The following documents filed with the
Securities and Exchange Commission (the "Commission") by the Company are
incorporated by reference into this Prospectus:

(1) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995,

(2) the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1996, and

(3) the description of the capital stock contained in the Company's
Registration Statement on Form 8-A filed with the Commission on April
18, 1991.

All documents filed with the Commission by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), after the initial filing of the Company's Registration
Statement on Form S-3 (the "Registration Statement") and prior to the
termination of this offering shall be deemed incorporated by reference into this
Prospectus and to be a part hereof from the respective dates of filing such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed modified, superseded or
replaced for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document that also is or is deemed
to be incorporated by reference herein modifies, supersedes or replaces such
statement. Any statement so modified, superseded or replaced shall not be
deemed, except as so modified, superseded or replaced, to constitute a part of
this Prospectus.

"ICOS" is a registered trademark of the Company. This Prospectus also
contains trademarks other than those of the Company.

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus or incorporated herein by
reference. The 4,800,000 shares of Common Stock initially being offered in the
United States and the 1,200,000 shares of Common Stock initially being offered
outside the United States and Canada are collectively referred to herein as the
"Offerings." Unless otherwise indicated, the information in this Prospectus
assumes that the Underwriters' over-allotment option will not be exercised. The
shares of Common Stock offered hereby involve a high degree of risk. Investors
should carefully consider the information set forth under the heading "Risk
Factors."

THE COMPANY

The primary objective of ICOS Corporation ("ICOS" or the "Company") is to
discover and develop new pharmaceuticals for the treatment of inflammatory and
other serious diseases by seeking points of intervention in the inflammatory
process that may lead to more specific and efficacious drugs. The Company's
strategy is to identify therapeutic targets through an understanding of
inflammation at the molecular level. ICOS scientists have discovered important
cellular and molecular mechanisms underlying directed cell movement, the
inhibition of pro-inflammatory mediators and intracellular signal transduction.
Each of these different mechanisms may provide broad opportunities in the
treatment of chronic diseases that have inflammatory components, such as
multiple sclerosis ("MS"), and in the treatment of acute inflammatory
conditions, such as those associated with hemorrhagic shock, ischemic stroke,
myocardial infarction ("MI"), graft versus host disease ("GvHD"), acute
respiratory distress syndrome ("ARDS") and acute pancreatitis.

In April 1996, ICOS began a Phase 2 clinical trial of Hu23F2G in patients
with trauma-induced hemorrhagic shock. Hu23F2G is a recombinant humanized
monoclonal antibody developed by ICOS to block CD11/CD18-mediated cell adhesion.
In December 1995, the Company completed a Phase 1 clinical trial of Hu23F2G in
patients with chronic MS. This Phase 1 trial was designed to gather safety and
pharmacological data for single dose administration of Hu23F2G. A second Phase 1
clinical trial for MS, which includes multiple dose administration of Hu23F2G,
began in late 1995. To date, Hu23F2G has been administered to over 40 patients
with chronic MS to demonstrate the safety of the product. Based on data from the
Phase 1 clinical trials, ICOS plans to initiate additional Phase 2 clinical
trials of Hu23F2G for the treatment of inflammation associated with MS, ischemic
stroke, MI and acute peripheral arterial occlusion. ICOS currently is producing
Hu23F2G to support Phase 1 and Phase 2 clinical trials.

In March 1996, the Company began Phase 1 clinical trials to gather safety
and pharmacological data on recombinant platelet-activating factor
acetylhydrolase ("rPAF-AH") for the treatment of ARDS. rPAF-AH is a recombinant
form of a naturally occurring antagonist of the pro-inflammatory mediator known
as platelet-activating factor ("PAF"). The inhibitory activity of rPAF-AH on
PAF-induced inflammation has been demonstrated in both in vitro and in vivo
preclinical studies. Additionally, ICOS is conducting preclinical studies of
rPAF-AH for a number of indications including asthma, acute pancreatitis,
inflammatory bowel disease ("IBD"), solid organ transplant preservation and
necrotizing enterocolitis ("NEC"). ICOS currently is producing rPAF-AH for use
in clinical trials.

In 1995, Phase 1 clinical trials began on PDE-5, a compound that has been
jointly developed under the Company's collaboration with Glaxo Wellcome p.l.c.
("Glaxo Wellcome") for the treatment of angina, congestive heart failure and
male erectile dysfunction ("MED"). PDE-5 is a novel phosphodiesterase ("PDE")
inhibitor that alters intracellular signal transduction. Compounds targeting
other PDE family members are also being evaluated in preclinical models of
certain inflammatory diseases.

ICOS' product development strategy is focused on the early acquisition of
Phase 2 data to determine a particular product candidate's utility in a specific
disease indication. To this end, ICOS has adopted a strategy of performing Phase
1 clinical trials that are designed to support the initiation of multiple Phase
2 clinical trials in distinct indications for each product candidate in order to
increase the likelihood of identifying clinically relevant indications. This
approach promotes an early identification of those disease indications whose
pathology is affected by the study drug and permits the Company to conduct
clinical trials in a parallel fashion.

Additionally, the Company has established a proprietary position and has
research programs in the areas of: (i) novel cell adhesion molecules such as
ICAM-3, ICAM-4 and Alpha d; (ii) novel cell-cycle checkpoint mediators; (iii)
additional members of the PDE enzyme family; (iv) anchoring proteins that
regulate important signal transduction enzymes in a cell-type specific manner;
and (v) novel chemokines. The Company has established a capacity to identify and
produce antibody- and enzyme-based therapeutics based on these programs. Also,
in order to more fully exploit its discoveries, the Company has put in place an
infrastructure designed to discover and develop small molecule-based therapeutic
agents.

3
<PAGE> 4

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Company.......... 6,000,000 shares
Common Stock to be Outstanding after the
Offerings.................................. 38,301,208 shares(1)
Use of Proceeds.............................. Research and product development, preclinical
testing and clinical trials, facilities
expansion and general corporate purposes. See
"Use of Proceeds."
Nasdaq Stock Market Symbol................... ICOS
</TABLE>

- ---------------
(1) Based on the number of shares outstanding at March 31, 1996, excluding
4,323,127 shares of Common Stock reserved for issuance upon the exercise of
outstanding options.

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 21, 1989
(INCORPORATION) YEAR ENDED DECEMBER 31,
THROUGH ---------------------------------------------------
DECEMBER 31, 1995 1995 1994 1993 1992 1991
------------------ -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Collaborative research and development
revenue...................................... $ 3,500 $ 1,500 $ -- $ -- $ 2,000 $ --
Research grant revenue......................... 1,452 -- -- 90 522 806
-------- -------- -------- -------- -------- -------
Total revenue.................................. 4,952 1,500 -- 90 2,522 806
Operating expenses:
Research and development....................... 85,692 24,039 21,272 18,116 11,913 7,748
General and administrative..................... 15,398 2,482 2,835 2,873 2,946 2,488
-------- -------- -------- -------- -------- -------
Total operating expenses....................... 101,090 26,521 24,107 20,989 14,859 10,236
-------- -------- -------- -------- -------- -------
Operating loss................................... (96,138) (25,021) (24,107) (20,899) (12,337) (9,430)
Other income (expense):
Investment income.............................. 15,218 1,769 1,498 3,134 4,218 3,321
Other, net..................................... (995) (117) (139) (173) (193) (304)
-------- -------- -------- -------- -------- -------
Total other income (expense)................... 14,223 1,652 1,359 2,961 4,025 3,017
-------- -------- -------- -------- -------- -------
Net loss......................................... $(81,915) $(23,369) $(22,748) $(17,938) $ (8,312) $(6,413)
======== ======== ======== ======== ======== =======
Net loss per common share........................ $ (0.73) $ (0.88) $ (0.71) $ (0.34) $ (0.31)
======== ======== ======== ======== =======
Weighted average common shares outstanding....... 32,194 25,946 25,401 24,198 20,878
======== ======== ======== ======== =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents, investment securities available for sale and interest
receivable ........................................................................... $ 21,376 $ 64,016
Working capital......................................................................... 17,666 60,306
Total assets............................................................................ 37,736 80,376
Long-term debt.......................................................................... -- --
Deficit accumulated during the development stage........................................ (81,915) (81,915)
Stockholders' equity.................................................................... 33,292 75,932
</TABLE>

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

(1) Adjusted to reflect the net proceeds from the sale of the 6,000,000 shares
of Common Stock in the Offerings at a public offering price of $7.625 per
share.

In this Prospectus, references to "dollar" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its territories and all areas subject to its jurisdiction.
------------------------

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

4
<PAGE> 5

RISK FACTORS

An investment in the shares being offered hereby involves a high degree of
risk. Prospective investors should carefully consider the following risk
factors, in addition to the other information contained in this Prospectus,
before purchasing the shares of Common Stock offered hereby.

EARLY STAGE OF DEVELOPMENT; LACK OF COMMERCIAL PRODUCTS; NO ASSURANCE OF
SUCCESSFUL PRODUCT DEVELOPMENT

ICOS was founded in 1989 and commenced operations in September 1990 to
discover and develop new pharmaceuticals for inflammatory conditions and related
diseases. To achieve profitable operations, the Company, alone or with others,
must successfully identify, develop, introduce and market proprietary products.
The Company does not have any products available for sale nor does it expect to
have any products commercially available for at least the next several years, if
at all. The Company's potential products will require significant additional
development, preclinical and clinical testing, regulatory approval and
additional investment prior to commercialization. The Company's potential
products are at early stages of research and development, with only limited
human testing of certain of the Company's products undertaken to date. There can
be no assurance that any potential products will be successfully developed,
prove to be safe and efficacious in clinical trials, meet applicable regulatory
standards, be capable of being produced in commercial quantities at acceptable
costs or be successfully marketed.

CONTINUING OPERATING LOSSES; FUTURE CAPITAL REQUIREMENTS

The Company had an accumulated deficit as of December 31, 1995 of
approximately $81.9 million. All of the Company's revenues to date have
consisted of interest income, research funding under collaborative agreements
with Glaxo Wellcome and Abbott Laboratories and a limited number of research
grants transferred to the Company. The Company anticipates that its operating
expenses and capital expenditures will increase significantly in 1996 and
subsequent years as it adds the personnel and facilities associated with
advancing products through development and clinical trials. Incremental costs in
the future may include, but are not limited to, those associated with the
Company's own product development, preclinical studies and clinical trials, and
patent filings. Other incremental costs may also include, but are not limited
to, preclinical studies and clinical trials, patent filings and administrative
activities required as part of corporate or other collaborative research or
development efforts or contracted research or development activities.
Furthermore, the Company expects to incur substantial costs for the expansion of
its research, development, manufacturing and administrative facilities. Although
the Company expects its production facility currently under construction to be
suitable for production of sufficient quantities of the Company's products for
early-stage clinical trials of its recombinant products, such facility may not
be capable of or suitable for producing the quantity of the Company's products
necessary for all clinical trials or commercial sale. The Company does not have
facilities for the manufacture of small molecule products. If the Company
chooses to establish additional manufacturing capability, significant capital
expenditures would be required.

The Company expects to incur increasing operating losses at least until
sales of its potential products commence. The development of the Company's
products will require the commitment of substantial resources to conduct the
time-consuming research, preclinical development and clinical trials necessary
to bring such products to market and to establish production and marketing
capabilities. There can be no assurance that the Company will generate
significant revenues or achieve profitability. The Company has, and expects to
have, fluctuations in quarterly results based on recognition of collaborative
and contract revenues, expenses and losses. Some of these fluctuations could be
significant.

The development of products in connection with the Company's collaboration
with Glaxo Wellcome will also require the commitment of Company resources. One
compound under the collaboration has entered exploratory development. Under the
terms of the Glaxo Wellcome collaboration, if this or any other compound moves
from exploratory to full development, the Company will incur substantial
additional expense in order to support its portion of the development
activities. The Company will recognize these potentially significant expenses
once its liability for them has been established.

5
<PAGE> 6

The Company anticipates that its existing capital resources, together with
the net proceeds of this offering, should be sufficient to fund its cash
requirements through 1997. The preceding forward-looking statement is subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. The amounts and timing of expenditures will
depend on the progress of ongoing research and development, the results of
preclinical testing and clinical trials, the rate at which operating losses are
incurred, the execution of any development and licensing agreements with
corporate partners, the Company's development of products, the United States
Food and Drug Administration ("FDA") regulatory process and other factors, many
of which are beyond the Company's control.

The Company will need to raise substantial additional funds for its
operations. The Company may seek additional funding through public or private
financings, including equity financings, and through other arrangements,
including collaborative arrangements. Any additional financings may be dilutive
to stockholders and debt financing, if available, may involve restrictions on
dividends and other restrictions on the Company. Adequate funds, whether through
financial markets or collaborative or other arrangements with corporate partners
or from other sources, may not be available when needed or, if available, on
terms acceptable to the Company. Lack of sufficient additional funds may require
the Company to delay, scale back or eliminate some or all of its research and
product development programs or to license others to commercialize products or
technologies that the Company would otherwise seek to develop itself. See "Use
of Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."

UNCERTAINTY ASSOCIATED WITH PRECLINICAL AND CLINICAL TESTING

Before obtaining regulatory approvals for the commercial sale of any of the
Company's potential products, the products will be subjected to extensive
preclinical and clinical testing to demonstrate their safety and efficacy in
humans. Results of initial preclinical and clinical testing of products under
development by the Company are not necessarily indicative of results that will
be obtained from subsequent or more extensive preclinical and clinical testing.
Furthermore, there can be no assurance that clinical trials of products under
development will be completed or will demonstrate the safety and efficacy of
such products at all or to the extent necessary to obtain regulatory approvals.
Companies in the biotechnology industry have suffered significant setbacks in
advanced clinical trials, even after achieving promising results in earlier
trials. The failure to adequately demonstrate the safety and efficacy of a
therapeutic product under development could delay or prevent regulatory approval
of the product and could have a material adverse effect on the Company.

The rate of completion of clinical trials depends on, among other factors,
the enrollment of patients. Patient accrual is a function of many factors,
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. Delays in planned patient enrollment in the
Company's current clinical trials or future clinical trials may result in
increased costs, program delays or both, which could have a material adverse
effect on the Company.

A significant aspect of the Company's clinical development strategy
includes performing Phase 1 clinical trials that are designed to support the
initiation of multiple Phase 2 clinical trials in distinct clinical indications
for each product candidate. Although one Phase 2 trial has been initiated by the
Company, there can be no assurance that the Phase 1 clinical trials will yield
data to support entering into any additional Phase 2 trials. Any adverse results
in a Phase 1 clinical trial could affect the Company's business prospects by
potentially rendering irrelevant extensive prior research and preclinical
testing on a product candidate with respect to each of its potential
indications.

GOVERNMENTAL REGULATION; NO ASSURANCE OF PRODUCT APPROVAL

The FDA and comparable agencies in foreign countries impose substantial
requirements on biotechnology and pharmaceutical companies prior to the
introduction of therapeutic products. These requirements include lengthy and
detailed laboratory and clinical testing procedures, sampling activities and
other costly and time-consuming procedures. Satisfaction of these requirements
typically takes a number of years and varies substantially based on the type,
complexity and novelty of the pharmaceutical. The Company cannot

6
<PAGE> 7

accurately predict when it might submit product applications or submissions for
FDA or other regulatory review. Governmental regulation also affects the
manufacture and marketing of pharmaceutical products.

Any future FDA or other governmental approval of products developed by the
Company may entail limitations on the indicated uses for which such products may
be marketed. Approved products may be subject to additional testing and
surveillance programs as required by regulatory agencies. In addition, product
approvals may be withdrawn or limited for noncompliance with regulatory
standards or the occurrence of unforeseen problems following initial marketing.
In the event that the Company were to manufacture therapeutic products for
commercial sale, it would be required to adhere to applicable standards for
manufacturing practices and to engage in extensive record keeping and reporting,
and its manufacturing facilities would be subject to periodic inspections by
state and federal agencies, including the FDA and comparable agencies in foreign
countries. See "Business -- Governmental Regulation."

The effect of governmental regulation may be to delay marketing new
products for a considerable period of time, to impose costly requirements on the
Company's activities or to provide a competitive advantage to other companies
that compete with the Company. There can be no assurance that FDA or other
regulatory approval for any products developed by the Company will be granted on
a timely basis, if at all. Adverse clinical results by others could have a
negative impact on the regulatory process and timing. A delay in obtaining or
failure to obtain regulatory approvals could adversely affect the marketing of
the Company's products and the Company's liquidity and capital resources. The
extent of potentially adverse governmental regulation that might arise from
future legislation or administrative action cannot be predicted.

The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with its research
work. The extent and character of governmental regulation that might result from
future legislation or administrative action cannot be accurately predicted.

UNCERTAIN AVAILABILITY OF THIRD-PARTY REIMBURSEMENT AND PRODUCT PRICING

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

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

LIMITED MANUFACTURING CAPABILITY; NO MARKETING OR SALES CAPABILITY

The Company currently anticipates the need to hire additional personnel
skilled in the manufacturing, clinical testing and regulatory compliance
processes. There can be no assurance that the Company will be able to acquire
such resources or establish relationships with others to supplement its
resources. Although the Company is completing construction of a facility for
production of purified recombinant protein bulk product,

7
<PAGE> 8

it does not currently have, and the current expansion is not expected to
provide, sufficient manufacturing capacity to manufacture its potential products
in commercial quantities. Moreover, such capacity may be inadequate to complete
all clinical trials contemplated by the Company. The Company does not have
facilities for the manufacture of small molecule products. Although the Company
expects to develop such capacity by expanding its current facilities, building
new facilities or contracting with others for manufacturing services, there can
be no assurance that such capacity will be developed or be available on a timely
basis. See "Business -- Process Development/Clinical Manufacturing."

Should the Company decide to market certain of its potential products
through a direct sales force in certain markets, if and when regulatory
approvals are obtained, it would be required to either hire a sales force with
expertise or contract with a third party to provide a sales force. There can be
no assurance that the Company will be able to establish such a sales force or be
successful in establishing other channels for distributing its potential
products.

DEPENDENCE ON OTHERS

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

UNCERTAINTY RELATING TO PATENTS AND PROPRIETARY RIGHTS

The Company's ability to compete effectively with others is materially
dependent on the proprietary nature of the Company's patents and technologies.
The Company has filed a number of patent applications and continues to actively
seek patent protection for its proprietary technology, both in the United States
and abroad. The Company has licensed rights to certain proprietary technology
from research institutions to which it is obligated to pay royalties if it
develops products incorporating the licensed technology. The Company has rights
to patent applications filed for this licensed technology on behalf of these
institutions.

Because of the length of time and expense associated with bringing new
products through development and the governmental approval process to the
marketplace, the pharmaceutical industry has traditionally placed considerable
importance on obtaining and maintaining patent and trade secret protection for
significant new technologies, products and processes. The Company and other
biotechnology and pharmaceutical firms have applied, and are applying, for
patents for their products and certain aspects of their technologies. The
enforceability of patents issued to biotechnology and pharmaceutical firms is
highly uncertain. Federal court decisions indicating legal considerations
surrounding the validity of patents in the field are in transition, and there
can be no assurance that the historical legal standards surrounding questions of
validity will continue to be applied or that current defenses as to issued
patents in the field will, in fact, be considered substantial in the future. In
addition, there can be no assurance as to the degree and range of protection any
patents will afford, whether patents will issue or the extent to which the
Company will be successful in not infringing patents granted to others.

While the Company pursues patent protection for products and processes
where appropriate, it also relies on trade secrets, know-how and continuing
technological advancement to develop and maintain its competitive

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<PAGE> 9

position. The Company's policy is to have each employee enter into an agreement
that contains provisions prohibiting the disclosure of confidential information
to anyone outside the Company. Research and development contracts and
relationships between the Company and its scientific consultants provide access
to aspects of the Company's know-how that is protected generally under
confidentiality agreements with the parties involved. There can be no assurance,
however, that these confidentiality agreements will be honored or that the
Company can effectively protect its rights to its unpatented trade secrets.
Moreover, there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets. See "Business -- Patents and Trade
Secrets."

The Company may be required to obtain licenses to patents or other
proprietary rights from third parties. There can be no assurance that any
licenses required under any patents or proprietary rights will be made available
on terms acceptable to the Company, if at all. If the Company does not obtain
required licenses, it could encounter delays in product development while it
attempts to redesign products or methods or it could find that the development,
manufacture or sale of products requiring such licenses could be foreclosed.

In addition, the Company could incur substantial costs in defending any
patent litigation brought against it or in asserting the Company's patent
rights, including those licensed to the Company by others, in a suit against
another party. The United States Patent and Trademark Office (the "USPTO") could
institute interference proceedings in connection with one or more of the
Company's patents or patent applications, which proceedings could result in an
adverse decision as to priority of an invention. The USPTO also could institute
reexamination proceedings in connection with one or more of the Company's
patents or patent applications, which could result in an adverse decision as to
the patents' validity or scope.

TECHNOLOGICAL CHANGE AND COMPETITION

The Company is engaged in fields characterized by extensive research
efforts and rapid technological development. New drug discoveries and
developments in recombinant-DNA technology, combinatorial chemistry, rational
drug design and other pharmaceutical processes are expected to continue at a
rapid pace in both industry and academia. The Company is involved in an
intensely competitive field. There are many companies and institutions, both
public and private, including pharmaceutical companies, chemical companies,
specialized biotechnology companies and research, government or academic
institutions, that are engaged in developing synthetic pharmaceuticals and
biotechnological products for human therapeutic applications, including the
applications targeted by the Company.

A number of competitors are conducting research and development in the
areas of cell-trafficking, mediators of inflammation and intracellular signal
transduction, and research by others specifically addresses areas of technology
targeted by the Company. Many of these companies have substantially more
capital, research and development, regulatory, manufacturing, marketing, human
and other resources and experience than the Company and represent significant
long-term competition for the Company. Such competitors may succeed in
developing products that are more effective or less costly than any that may be
developed by the Company and may also be more successful than the Company in
production and marketing. In addition, other recently developed technologies
are, or may in the future be, the basis for competitive products. There can be
no assurance that competitors will not succeed in developing technologies and
products that are more effective than any being developed by the Company or that
would render the Company's technology and products obsolete or noncompetitive.
See "Business -- Competition."

DEPENDENCE ON KEY MANAGEMENT AND QUALIFIED PERSONNEL

The Company is dependent on its staff and management team. The loss of any
of these individuals could adversely affect the Company. Because of the
specialized scientific nature of the Company's business, the Company is also
highly dependent on its ability to attract and retain qualified scientific,
technical and key management personnel. The Company's activities will require
additional expertise in such areas as preclinical testing, clinical trial
management, regulatory affairs, manufacturing and marketing. These activities
will require additional personnel, including management, and the development of
additional expertise by existing

9
<PAGE> 10

management. There is intense competition for qualified personnel in the areas of
the Company's activities, and there can be no assurance that ICOS will be able
to continue to attract and retain qualified personnel necessary for the
development of its business. See "Management -- Directors and Executive
Officers."

POTENTIAL PRODUCT LIABILITY

The Company faces an inherent business risk of exposure to product
liability claims in the event that the use of its technology or products is
alleged to have resulted in adverse effects. Such risk exists in human clinical
trials and even with respect to those products, if any, that receive regulatory
approval for commercial sale. There can be no assurance that the Company can
avoid significant product liability exposure. Although the Company has in place
product liability insurance relevant to its current level of clinical trials,
there can be no assurance that the Company will be able to obtain or maintain
such insurance in the future on acceptable terms or that such insurance will
provide adequate coverage against potential liabilities either for clinical
trials or commercial sales if and when they commence. There can be no assurance
that adequate insurance coverage will be available at acceptable costs, if at
all. A product liability claim or recall could materially adversely affect the
business, financial condition or future prospects of the Company.

HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS

The Company's research and development activities involve the controlled
use of hazardous materials, chemicals, viruses and radioactive compounds. The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. Although the Company believes that its safety procedures
for the handling and disposal of such materials comply with the standards
prescribed by such laws and regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that result
and any such liability could exceed the Company's resources. The Company may be
required to incur significant costs to comply with environmental laws and
regulations in the future. The Company's operations, business or assets may be
materially adversely affected by current or future environmental laws or
regulations. See "Business -- Governmental Regulation."

VOLATILITY OF COMMON STOCK PRICE

Investors should be aware that market prices for securities of
biotechnology companies have been highly volatile. This volatility has had a
significant effect on the market prices of securities of many companies in the
sector for reasons other than such companies' operating performance. The Company
believes that factors such as the results of preclinical studies and clinical
trials by the Company, its competitors or other companies, other evidence of the
safety or efficacy of products of the Company, its competitors or other
companies, announcements of technological innovations or new products by the
Company, its competitors or other companies, announcements of technological or
product setbacks or failures by the Company, its competitors or other companies,
developments as to current or future collaborations by the Company, its
competitors or other companies, changes in governmental regulation, the status
of healthcare reform, developments in patent or other proprietary rights of the
Company, its competitors or other companies, including litigation, fluctuations
in the Company's results of operations and changes in general market conditions
for biotechnology stocks could have a significant effect on the future price of
the Common Stock.

DILUTION; ABSENCE OF DIVIDENDS

Purchasers of shares of Common Stock in the Offerings will experience
immediate and substantial dilution in the net tangible book value of their
shares. Further dilution will occur upon the exercise of outstanding stock
options, the expiration dates of which do not occur for a number of years. See
"Dilution."

The Company has never declared or paid dividends on its Common Stock and
does not anticipate paying any dividends in the foreseeable future. See
"Dividend Policy."

10
<PAGE> 11

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 6,000,000 shares of
Common Stock offered in the Offerings, at a public offering price of $7.625 per
share, are estimated to be approximately $42.6 million (approximately $49.1
million if the Underwriters' over-allotment option is exercised in full) after
deducting underwriting discounts and commissions and estimated offering
expenses.

The Company anticipates that the net proceeds will be used for continued
research and product development, funding of preclinical testing and clinical
trials, expansion of the Company's facilities and general corporate purposes.
Approximately 85% of the net proceeds is expected to be used to fund existing
research and product development programs and clinical trials. Approximately 15%
is expected to be used for expansion of the Company's current facilities,
purchase of capital equipment and general corporate purposes.

The Company believes that its available cash resources and the net proceeds
from the Offerings should be adequate to fund its currently planned cash
requirements through 1997.

The preceding forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. The amounts and timing of expenditures will depend on the progress of
ongoing research and development, the results of preclinical testing and
clinical trials, the rate at which operating losses are incurred, the execution
of any development and licensing agreements with corporate partners, the
Company's development of products, the FDA regulatory process and other factors,
many of which are beyond the Company's control. Additional capital resources
will be required to fund the Company's operations through the commercialization
of its first product.

Pending such uses, the Company intends to invest the net proceeds of the
Offerings in high-grade, interest-bearing financial instruments.

PRICE RANGE OF COMMON STOCK

The Common Stock is traded on The Nasdaq Stock Market under the symbol
ICOS. The following table sets forth, for the periods indicated, the range of
high and low sales prices for the Common Stock as reported by Nasdaq.

<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1994
First Quarter.............................................................. $ 6 1/8 $5 3/8
Second Quarter............................................................. 5 1/2 4
Third Quarter.............................................................. 5 1/4 3
Fourth Quarter............................................................. 4 7/8 3 3/8
1995
First Quarter.............................................................. $ 5 $3 3/8
Second Quarter............................................................. 6 1/2 3 7/8
Third Quarter.............................................................. 8 1/8 5 5/8
Fourth Quarter............................................................. 7 5/8 5 1/4
1996
First Quarter.............................................................. $10 3/8 $6 1/2
Second Quarter (through May 7, 1996)....................................... 9 3/4 7 5/8
</TABLE>

On May 7, 1996, the last reported sales price for the Common Stock on The
Nasdaq Stock Market was $7.75 per share. As of May 6, 1996, there were
approximately 2,325 holders of record of the Common Stock.

11
<PAGE> 12

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its Common Stock
and does not anticipate paying any dividends in the foreseeable future. The
Company currently intends to retain its earnings, if any, for use in expanding
its business.

DILUTION

As of December 31, 1995, the net tangible book value of the Company was
$33,292,358, or $1.033 per share. Net tangible book value per share is equal to
net tangible assets (tangible assets of the Company less total liabilities)
divided by the total number of shares of Common Stock outstanding. After giving
effect to the sale of the 6,000,000 shares of Common Stock by the Company in the
Offerings at a public offering price of $7.625 per share and the receipt of the
estimated net proceeds therefrom, the pro forma net tangible book value of the
Company as of December 31, 1995 would have been $75,932,358, or $1.986 per
share. This represents an immediate increase in net tangible book value of
$0.953 per share to existing stockholders and an immediate dilution of $5.639
per share to new investors in the Offerings. The following table illustrates
this pro forma per share dilution:

<TABLE>
<S> <C> <C>
Public offering price.............................................. $7.625
Net tangible book value before Offerings......................... $1.033
Increase attributable to new investors........................... 0.953
------
Pro forma net tangible book value after Offerings.................. 1.986
------
Dilution of net tangible book value to new investors............... $5.639
======
</TABLE>

12
<PAGE> 13

SELECTED FINANCIAL DATA

The following selected financial data as of December 31, 1995, 1994, 1993,
1992 and 1991 and for each of the years ended December 31, 1995, 1994, 1993,
1992 and 1991 and the period from September 21, 1989 (incorporation) through
December 31, 1995 have been derived from the financial statements of the
Company, which have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. The data should be read in conjunction with the financial
statements, related notes, the audit report, which refers to a change in the
method of accounting for investments effective January 1, 1994, and other
financial information incorporated herein by reference.

<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 21, 1989
(INCORPORATION) YEAR ENDED DECEMBER 31,
THROUGH -----------------------------------------------------------------------
DECEMBER 31, 1995 1995 1994 1993 1992 1991
------------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Collaborative research and
development revenue......... $ 3,500,000 $ 1,500,000 $ -- $ -- $ 2,000,000 $ --
Research grant revenue........ 1,451,409 -- -- 90,076 522,053 805,656
------------ ------------ ------------ ------------ ------------ ------------
Total revenue................. 4,951,409 1,500,000 -- 90,076 2,522,053 805,656
Operating expenses:
Research and development...... 85,691,604 24,039,185 21,272,072 18,116,077 11,913,090 7,746,993
General and administrative.... 15,397,989 2,482,306 2,834,984 2,872,820 2,945,712 2,488,374
------------ ------------ ------------ ------------ ------------ ------------
Total operating expenses...... 101,089,593 26,521,491 24,107,056 20,988,897 14,858,802 10,235,367
------------ ------------ ------------ ------------ ------------ ------------
Operating loss.................. (96,138,184) (25,021,491) (24,107,056) (20,898,821) (12,336,749) (9,429,711)
Other income (expense):
Investment income............. 15,218,080 1,768,725 1,497,542 3,133,990 4,217,827 3,321,374
Other, net.................... (994,572) (115,824) (138,686) (173,099) (193,206) (304,449)
------------ ------------ ------------ ------------ ------------ ------------
Total other income
(expense)................... 14,223,508 1,652,901 1,358,856 2,960,891 4,024,621 3,016,925
------------ ------------ ------------ ------------ ------------ ------------
Net loss........................ $(81,914,676) $(23,368,590) $(22,748,200) $(17,937,930) $ (8,312,128) $(6,412,786)
============ ============ ============ ============ ============ ============
Net loss per common share....... $ (0.73) $ (0.88) $ (0.71) $ (0.34) $ (0.31)
============ ============ ============ ============ ============
Weighted average common shares
outstanding................... 32,194,018 25,945,660 25,401,426 24,198,483 20,877,611
============ ============ ============ ============ ============
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents, investment securities
available for sale and interest receivable........ $ 21,376,428 $ 44,484,696 $ 44,401,520 $ 63,917,918 $53,219,448
Working capital..................................... 17,665,786 41,755,309 42,820,289 61,832,202 50,908,561
Total assets........................................ 37,735,530 58,534,563 58,870,294 77,495,139 60,829,749
Obligations under capital lease, excluding current
installments...................................... -- 73,894 984,495 1,682,135 2,332,433
Deficit accumulated during the development stage.... (81,914,676) (58,546,086) (35,797,886) (17,859,956) (9,547,828)
Stockholders' equity................................ 33,292,358 55,019,944 55,595,097 73,028,867 55,490,482
</TABLE>

<PAGE> 14

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Overview

The Company's mission is to improve the quality of life and health for
people worldwide by leading in the discovery, development and commercialization
of novel therapeutics by focusing on molecular targets in inflammatory and other
serious diseases. The Company has discovered important mechanisms underlying
directed cell movement, the inhibition of pro-inflammatory mediators and
intracellular signal transduction that may provide broad opportunities in the
treatment of inflammatory diseases and conditions.

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

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

During 1994, the Company initiated a Phase 1 clinical trial of Hu23F2G in
patients with chronic progressive MS. In addition, PDE-5, a compound targeting
cardiovascular diseases that was developed as part of the collaboration with
Glaxo Wellcome, entered exploratory development in early 1994. A number of other
compounds based on molecules discovered by Company scientists were in
preclinical development as potential product candidates during 1994. The Company
also filed several new patent applications based on results of its research
efforts. In November 1994, the Company completed a Rights Offering of 6,425,000
shares of Common Stock to existing stockholders that provided total net proceeds
of $22,733,986.

During 1995, the Company completed a Phase 1 single dose clinical trial of
Hu23F2G in patients with chronic progressive MS. In 1995, Phase 1 clinical
trials began on PDE-5, a compound that has been jointly developed under the
Glaxo Wellcome collaboration, for the treatment of angina, congestive heart
failure and MED. In addition, the Company established a research and development
collaboration with Abbott Laboratories in an area of cell adhesion/signal
transduction.

The Company had an accumulated deficit of $81,914,676 during the
development stage as of December 31, 1995. The Company's results of operations
may vary significantly from quarter to quarter and will depend, among other
factors, on the timing of certain expenses, payments received on certain
research collaborations and the progress of the Company's research and
development efforts. ICOS expects increased expenditures over the next several
quarters as the Company plans to expand clinical studies on its product
candidate Hu23F2G for treatment of MS and other medical indications. In
addition, the Company began clinical trials on rPAF-AH in March 1996 and
anticipates expanding preclinical research and development activities for other
additional potential products and commencing clinical studies on those deemed
most promising.

Year Ended December 31, 1995 Compared with the Year Ended December 31, 1994

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

14
<PAGE> 15

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

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

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

Year Ended December 31, 1994 Compared with the Year Ended December 31, 1993

There was no revenue in 1994 as compared to revenue of $90,076 in 1993,
which consisted of payments from government research grants, all of which
expired in 1993.

Total operating expenses increased 15% to $24,107,056 in 1994 from
$20,988,897 in 1993. Research and development expenses increased 17% to
$21,272,072 in 1994 from $18,116,077 in 1993. This increase reflects accelerated
development and preclinical activities related to several potential product
projects, as well as costs of clinical trials of Hu23F2G. Research and
development costs represented 88% of total operating expenses in 1994. General
and administrative expenses decreased slightly to $2,834,984 in 1994 from
$2,872,820 in 1993.

Investment income for 1994 decreased 52% to $1,497,542 from $3,133,990 in
1993. The decrease is attributable to lower average invested cash balances and
the recognition of a loss on the sale of an investment security.

The Company's net loss increased 27% to $22,748,200 for 1994 as compared to
a net loss of $17,937,930 for 1993.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations since inception through private and
public sales of Common Stock, investment income, revenue from research
collaborations and grants and a capital lease. Through December 31, 1995, the
Company had raised $30,762,901 in net proceeds from private sales of Common
Stock, a total of $57,988,708 in net proceeds from two public offerings of
Common Stock, $22,733,986 in net proceeds from a Rights Offering of Common Stock
to existing stockholders and $3,799,189 from the exercise of stock options and
warrants. It had earned $15,218,080 in investment income and $4,951,409 in
research-related revenue.

At December 31, 1995, the Company had $21,376,428 in cash and cash
equivalents, investment securities available for sale and interest receivable.
Through December 31, 1995, the Company had invested a total of $23,553,789 in
production facilities, laboratory and computer equipment, furniture and
leasehold improvements. In addition, the Company has invested $2,309,979 in land
for future facilities expansion. The Company anticipates that its operating
expenses will increase in 1996 and subsequent years as it adds the personnel and
facilities associated with advancing several potential products through
development and clinical trials. Foreseeable incremental costs may include, but
are not limited to, those associated with the Company's product development,
preclinical studies and clinical trials, patent filings and administrative
activities. In addition, the Company may incur obligations and costs under the
Glaxo Wellcome collaboration agreement related to its portion of development
costs for potential products developed under the agreement. Under certain
provisions of the collaboration agreement, the Company is only liable for
certain of these costs if the product candidate has successfully passed certain
milestones in the development process. The Company will recognize these
potentially significant costs once its liability for them has been established.

The Company expects to continue to enter into collaborations with other
parties where the work complements that at ICOS. These relationships may involve
commitments by ICOS to fund some or all of certain research programs over a
defined period. Although corporate collaborations have provided revenue to

15
<PAGE> 16

the Company in the past, there can be no assurance that similar sources of funds
will be available to the Company in the future. The Company plans to hire the
additional personnel necessary to continue its discovery research, as well as
continue development of its current portfolio of product candidates, and to
continue to modify its existing facilities in the future to complete a
production facility and add additional laboratory and office space. Further
expenditures will be required for additional laboratory, development and office
facilities to accommodate the activities and personnel associated with
discovering new and novel disease mechanisms and developing current and
potential products with a view toward expanding the number of clinical trials in
the future. All these activities will require substantial financial resources.
There can be no assurance that the Company will have sufficient resources to
fund the cost of such activities or that the Company will be able to obtain
additional resources on acceptable terms or in time to fund any necessary or
desirable expenditures.

The Company anticipates that its existing capital resources, together with
the net proceeds of the Offerings, should be sufficient to fund its cash
requirements through 1997. The preceding forward-looking statement is subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. The amounts and timing of expenditures will
depend on the progress of ongoing research and development, the results of
preclinical testing and clinical trials, the rate at which operating losses are
incurred, the execution of any development and licensing agreements with
corporate partners, the Company's development of products, the FDA regulatory
process and other factors, many of which are beyond the Company's control. The
Company's existing capital resources will not be sufficient to fund the
Company's operations through commercialization of its first product. The Company
will need to raise substantial additional funds for its programs.

NEW PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), which establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS 121 requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company adopted SFAS 121 as of January 1996.
Management believes adoption of SFAS 121 will not significantly impact the
Company's financial position and results of operations.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), which addresses the
accounting for stock-based compensation arrangements. SFAS 123 permits a company
to choose either a new fair value-based method or the current Accounting
Principles Board ("APB") Opinion 25 intrinsic value-based method of accounting
for stock-based compensation arrangements. SFAS 123 requires pro forma
disclosures of net income and earnings per share computed as if the fair
value-based method had been applied in financial statements of companies that
continue to follow current practice in accounting for such arrangements under
APB Opinion 25. The Company must adopt SFAS 123 for the fiscal year ending
December 31, 1996. The Company will continue to record stock-based compensation
using the current APB Opinion 25 intrinsic value-based method and therefore
believes adoption of SFAS 123 will not impact its financial position and results
of operations.

16
<PAGE> 17

BUSINESS

OVERVIEW

ICOS' primary objective is to discover and develop new pharmaceuticals for
the treatment of inflammatory and other serious diseases by seeking points of
intervention in the inflammatory process that may lead to more specific and
efficacious drugs.

The Company's strategy is to identify therapeutic targets through an
understanding of inflammation at the molecular level. ICOS scientists have
discovered important cellular and molecular mechanisms underlying directed cell
movement, the inhibition of pro-inflammatory mediators and intracellular signal
transduction. Each of these different mechanisms may provide broad opportunities
in the treatment of chronic diseases that have inflammatory components, such as
MS, and in the treatment of acute inflammatory conditions, such as those
associated with hemorrhagic shock, ischemic stroke, acute pancreatitis, ARDS, MI
and GvHD. Moreover, ICOS' signal transduction programs in PDE inhibitors and
cell cycle checkpoint enzymes have yielded additional approaches to certain
cardiovascular diseases and cancer. ICOS believes that its discoveries will
allow it to develop novel therapeutics that are more selective in their
activities than existing drugs.

Although each step in the inflammation process can be viewed as a potential
target for therapeutic intervention, ICOS employs a critical strategy in
evaluating potential product opportunities and developing its product
candidates:

- ICOS concentrates its efforts on molecular targets for which it believes
it has a proprietary position. ICOS believes it was the first to identify
and clone the genes encoding a number of novel cell adhesion molecules,
anti-inflammatory mediators and signal transduction enzymes. These
discoveries form the basis of a number of the Company's research and
development programs.

- ICOS has identified and focused on molecular targets that it considers to
be both dominant influences in the inflammatory process and those that
are active in the early stages of inflammation.

- ICOS emphasizes the identification of new cell adhesion molecules,
antagonists of pro-inflammatory mediators and signal transduction targets
that are limited to specific sites or cell types and that offer the
potential for increased therapeutic specificity and activity.

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

PROGRESS TO DATE

17
<PAGE> 18

multiple dose administration of Hu23F2G, began in late 1995. To date, Hu23F2G
has been administered to over 40 patients with chronic MS to demonstrate the
safety of the product. Based on data from the Phase 1 clinical trials, ICOS
plans to initiate additional Phase 2 clinical trials of Hu23F2G for the
treatment of inflammation associated with MS, ischemic stroke, MI and acute
peripheral arterial occlusion. ICOS currently is producing Hu23F2G to support
Phase 1 and Phase 2 clinical trials.

In March 1996, the Company began Phase 1 clinical trials to gather safety
and pharmacological data on rPAF-AH for the treatment of ARDS. rPAF-AH is a
recombinant form of a naturally occurring antagonist of the pro-inflammatory
mediator known as PAF. The inhibitory activity of rPAF-AH on PAF-induced
inflammation has been demonstrated in both in vitro and in vivo preclinical
studies. Additionally, ICOS is conducting preclinical studies of rPAF-AH for a
number of indications including asthma, acute pancreatitis, IBD, solid organ
transplant preservation and NEC. ICOS currently is producing rPAF-AH for use in
clinical trials.

In 1995, Phase 1 clinical trials began on PDE-5, a compound that has been
jointly developed under the Glaxo Wellcome collaboration, for the treatment of
angina, congestive heart failure and MED. PDE-5 is a novel PDE inhibitor that
alters intracellular signal transduction. Compounds targeting other PDE family
members are also being evaluated in preclinical models of certain inflammatory
diseases.

The Company has established a proprietary position and has research
programs in the areas of: (i) novel cell adhesion molecules such as ICAM-3,
ICAM-4 and Alpha d; (ii) novel cell-cycle checkpoint mediators; (iii) additional
members of the PDE enzyme family; (iv) anchoring proteins that regulate
important signal transduction enzymes in a cell-type specific manner; and (v)
novel chemokines. The Company has established a capacity to identify and produce
antibody- and enzyme-based therapeutics based on these programs. Also, in order
to more fully exploit its discoveries, the Company has put in place an
infrastructure designed to discover and develop small molecule-based therapeutic
agents.

THE HUMAN IMMUNE SYSTEM

The human immune system exists in part to protect the body against foreign
invaders, which include agents such as bacteria, viruses, fungi and parasites.
To successfully defend against these insults, the immune system mounts an
extremely diverse array of responses specific to each type of pathogen.
Moreover, the immune system normally possesses the capacity to differentiate
between what is foreign, or "nonself," and what is self, thereby limiting the
intensity and duration of its response so that normal tissues are not damaged
severely by the body's own defense mechanisms. Inappropriate damage by the
immune response occurs when these properties are disregulated.

Challenges to tissue integrity are diverse and occur through many distinct
anatomic routes, such as through the skin or gastrointestinal tract. To combat
these attacks, the immune system has evolved a complex series of specialized
white blood cells (leukocytes), defensive proteins such as antibodies and small
immune "triggering" molecules known as pro-inflammatory mediators, all of which
perform distinct but interactive functions.

In general terms, there are three major leukocyte subtypes present in the
bloodstream -- lymphocytes, monocytes and granulocytes -- each of which is
involved in different aspects of inflammation. Lymphocytes are categorized into
two major subtypes, B cells and T cells. B cells produce proteins called
antibodies, which recognize and bind to pathogens. T cells perform a variety of
functions, including the promotion of B cell responses, the direct killing of
virus-infected cells and cancer cells, as well as secretion of pro-inflammatory
mediators that promote and amplify the immune response. Monocytes become
macrophages when they leave the bloodstream and enter tissue at the site of
inflammation. Macrophages have three main functions in the immune response: (i)
engulfment and digestion of pathogens and cell debris, (ii) secretion of pro-
inflammatory mediators and (iii) presentation of processed foreign proteins,
termed antigens, at their cell surface for recognition by T cells. Granulocytes
contain secretory granules of pro-inflammatory mediators and other substances.
The most common blood-borne granulocyte, the neutrophil, engulfs and digests
pathogens and debris, secretes pro-inflammatory mediators and is responsible for
much of the tissue damage associated with acute events such as hemorrhagic
shock, ischemic stroke and MI. Eosinophils, another type of

18
<PAGE> 19

granulocyte, combat parasitic infestations but, when functioning improperly,
trigger many of the symptoms of asthma and lung inflammation.

MAJOR TYPES OF WHITE BLOOD CELLS INVOLVED IN INFLAMMATION

<TABLE>
<CAPTION>
TYPE OF SELECTED TYPE OF
LEUKOCYTE SUBTYPES ROLE INFLAMMATION
- ------------- ------------ ------------------------------------------------ -------------
<S> <C> <C> <C>
Lymphocytes B cells Manufacture antibodies that bind to and Chronic
recognize pathogens
T cells Direct killing of target cells; secrete Chronic
pro-inflammatory mediators; promote B cell
response
Monocytes Macrophages Engulf and digest pathogens and cell debris; Chronic/Acute
secrete pro-inflammatory mediators; present
antigens for T cell recognition
Granulocytes Neutrophils Engulf and digest pathogens and debris; secrete Acute
pro-inflammatory mediators
Eosinophils Combat parasitic infestations Chronic/Acute
</TABLE>

After foreign organisms invade the body, leukocytes that reside in the
invaded tissue are activated. Activated leukocytes in tissue (as well as other
cells of the invaded region) produce pro-inflammatory mediators that attract and
activate additional leukocytes circulating in the blood to help fight the
infection. Pro-inflammatory mediators include lipids, such as PAF, and proteins,
such as interleukins and interferons. Pro-inflammatory mediators serve to
amplify the immune response and may also increase tissue damage associated with
the immune response.

Invading microorganisms and viruses are also neutralized by antibodies
produced by B cells. Antibodies are proteins that specifically recognize and
bind to proteins and other molecules of the invading microbe. Pathogens bound by
antibodies are made more susceptible to killing by activated leukocytes. Since
antibodies typically only recognize and bind to molecules that are foreign to
the host, they provide a selective means for killing the pathogens while
limiting damage to the host tissue. Because the array of potentially invading
organisms is so diverse, antibodies can be raised by the B cells that recognize
and bind to almost any protein that is foreign to the host.

It is possible to suppress the immune response in humans by administering
antibodies that block the function of critical immune-related human proteins.
Significantly, antibodies from mice or rabbits can be raised that bind to and
functionally block specific human proteins. In order to reduce the immune
response against desirable antibodies derived from animals, such antibodies can
be "humanized" to modify their structure to mimic naturally occurring human
antibodies. Hu23F2G and ICM3, an anti-ICAM-3 antibody developed by ICOS, are two
such humanized antibodies.

While each distinct leukocyte subtype is a potent defender in its own
right, the immune system functions most effectively when all the necessary
subtypes are drawn together in concert at the specific site of immune challenge.
Therefore, the leukocytes circulate continuously throughout the body and possess
mechanisms whereby they can be recruited selectively to the site of
inflammation. Other key elements of the recruitment and activation process in
the immune response are (i) cell adhesion molecules, which promote cell-cell
communication and cell trafficking; (ii) pro-inflammatory mediators, which
promote not only selective cell trafficking but also the activation of
leukocytes at the site of inflammation in the tissues; and (iii) antibodies,
which recognize and bind to proteins and other molecules of the pathogen.

INFLAMMATION

During inflammation, affected tissues classically exhibit warmth, redness,
pain and swelling as evidence of the inflammatory response directed at invading
microorganisms. Familiar examples of responses to inflammatory agents include a
boil, a sore throat or swelling at the site of an injury. Inflammation also
removes dead tissue and initiates healing of injured tissue. Although not always
visible, inflammation can occur

19
<PAGE> 20

anywhere in the body and the response can be brought on by injury, infection or
other stimuli. The inflammatory response involves an integrated cascade of
molecular events, involving numerous cell types, pro-inflammatory mediators and
cell-cell communication.

Tissue injury, infection or other stimuli activate local cells to release
biologically active inflammatory mediators. These mediators, including histamine
and PAF, stimulate several orchestrated biological responses. Blood vessels
dilate in order to increase blood flow to the affected region, accounting for
the redness and warmth associated with inflamed tissues. Concurrently, the
endothelial lining of blood vessels changes so that blood components can leave
the vessel and enter the affected tissue. The enhanced blood flow and
permeability of the blood vessels deliver even more pro-inflammatory blood
components, such as antibodies and leukocytes, to the affected tissue, thereby
causing swelling.

The permeability of the blood vessels and the subsequent flow of blood
components to affected tissue is not a passive event; rather, it is an active
process in which leukocytes are stimulated by pro-inflammatory mediators to
express activated cell adhesion molecules. The endothelial cells lining blood
vessels are also stimulated to express complementary cell adhesion molecules on
their surfaces. These processes work in concert to selectively localize
leukocytes in areas of inflammation.

The pro-inflammatory mediators that are produced by endothelial cells also
stimulate leukocytes to move toward the inflamed site. Cell adhesion molecules
on the surface of the leukocytes, such as CD11/CD18, are activated during the
inflammatory process so that leukocytes become more "sticky" and adhere to the
activated endothelial cells more strongly. Once adhered, these leukocytes
migrate through the endothelial cell layer to exit the blood vessel and enter
the injured tissue. In this way, large numbers of leukocytes preferentially
infiltrate affected tissue. Once in the tissue, leukocytes are further activated
by pro-inflammatory mediators to perform their killing and scavenging functions
more effectively. Cell surface receptors on these leukocytes, called
intercellular adhesion molecules ("ICAMs"), play a critical role in this
activation process.

Due to the nonspecific nature of many of the mediators of inflammatory
responses, even a normal inflammatory response can kill healthy cells and cause
additional injury. For example, once activated, neutrophils and macrophages
indiscriminately secrete toxic enzymes and free radicals into injured tissue.
Because these enzymes and free radicals are not selectively targeted solely to
dead tissue or invading microorganisms, healthy cells are exposed to their toxic
effects. The injury to healthy cells stimulates further production of
pro-inflammatory mediators and increases the level of the inflammatory reaction,
in turn causing more injury to healthy tissue.

Typically, these injurious aspects of inflammation are kept in check and do
not cause severe or lasting damage. In some human conditions, however, the
inflammatory response causes significant, or even life-threatening, injury. In
MS, for example, leukocytes infiltrating the brain and spinal cord damage the
myelin sheaths that insulate nerve cell tracts. As the myelin sheath is degraded
by inflammation, nerve conduction is impaired and the patient develops
neurological disabilities. In another example, a major component of the cell
death associated with MI and ischemic stroke is caused by the inflammatory
response, which follows the initial insult.

By reducing inflammation, it may be possible to lessen tissue damage and
significantly reduce the impact of the disease on the patient. The orchestrated
events involved in the inflammatory cascade offer several key points of
intervention. ICOS scientists have focused on cell adhesion molecules,
pro-inflammatory mediators, intracellular signal transduction and cell surface
receptors as the key points of intervention in the inflammatory cascade. ICOS is
developing pharmaceuticals through an understanding of the disease process at
the molecular level, which may lead to more efficacious treatments for numerous
inflammatory diseases.

20
<PAGE> 21

PRODUCT DEVELOPMENT STRATEGY

ICOS' product development strategy is focused on the early acquisition of
Phase 2 data to determine a particular product candidate's utility in a specific
disease indication. To this end, ICOS has adopted a strategy of performing Phase
1 clinical trials that are designed to support the initiation of multiple Phase
2 clinical trials in distinct clinical indications for each product candidate.
If satisfactory Phase 1 results are achieved, the Company intends to initiate
numerous appropriate Phase 2 clinical trials in order to increase the likelihood
of identifying clinically relevant programs. This approach provides an early
identification of those disease indications whose pathology is affected by the
study drug and permits the Company to conduct clinical trials in a parallel
fashion. See "Risk Factors -- Uncertainty Associated With Preclinical and
Clinical Testing."

For example, the data derived from the Phase 1 single dose clinical trial
of Hu23F2G for the treatment of inflammation associated with MS enabled the
Company to initiate a Phase 2 clinical trial in patients with trauma-induced
hemorrhagic shock. Based on data from this Phase 1 trial as well as the Phase 1
multiple dose clinical trial for MS, ICOS intends to initiate additional Phase 2
clinical trials of Hu23F2G for the treatment of MS, ischemic stroke, MI and
acute peripheral arterial occlusion. Upon successful completion of Phase 2
clinical trials for each particular indication, ICOS intends to undertake Phase
3 pivotal clinical trials sufficient for marketing approval of the compound for
the specific indications. Similar clinical strategies will be followed for
rPAF-AH, PDE-5 and other compounds. However, in certain indications, ICOS may
need to conduct separate Phase 1 clinical trials.

PRODUCT DEVELOPMENT PROGRAMS

The Company has discovered important molecules and mechanisms underlying
directed cell movement, the inhibition of pro-inflammatory mediators and
intracellular signal transduction. The clinical targets that are the subject of
ICOS' discoveries include inflammatory diseases whose pathology is the result of
the dysfunction of the normal inflammatory mechanisms. The clinical targets for
Hu23F2G include acute exacerbations of MS, hemorrhagic shock, ischemic stroke,
MI and others. ICOS is developing rPAF-AH for treatment of ARDS, acute
pancreatitis, asthma, IBD and other indications. Due to the role of PDE-5 in
intracellular signal transduction, the disease indications that are targets for
treatment with PDE-5 include angina, congestive heart failure and MED.

21
<PAGE> 22

The following table sets forth the current status of ICOS' product
development programs.

<TABLE>
<CAPTION>
PROGRAM PRODUCT CANDIDATE INDICATION STATUS(1)
- ----------------------- ------------------------- ---------------------------------- --------------
<S> <C> <C> <C>
CELL ADHESION Hu23F2G Multiple sclerosis Phase 1(2)
Hemorrhagic shock Phase 2(3)
Ischemic stroke Preclinical
Myocardial infarction Preclinical
Acute peripheral arterial Preclinical
occlusion
Head trauma Preclinical
Solid organ transplant Research
preservation

ICM3 Psoriasis Preclinical
Graft versus host disease Preclinical
Organ transplantation (rejection) Preclinical

ICAM-4 modulator Neurological diseases Research

Alpha d modulator Atherosclerosis Preclinical
Inflammatory bowel disease Preclinical
Arthritis Preclinical
Respiratory disease Preclinical

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
ANTAGONISTS OF PRO- rPAF-AH Acute respiratory distress Phase 1(4)
INFLAMMATORY syndrome
MEDIATORS Acute pancreatitis Preclinical
Asthma Preclinical
Necrotizing enterocolitis Preclinical
Inflammatory bowel disease Preclinical
Acute peripheral arterial Preclinical
occlusion
Head trauma Preclinical
Ischemic stroke Preclinical
Solid organ transplant Preclinical
preservation

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SIGNAL TRANSDUCTION PDE-5 inhibitor Angina/congestive heart failure/ Phase 1(4)
(w/Glaxo Wellcome) male erectile dysfunction

PDE-4 inhibitor Inflammatory diseases Preclinical
(w/Glaxo Wellcome)

Chemokines Inflammatory diseases Research

Cell cycle checkpoint Cancer and other proliferative Research
modulators disorders
Inflammatory diseases Research

Anchoring proteins Inflammatory diseases Research
Neurological diseases Research
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
CELL ADHESION/SIGNAL Integrin/ICAM signal Inflammatory diseases Research
TRANSDUCTION transduction modulators Cancer Research
(w/Abbott Laboratories)
</TABLE>

(1) Research: discovery research, target or lead molecules identified; studies
initiated to define preclinical target(s).
Preclinical: in vivo and in vitro studies initiated.
See also "Governmental Regulation."

(2) Phase 1 single dose clinical trial in MS patients completed in December
1995; Phase 1 multiple dose clinical trial in MS patients begun in late
1995.

(3) Phase 2 clinical trials in patients with trauma-induced hemorrhagic shock
begun in April 1996.

(4) Phase 1 clinical trial in healthy volunteers.

<PAGE> 23

CELL ADHESION PROGRAMS

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

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

Hu23F2G

It is believed that by intervening in the adhesion process, much of the
inflammation-associated damage can be prevented. Monoclonal antibodies directed
to CD11/CD18 adhesion molecules have been shown to protect against
leukocyte-mediated tissue injury by blocking adherence in a variety of disease
models. Hu23F2G is a recombinant humanized monoclonal antibody developed by ICOS
to block CD11/CD18-mediated cell adhesion in humans. Since the molecule is
humanized, the potential for adverse effects is believed to be limited. ICOS
currently is producing Hu23F2G to support Phase 1 and Phase 2 clinical trials.

In Phase 1 clinical trials, Hu23F2G has been shown to bind to CD11/CD18 on
the surfaces of leukocytes and to block subsequent movement into the surrounding
tissue. To date, Hu23F2G has been administered to over 40 patients with chronic
MS in Phase 1 clinical trials to demonstrate the safety of the product. In April
1996, ICOS initiated a Phase 2 clinical trial of Hu23F2G in patients with
trauma-induced hemorrhagic shock. The inhibitory activity of Hu23F2G on human
leukocyte transmigration in vitro and in vivo supports further development of
the compound. The Company is exploring the clinical development of Hu23F2G in
the indications described below. However, there can be no assurance that Hu23F2G
will demonstrate safety or efficacy in any or all of these indications.

Clinical Application -- Multiple Sclerosis

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

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

MS affects approximately 250,000 individuals in the United States and,
based on the frequency of exacerbations, the Company expects 120,000
exacerbations per year are potentially treatable with Hu23F2G. Current treatment
for acute exacerbations of MS consists of systemic administration of
corticosteroids, usually initiated as intravenous therapy for the first few days
of the exacerbation, followed by a course of oral steroid therapy. This therapy
is effective in shortening the exacerbations in some patients, but does not
appear to alter

23
<PAGE> 24

the subsequent course of the disease. In July 1993, the FDA approved the use of
Betaseron in relapsing remitting MS to reduce the frequency of acute attacks.
Despite the advance represented by the approval of Betaseron, there remains a
significant need for therapy to treat acute exacerbations of MS.

The Company believes that Hu23F2G may reduce the severity and length of
acute exacerbations of MS by interfering with the ability of leukocytes to bind
to the vascular endothelium in the brain and spinal cord, and thus limit their
mobility into these tissues. The Company believes that this would allow the
inflammation to resolve sooner and the neurologic damage to be reduced. The
Company believes that treatment of the acute exacerbation with Hu23F2G may be
superior to corticosteroids and other treatments because of improved efficacy
and reduced frequency of administration.

In December 1995, ICOS completed a Phase 1 single dose clinical trial of
Hu23F2G in MS patients. A second Phase 1 clinical trial of Hu23F2G, which
includes a multiple dose treatment arm, began in late 1995. The Phase 1 clinical
trials of Hu23F2G are intended to provide essential pharmacological and
functional data to support the continued development of Hu23F2G. To date,
Hu23F2G has been administered to over 40 patients with chronic MS to demonstrate
the safety of the product.

Clinical Application -- Hemorrhagic Shock

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

Based on in vitro and in vivo data, it has been hypothesized that MOF is
the result of neutrophil-mediated tissue injury. Resuscitation of the trauma
patient by administering intravenous fluids and blood products leads to the
re-establishment of circulation in the affected tissues. This process not only
causes the blood vessels to become highly adhesive, but it also brings oxygen
and leukocytes, in particular neutrophils, into contact with the now
hyperadhesive vasculature, resulting in activation and adhesion of neutrophils
to the endothelium. Once attached to the endothelium, activated neutrophils
release toxins, such as free radicals and proteases, that can damage the
endothelium, leading to edema, hemorrhage and thrombosis that can often result
in organ dysfunction and failure.

Since the adhesion of neutrophils to endothelium is inhibited by Hu23F2G,
the Company believes that treatment of trauma-induced hemorrhagic shock patients
with Hu23F2G may prevent the development of MOF and improve overall mortality
rates. If Hu23F2G is demonstrated to be effective in this setting, it might
quickly be adopted as standard therapy for hemorrhagic shock, given the poor
outcome and high cost associated with current therapy. In April 1996, ICOS
initiated a Phase 2 clinical trial of Hu23F2G in patients with trauma-induced
hemorrhagic shock to evaluate the compound's safety and pharmacology.

Clinical Application -- Ischemic Stroke

Each year, over 400,000 persons suffer from stroke in the United States. Of
these, about two-thirds survive, and about half of the survivors suffer
substantial disability, including the loss of limb function and speech skills.
During a stroke, a blood vessel becomes occluded and blood flow to a region of
the brain is blocked. This blockage results in injury to and death of brain
tissue in the affected region. Current treatment of ischemic stroke is unable to
protect at-risk tissue from further damage or death.

Although ischemic stroke arises from blockage of one or more cerebral blood
vessels by a blood clot, subsequent damaging events are inflammatory in nature.
Experimental models of stroke suggest that much of the tissue damage may be
caused by neutrophil-mediated neuronal injury and persistent blockage of the
microvasculature by neutrophils. Treatment directed against CD11/CD18 cell
adhesion molecules has been shown to improve the outcome in several models of
ischemic stroke and may address both of these issues.

The Company believes that treatment with Hu23F2G may decrease the extent of
tissue damage in patients who have suffered ischemic stroke and is conducting
preclinical studies with respect to the use of Hu23F2G for this indication. It
is thought that Hu23F2G, given alone or in combination with a thrombolytic agent
such as t-PA, may reduce post-ischemia tissue damage, thereby reducing both the
chance and degree of

24
<PAGE> 25

permanent disability for the patient. ICOS is currently conducting preclinical
studies of Hu23F2G for the treatment of ischemic stroke.

Clinical Application -- Myocardial Infarction

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

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

ICOS is conducting preclinical studies of Hu23F2G in models of MI. The
Company believes that treatment of patients with Hu23F2G following an MI may
limit the degree of inflammatory tissue damage and protect significant amounts
of heart tissue. In turn, this tissue preservation should help maintain the
pumping capacity of the heart, thereby reducing mortality and disability.

Clinical Application -- Acute Peripheral Arterial Occlusion

Approximately 450,000 people in the United States suffer from occlusive
disease of peripheral arteries that supply blood to the limbs. Each year, many
of these people experience acute blockage of an artery by a thrombus or embolus.
Often, the tissue downstream of the blockage is at risk for tissue death. In
these instances, thrombolytic or surgical intervention is required to save the
limb. About 150,000 such interventions are performed each year in the United
States.

Following relief of the occlusion, blood-borne neutrophils initiate an
inflammatory response. This inflammation can compromise revascularization of the
limb, increase tissue injury and contribute to the disability, swelling and
prolonged hospitalization of these patients. In many cases, additional
intervention is necessary to maintain blood flow in swollen and dysfunctional
limbs.

The Company believes that treatment directed to the neutrophil-mediated
inflammatory component of this condition will lessen the associated tissue
injury, decrease residual disability and lessen the need for additional
intervention. ICOS has initiated preclinical studies of Hu23F2G for the
treatment of acute peripheral arterial occlusion.

Clinical Application -- Head Trauma

Each year, approximately 2 million Americans sustain head injuries severe
enough to cause brain injury, of which approximately 500,000 require
hospitalization and approximately 90,000 suffer significant residual disability.
While direct impact to and twisting of the brain cause significant injury, an
additional injury component associated with head trauma is believed to result
from a neutrophil-mediated inflammatory response.

Preclinical studies have demonstrated that limiting the inflammation
accompanying head trauma decreases both the residual injury to brain tissue and
its accompanying disability. Because Hu23F2G can inhibit both migration and
activation of leukocytes, the Company believes that Hu23F2G may significantly
reduce brain inflammation following head injury. In addition, this may reduce
residual brain injury and facilitate healing, speed recovery and lessen
long-term disability. ICOS has initiated preclinical studies of Hu23F2G for the
treatment of inflammation resulting from head trauma.

Clinical Application -- Solid Organ Transplant Preservation

Approximately 20,000 solid organ transplantations are performed each year
in the United States. Most of these procedures require that the transplanted
organ be transported from the site of organ harvest to the

25
<PAGE> 26

recipient. Organ transport and recipient preparation can take as long as 48
hours, during which time the organ has no blood supply. Although the organ is
preserved by cold storage and preservation solutions, some degree of organ
damage occurs. Following transplantation, the damaged tissue in the transplanted
organ initiates an inflammatory response, which results in further injury to the
transplanted organ. It is believed that neutrophil-mediated tissue injury
following solid organ transplantation contributes to early graft dysfunction and
graft rejection.

The Company is conducting research on Hu23F2G as a potential inhibitor of
inflammation-mediated injury following solid organ transplantation. By using
Hu23F2G, it may be possible to enhance early graft function and limit both acute
and chronic rejection. Enhancing early graft function can decrease the need for
dialysis following kidney transplant or significantly lessen the hospitalization
required following liver or lung transplants. Limiting organ rejection can also
decrease the need for acute antirejection therapy and significantly prolong
graft survival.

ICM3

ICOS, through its discoveries of new cell adhesion molecules, has uncovered
potential targets for more specific modulation of immune functions. At the time
ICOS began its work, only two members of the ICAM family were known, ICAM-1 and
ICAM-2, both of which are expressed in a general way throughout the body on both
leukocytes and the endothelial cells lining blood vessels. ICOS scientists
recently discovered an additional member of the ICAM family, ICAM-3 (which ICOS
initially described as ICAM-R). Expression of ICAM-3 occurs almost exclusively
at high levels on leukocytes, which, along with the prominent role of ICAM-3 in
regulating the early events of inflammation integral to lymphocyte activation,
suggests utility for ICAM-3-related therapeutics in conditions such as acute
rejection in organ transplantation and GvHD, in which T cell activation is an
early and prerequisite element. Also, expression of ICAM-3 on endothelium is
rare, being restricted typically to the endothelium of newly developing blood
vessels of certain solid cancerous tumors. This suggests that ICAM-3-related
therapeutics might be useful in certain types of diseases in which targeting of
proliferating endothelium in developing blood vessels would be attractive.

ICOS has demonstrated that ICAM-3 is an attractive target for
identification and development of a therapeutic since it participates in the
activation of leukocytes at a stage prior to that mediated by ICAM-1. ICOS has
also discovered that ICAM-3 can bind to at least three different integrins,
including LFA-1 and Alpha d. The Company has developed site-specific proprietary
antibodies and other agents that inhibit one facet of the leukointegrin/ICAM
immune function while leaving others intact. It is anticipated, therefore, that
selective, rather than general, immunosuppression can be achieved and tailored
to specific disease-state requirements.

ICOS has also demonstrated that the binding of specific regions
("epitopes") of the extracellular portion of ICAM-3 with T cells causes the
transduction of an intracellular signal that renders the lymphocyte unresponsive
to potent stimuli. This has been found to be a dominant effect, indicating that
selective manipulation of ICAM-3 may beneficially down-regulate the immune
response of T cells.

A proprietary series of anti-ICAM-3 antibodies developed by ICOS has
demonstrated efficacy and one humanized antibody, termed ICM3, was identified as
the most potent inhibitor of T cell activation in response to a variety of
stimuli in in vitro studies. ICM3 is currently in preclinical development to
determine its therapeutic value as a potential treatment for psoriasis, GvHD and
organ transplantation rejection.

ICAM-4

ICOS scientists recently discovered a new ICAM family member, ICAM-4, the
expression of which is restricted to a subset of neurons found in the central
nervous system. ICAM-4 is the first ICAM family member that is both prominent in
immune function and known to be expressed on neural cells. It thus represents an
intriguing potential interface between the nervous and immune systems. ICOS is
conducting research on the role of ICAM-4 in certain neurological diseases.

26
<PAGE> 27

Alpha d

Prior to ICOS' work in the field of leukointegrin-ligand interaction, only
three leukointegrin family members (and their corresponding ligand pairs) had
been described: LFA-1 (CD11a/CD18), Mac-1 (CD11b/CD18) and gp150/85
(CD11c/CD18). ICOS' research in the area of cell adhesion has led to the
discovery and cloning of the gene that encodes a fourth leukointegrin, Alpha d.
In some inflammatory diseases, many of the immune cells found at the inflamed
site selectively express high levels of Alpha d. ICOS researchers believe that
agents that target Alpha d function may be efficacious in the treatment of these
diseases. Since Alpha d expression is restricted and distinct from that of other
leukointegrin family members, targeting Alpha d function may prove to be a
precise means of intervening in the pathologic inflammatory processes.

The therapeutic potential of Alpha d-specific agents has been supported by
preclinical studies conducted by ICOS. For example, administration of antibodies
specific for Alpha d was found to significantly moderate tissue damage in a
model of lung injury. ICOS is conducting preclinical studies of Alpha d agents
for their clinical utility in treating such indications as atherosclerosis, IBD,
arthritis and some respiratory diseases.

In addition to antibody-based approaches, ICOS is also pursuing the
discovery of small molecule drugs through proprietary-based drug screens that
target Alpha d.

ANTAGONISTS OF PRO-INFLAMMATORY MEDIATORS PROGRAMS

A variety of stimuli has been found to activate leukocytes in vitro. In a
physiologic context, in vivo leukocyte activation is almost certainly a more
tightly and specifically regulated process, called juxtacrine activation, and is
driven by the close juxtaposition of distinct cell types (such as leukocytes and
endothelium). By virtue of the integrated approach to cell adhesion and signal
transduction, ICOS scientists have made significant discoveries recently in this
area that provide additional opportunities for potential clinical development.
The paradigm of leukocyte transmigration across a blood vessel wall illustrates
this process. Leukointegrins mediate the initial contact between a leukocyte and
the endothelium. Next, the loosely bound leukocyte rolls along the blood vessel.
While rolling, it utilizes a series of heptahelical, or serpentine
G-protein-coupled, receptor molecules on its cell surface (analogous to those
used in taste and olfaction) to sense the surface of the endothelial cells
lining the vessel. Molecules present on the endothelial surface bind
specifically to these leukocyte receptors, triggering activation of the
leukocytes and initiating leukocyte transmigration into the surrounding tissues.

If juxtacrine activation does not occur, the interaction between the
leukocyte and the blood vessel is nonproductive and leukocytes do not exit the
blood vessel. ICOS successfully identified and molecularly cloned the gene
encoding an enzyme, PAF-AH, that dramatically inhibits, both in vitro and in
vivo, the activity of PAF, a potent mediator of this type of juxtacrine
activation. ICOS believes that its proprietary recombinant form of PAF-AH,
termed rPAF-AH, will show inhibitory activity on PAF and, as such, is a
promising therapeutic candidate.

Recombinant Platelet-activating Factor Acetylhydrolase (rPAF-AH)

PAF is a potent pro-inflammatory mediator with diverse biologic effects and
is implicated in a number of debilitating inflammatory diseases, including ARDS,
asthma and acute pancreatitis. It is produced naturally by a variety of human
cells, including endothelial cells, leukocytes, platelets and mast cells. PAF
affects a variety of cells that are involved in the inflammatory process,
including leukocytes, platelets and vascular endothelial cells, and acts by
binding to specific receptors, thereby up-regulating the inflammatory response.

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

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PAF-AH is a naturally occurring enzyme that hydrolyzes PAF to a
biologically inactive form, thereby limiting its pro-inflammatory effects. ICOS
is developing rPAF-AH, the recombinant form of PAF-AH, as an agent for the
treatment of diseases characterized by disregulated PAF activity. Since PAF-AH
is a naturally occurring human protein, ICOS believes rPAF-AH will have a
favorable side effect profile. ICOS has produced rPAF-AH for use in clinical
trials.

The inhibitory activity of rPAF-AH on PAF-induced inflammation has been
demonstrated in both in vitro and in vivo preclinical studies. ICOS is currently
conducting Phase 1 clinical trials of rPAF-AH for the treatment of ARDS and
preclinical studies of rPAF-AH in a number of other indications, including
asthma, acute pancreatitis, IBD, solid organ transplant preservation and NEC.
However, there can be no assurance that rPAF-AH will demonstrate safety or
efficacy in any or all of these indications.

Clinical Application -- Acute Respiratory Distress Syndrome

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

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

The inhibitory activity of rPAF-AH on PAF-induced lung inflammation has
been demonstrated by ICOS in both in vitro and in vivo preclinical studies. The
data obtained from these studies indicate that rPAF-AH may be effective in
patients at risk for ARDS or in improving the outcome in patients who have
already been diagnosed with ARDS by inhibiting the ability of PAF to contribute
to lung inflammation.

In March 1996, ICOS commenced a Phase 1 clinical trial of rPAF-AH. Upon
successful completion, the Company intends to initiate a Phase 2 clinical trial
investigating the potential of rPAF-AH for the prevention of ARDS in subjects at
risk for the disease. A subsequent Phase 2 clinical trial will evaluate the
therapeutic potential of rPAF-AH treatment in patients diagnosed with ARDS.

Clinical Application -- Acute Pancreatitis

Each year, approximately 42,500 people suffer from acute pancreatitis in
the United States. Currently, there is no specific therapy available to treat
this disease. PAF has been implicated as a mediator of acute pancreatitis. In
diverse models of acute pancreatitis, the amount of PAF present in the pancreas
has been shown to be at increased levels compared to healthy tissue.

The Company believes that rPAF-AH may be useful in resolving acute
pancreatitis and preventing the subsequent complications by inactivating the
ability of PAF to cause inflammatory damage to the pancreas as well as to other
organs. In preclinical models, rPAF-AH has been demonstrated to reduce the
severity of pancreatitis.

Clinical Application -- Asthma

Approximately 15 million people in the United States suffer from asthma.
Although there are a number of effective drugs for asthma, the disease still
causes considerable morbidity and mortality. Each year, approximately 300,000
people are hospitalized with acute asthma.

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Asthma is characterized by a reversible narrowing of the airways and
chronic airway inflammation. In preclinical studies, PAF has been shown to cause
bronchoconstriction and induce inflammation of the airways similar to that
observed in asthma.

The Company believes that rPAF-AH may be useful in the treatment of acute
asthma attacks by rapidly inhibiting the detrimental effects of PAF, thereby
reducing the continuing inflammation that contributes to persistent airway
narrowing. ICOS is conducting preclinical studies of rPAF-AH for the treatment
of asthma.

Clinical Application -- Necrotizing Enterocolitis

Each year, approximately 35,000 very low birth-weight infants are born in
the United States. These infants are at high risk for developing a variety of
diseases. NEC is one of the most severe and life-threatening of these diseases,
and occurs in about 3,000 infants each year. About 30% of these affected babies
die of the disease.

NEC is an inflammatory disease of the gastrointestinal tract. The disease
causes the intestine to become markedly inflamed, which kills substantial
amounts of tissue in the involved regions. There are no adequate medical
therapies for the disease. Surgery to excise dead and severely injured tissue is
necessary in many babies with NEC. Even surviving babies generally require
prolonged hospitalization and aggressive supportive therapy, and have residual
gastrointestinal dysfunction. Although not a common disease, NEC causes
significant disability and results in high medical costs.

There is evidence that PAF plays a role in the development and perpetuation
of NEC. The Company believes that decreasing PAF levels in babies at risk for
NEC by treatment with rPAF-AH may substantially lessen the incidence and
severity of the disease. Also, the Company believes that rPAF-AH may be useful
in reducing disease severity and inhibiting progression in babies that have
developed NEC. Preclinical studies of rPAF-AH for the treatment of NEC showed a
positive treatment effect, and additional preclinical evaluation is currently
underway.

Clinical Application -- Inflammatory Bowel Disease

Approximately 300,000 people in the United States suffer from Crohn's
disease and ulcerative colitis, collectively referred to as inflammatory bowel
disease, or IBD, with approximately 200,000 of these patients suffering moderate
to severe exacerbations each year. Both Crohn's disease and ulcerative colitis
are characterized by inflammation of the gastrointestinal tract. Although the
causes of these diseases are unknown, it is believed that the inflammatory
reaction in the gastrointestinal tract substantially contributes to the clinical
aspects of the diseases. This inflammatory reaction is often associated with
severe symptoms of abdominal pain, diarrhea, weight loss and fever.
Exacerbations may last for several months or longer and require surgery or
treatment with toxic immunosuppressive drugs.

Levels of PAF have been shown to be elevated in gastrointestinal tissue in
patients with both Crohn's disease and ulcerative colitis. The Company believes
that treatment with rPAF-AH will help reduce the inflammation causing patients'
symptoms. In addition, by inhibiting the inflammation, the Company believes that
rPAF-AH may induce remission of the disease. The Company has initiated
preclinical studies of rPAF-AH in the treatment of IBD.

Clinical Application -- Acute Peripheral Arterial Occlusion

Following relief of the occlusion, PAF contributes to an inflammatory
response. This inflammation can compromise revascularization of the limb,
increase tissue injury and contribute to the disability, swelling and

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prolonged hospitalization of these patients. In many cases, additional
intervention is necessary to maintain blood flow in swollen and dysfunctional
limbs.

The Company believes that treatment directed to the PAF-mediated
inflammatory component of this condition will lessen the associated tissue
injury, decrease residual disability and lessen the need for additional
intervention. The Company is initiating preclinical studies of rPAF-AH in acute
peripheral arterial occlusion.

Clinical Application -- Head Trauma

One aspect of the inflammation is that high levels of PAF are found in the
injured brain tissue. It is believed that PAF is directly toxic to brain cells
and causes additional injury independent of its role as a pro-inflammatory
mediator. The Company believes that by limiting localized PAF levels and the
inflammation injury accompanying head trauma, residual brain damage may be
substantially reduced. The Company believes that treatment with rPAF-AH may
alleviate injury due to both direct PAF toxicity and injury-related
inflammation. By limiting brain injury, rPAF-AH treatment would be expected to
facilitate healing, speed recovery and lessen long-term disability. ICOS is
currently investigating rPAF-AH for the treatment of head injury in preclinical
models.

Clinical Application -- Ischemic Stroke

Each year, over 400,000 persons suffer from stroke in the United States. Of
these, about two-thirds survive, and about half of the survivors suffer
substantial disability, including the loss of limb function and speech skills.
During a stroke, a blood vessel becomes occluded and blood flow to a region of
the brain is blocked. This blockage results in injury to and death of brain
tissue in the affected region. A significant portion of the tissue injury and
death is thought to be caused by PAF-induced inflammatory damage. Blocking the
action of PAF has been shown to significantly lessen stroke damage in
preclinical models.

The Company believes that treatment of patients with rPAF-AH following a
stroke may limit the degree of inflammatory tissue damage and protect
significant amounts of brain tissue, thereby substantially reducing mortality
and disability. ICOS is currently conducting preclinical studies of rPAF-AH in
models of ischemic stroke.

Clinical Application -- Solid Organ Transplant Preservation

Approximately 20,000 solid organ transplantations are performed each year
in the United States. Most of these procedures employ cadaveric organs.
Generally, organs are not harvested at the recipient's location and must be
transported. Transportation of these organs and recipient preparation can take
as long as 48 hours, during which time the organs have no blood supply. Although
the organs are preserved by cold storage and preservation solutions, some degree
of organ damage occurs. Following transplantation, the damaged tissue in the
transplanted organ initiates an inflammatory response, which results in further
injury to the transplanted organ. It is believed that such tissue injury
contributes to early graft dysfunction and graft rejection.

The Company believes that by inhibiting the inflammatory effects of PAF,
early graft function may be enhanced and both acute and chronic rejection may be
lessened. Improving early graft function may limit requirements for
post-transplant kidney dialysis and significantly lessen the duration and
expense of hospitalization following transplant. Limiting organ rejection can
also impact healthcare costs and the patient's quality of life by prolonging
graft survival and decreasing the need for acute antirejection therapy.

The Company believes that reduction of PAF levels with rPAF-AH may
significantly reduce the inflammation and subsequent injury to transplanted
solid organs. Presently, ICOS is evaluating rPAF-AH in preclinical models for
prevention of tissue damage in transplanted solid organs.

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SIGNAL TRANSDUCTION PROGRAMS

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

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

PDE-5 Phosphodiesterase Inhibitor

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

There are at least 15 human genes encoding more than 20 different PDEs that
form seven distinct PDE families. The Company has cloned and expressed a
majority of these PDEs, each of which has been shown to target particular signal
transduction pathways. These diverse proteins are not uniformly expressed and
distributed throughout the body and are found in different amounts in different
tissues. This tissue-selective expression may provide opportunities for specific
intervention.

The Company, in its collaboration with Glaxo Wellcome, is seeking to
identify and develop compounds that will have a therapeutic impact on
inflammatory diseases and on cardiovascular disorders by selective modulation of
PDE activity. The first of these, PDE-5, which inhibits the type V family of
PDEs, entered Phase 1 clinical trials in 1995. PDE-5 is being evaluated for the
treatment of angina, congestive heart failure and MED. However, there can be no
assurance that PDE-5 will demonstrate safety or efficacy in any or all of these
indications. Compounds targeting other PDE family members, including a PDE-4
inhibitor, are also being evaluated in preclinical models of inflammatory
diseases.

Clinical Application -- Angina

Angina affects approximately 6 million individuals in the United States.
Current therapy attempts to reduce the oxygen demands of the heart, improve
perfusion and reduce the risk of thrombosis. Such therapy includes
beta-adrenergic blocking agents, which are used to reduce heart work, and
thereby reduce oxygen demand; nitrates, which cause vascular dilatation, thereby
reducing cardiac oxygen demand and increasing coronary blood flow; and calcium
channel blockers and antiplatelet agents. Current therapy to treat persistent
pain associated with angina typically includes angioplasty or coronary artery
bypass surgery, both of which are invasive. The Company believes the vasodilator
properties of PDE-5 may provide a novel approach to the treatment of angina.
PDE-5 is currently in Phase 1 clinical trials to establish safety and determine
its pharmacokinetic parameters.

Clinical Application -- Congestive Heart Failure

Congestive heart failure affects between 2 million to 3 million individuals
in the United States. Drug therapy for congestive heart failure includes
diuretics, vasodilators and positive inotropic agents, alone or in

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combination, to reduce the load on the heart, decrease the vascular resistance
and improve cardiac contractility. The Company believes PDE-5 may be a novel
addition to therapy because this agent is believed to augment the effects of
ANP, which is a naturally occuring protein released during congestive heart
failure to alleviate the symptoms of the condition. PDE-5 is currently in Phase
1 clinical trials to establish safety and determine its pharmacokinetic
parameters.

Clinical Application--Male Erectile Dysfunction

It is estimated that in the United States more than 10 million men suffer
from MED, a type of impotence. MED results annually in approximately 400,000
out-patient visits and approximately 30,000 hospital admissions. Although MED is
thought to be generally caused by psychogenic factors, other causes include
complications resulting from surgical procedures, medications (for example
antihypertension drugs), vascular insufficiency as a result of atherosclerosis
or diabetes, and spinal cord trauma. Treatments for MED include injection of
prostaglandin E(1) ("PGE(1)") directly into the corpus cavernosa, surgical
implantation of prostheses and vacuum-induced erection. Treatment with PGE(1)
can cause side effects, including pain, priapism (sustained erection that
requires medical intervention) and ecchymosis (blood loss into the surrounding
tissues from ruptured vessels).

Release of nitric oxide is a critical part of the development of an
erection, relaxing the cavernosal smooth muscle by activating guanylyl cyclase,
thereby increasing the production of cGMP. The Company believes that the type V
family of PDEs, which converts cGMP to the inactive 5'-guanosine monophosphate,
attenuates the effect of nitric oxide.

The Company believes that blocking the action of the type V family of PDEs
through the use of PDE-5 may preserve and enhance the normal signals designed to
induce erection. This reinforcement of the body's normal response to sexual
stimuli may avoid some of the problems associated with the use of direct
stimulators of erection, such as prostaglandins. PDE-5 is currently in Phase 1
clinical trials to establish safety and determine its pharmacokinetic
parameters.

Chemokines

Chemokines are a gene family of small proteins that have potent
chemoattraction and activation activities. Like PAF, chemokines activate
leukocytes that are juxtaposed to endothelial cells. Chemokines are recognized
by the specific G-protein-coupled receptors that are selectively found on
certain types of leukocytes that trigger activation. Thus, chemokines provide a
selective method of enhancing leukocyte activation.

ICOS scientists have isolated several novel chemokines as well as several
novel chemokine receptors. During inflammation, these molecules may be involved
in recruiting leukocytes to inflammatory sites and have been found to be
associated with several disease states. The Company is currently developing
several inhibitors of chemokine action.

To this end, the Company has identified certain monoclonal antibodies that
block chemokine-triggered activation in vitro. In addition, ICOS is screening
its library of small molecule compounds for their ability to block chemokine
activation. ICOS scientists believe that some chemokines also may provide direct
therapeutic benefit in clinical settings that require immune enhancement, such
as AIDS or cancer chemotherapy follow-up.

Cell Cycle Checkpoint Modulators

Coordinated regulation of cell activation and cell proliferation occurs
through the action of an integrated network of cell cycle regulators or
mediators. During a normal cell division cycle, a series of dependent steps
occurs that ensures the correct replication and segregation of the genetic
material. During the cell cycle, errors in replication of the DNA or in the
timing of cell cycle stages can occur. These are usually corrected by repair
reactions and mechanisms within the cell. In order for the cell cycle to
maintain internal timing, a series of checkpoints ensures that adequate
opportunity is given for DNA repair to occur. Compounds that affect cell cycle
regulation and checkpoints show promise as potential means of therapeutic
intervention in a variety of diseases involving cell division and replication.

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ICOS is exploring cell cycle control and checkpoint regulation in two broad
target classes: CKI protein kinases and PIK kinases. CKI is a small family of
protein kinase enzymes that has been shown to be an important integrator of
signal transduction. Experiments in several model systems have shown its role in
cell cycle regulation and an association with DNA repair. CKI protein kinases
interact with a variety of important proteins, including tumor suppressers and
transcription factors during cell replication. PIK kinases are another important
class of enzymes that regulate cell cycle progression and checkpoint control.
ICOS scientists have identified proprietary targets in this human gene family.
ICOS has initiated small molecule screens for identifying both CKI protein
kinase and PIK protein kinase modulators in order to develop potent
antiproliferative agents. Cell cycle checkpoint modulators may have
applicability in the treatment of cancer, inflammation, atherosclerosis and
autoimmune disorders.

Anchoring Proteins

Some enzymes, such as PDEs, exist as multiple isotypes. These different
isotypes are distributed selectively within the human body among specific
tissues and cell types. While multiple isoforms of other important
signal-transducing enzymes often exist, these are not always distributed among
different cell types in a manner that is attractive for specific drug targeting.
In addition, a single enzyme may often perform multiple disparate roles in a
single cell, thus impacting several processes simultaneously. Thus, inhibitors
that act through direct inhibition of broad catalytic function may cause side
effects in patients that may severely limit their therapeutic potential.

ICOS scientists have discovered that many important enzymes are
compartmentalized within specific intracellular locations through interactions
with cell-type-restricted anchoring proteins. ICOS discovered and cloned a
variety of these anchoring proteins and characterized their binding properties
for specific enzyme subunits. Furthermore, ICOS scientists have demonstrated
that disruption of the anchoring function per se can regulate important
downstream cellular behaviors such as ion flux and secretion of pro-inflammatory
mediators. Anchoring proteins have also been shown to impact disease-relevant
signaling pathways. Thus, rather than modulating the enzyme's catalytic subunit,
ICOS is targeting enzymatic regulatory components that modulate the enzyme's own
activity within specific cell compartments or in specific cell types.

ICOS scientists have demonstrated that the targeting of anchoring proteins
can serve as a powerful modulator of pro-inflammatory events and believe that it
may be possible to derive novel solutions to a previously intractable problem,
namely, selective modulation of a multifunctional enzyme in a subcellular
compartment or cell-specific manner. ICOS is currently conducting research in
the use of anchoring proteins for the treatment of inflammatory-related and
neurological diseases.

CELL ADHESION/SIGNAL TRANSDUCTION PROGRAM

In April 1995, ICOS entered into a collaboration with Abbott Laboratories
to jointly develop novel drugs that target the intracellular linkages between
certain cell adhesion molecules and signal transduction pathways. Structurally,
each ICAM or leukointegrin molecule bridges a cell's membrane, with its ligand-
binding domains protruding from the cell into the extracellular space and its
intracellular domains anchored within the cytoplasm of the cell. A connection
between the cytoplasmic domain of ICAM-3 and intracellular signaling pathways is
implied by the capacity of ICAM-3 to regulate lymphocyte activation. Similarly,
the affinity of leukointegrins to bind to their ligands with high affinity is
regulated by cytoplasmic connections. ICOS has confirmed this action by genetic
means, and has begun to delineate the specific pathways involved, identifying a
number of proteins that interact with the ICAM and integrin cytoplasmic domains.

ICOS scientists have conducted genetic tests to determine the role of these
proteins in ICAM-3-mediated signal transduction. These reagents may lead to the
design of improved screens for the discovery of selective inhibitors of
leukocyte activation. The goal of the collaboration is the development of small
molecule modulators of the interaction between program-associated cell adhesion
molecules and intracellular signal-transducing proteins for the treatment of
certain inflammatory diseases and cancer.

SMALL MOLECULE DISCOVERY PROGRAM

In addition to protein-based therapeutics such as antibodies and enzymes,
the Company is also working to identify and develop synthetic or small
molecule-based therapeutics based on the Company's knowledge of

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the mechanisms of inflammation and its proprietary identification of molecules
and receptors involved in the inflammation process. To this end, the Company has
put in place computerized robotic capabilities and initiated an in-house,
high-throughput small molecule screening program. Through its collaborations and
independent compound acquisitions, ICOS has assembled an extensive chemical
library, consisting of synthetic organic molecules, that has been used
successfully as a source of lead drug candidates for a number of its proprietary
targets.

ICOS also intends to identify and develop small molecule modulators based
on the Company's structural definition of active receptor sites on the
extracellular domains of both leukointegrins and ICAMs. The identification of
these sites on cell adhesion molecules has greatly facilitated the development
of small molecule drug screens for orally active therapeutics.

COLLABORATIONS

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

To exploit the potential of one of the Company's signal transduction
programs, in 1991 ICOS entered into a collaboration with Glaxo Wellcome. Under
the collaboration, the companies each pursue research and exploratory
development with their own resources, with the expectation that each will make
equivalent contributions. Generally, the companies will share in full
development and will co-promote and share profits from any commercial products
arising from the collaboration. The research and exploratory development phase
of the collaboration automatically renews for one-year terms, unless either
party gives advance notice of termination. A terminating party must transfer to
the other party patent rights for product candidates in research or exploratory
development, and cannot subsequently conduct research in the PDE field for a
period of time.

Screening programs are now underway at Glaxo Wellcome to identify and
develop small molecule-based therapeutics based on discovery and cloning of PDE
proteins by ICOS. To date, the Glaxo Wellcome/ICOS collaboration has developed
PDE-5, a compound initially targeting cardiovascular diseases. PDE-5 currently
is in Phase I clinical trials for angina, congestive heart failure and MED. This
collaboration has also produced several molecules currently in preclinical
studies for the treatment of other inflammatory and cardiovascular indications.

In April 1995, the Company formed a collaboration with Abbott Laboratories
that seeks to discover small molecule drugs that modulate the intracellular
signaling connections of certain ICAMs and integrins. Included in this
collaboration are small molecule drugs that might interact with the
intracellular portion of the following leukointegrins: CD11a/CD18, CD11b/CD18,
CD11c/CD18 and alpha-4 chain-containing integrins. Also included are small
molecule compounds that bind to the intracellular portions of ICAM-1, ICAM-2 and
ICAM-3. Drugs that interact with ICAM-4 and Alpha d/CD18 are specifically
excluded from the collaboration as are small molecule drugs that target the
extracellular domains of any of the aforementioned ICAMs or integrins. Also
excluded are other antibody- or protein-based therapeutics for use against these
targets. Under the collaboration, the Company will have exclusive U.S. rights
for all products for the treatment of cancer, while Abbott Laboratories will
have exclusive rights outside the United States for all products for the
treatment of cancer and exclusive worldwide rights for all other products. The
Company will receive research funding and milestone and royalty payments for
products, other than cancer treatment products, developed by Abbott Laboratories
as a result of the collaboration. Each party will be responsible for the
development, registration and commercialization of its products in its
respective territory. In addition, the collaboration provides the Company with a
library of chemical compounds for use in its own discovery programs.

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

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development of the technology, or both, and will obtain an exclusive license or
option to the technology developed, subject to certain royalty and other
obligations. See "Risk Factors -- Continuing Operating Losses; Future Capital
Requirements" and "-- Dependence on Others."

COMPETITION

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

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

The Company expects to encounter significant competition for the products
it plans to develop. Companies that complete clinical trials, obtain required
regulatory approvals and commence commercial sales of their products before
their competitors may achieve a significant competitive advantage. A number of
biotechnology and pharmaceutical companies are developing anti-inflammatory
products aimed at the same indications as those the Company has targeted. Some
of these have entered clinical trials or are commercially available.

Certain biotechnology firms have also entered into cooperative arrangements
with major companies for the development and commercialization of products,
creating an additional source of competition that may become particularly
significant in the future. These firms compete with the Company for corporate
partners in several areas of potential collaboration, including funding of
research and product development, manufacturing and marketing. Several have been
in business longer than ICOS, have greater financial resources and have more
experience in obtaining and negotiating with corporate partners.

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

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

GOVERNMENTAL REGULATION

Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the manufacture and marketing of the
Company's potential products and in its ongoing research and product development
activities. Virtually all the Company's products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human therapeutic products are subject to rigorous preclinical and clinical
testing and other approval requirements by the FDA and comparable agencies in
foreign countries. The time required for completing such testing and obtaining
such approvals is uncertain. Any delay in testing may delay product development.
In addition, delays or rejections may be encountered based on changes in FDA or
foreign regulatory policy during the period of product development and testing.
Various federal statutes and regulations also regulate the manufacturing,
safety, labeling, storage, record-keeping and marketing of such products. The
lengthy process of obtaining regulatory approvals and ensuring compliance with
appropriate federal statutes and regulations requires the expenditure of
substantial resources. Any delay or failure by the Company or its collaborators
or licensees to obtain regulatory approval could

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adversely affect the commercialization of products being developed by the
Company, its ability to receive product or royalty revenue and its liquidity and
capital resources.

Preclinical studies are generally conducted in the laboratory to evaluate
the potential efficacy and the safety of a therapeutic product. The results of
these studies are submitted to the FDA as part of an IND application, which must
be reviewed by FDA personnel before clinical testing can begin. Once the FDA is
satisfied with the submission, the clinical trial process can commence.
Typically, clinical evaluation involves three sequential phases, which may
overlap. During Phase 1, clinical trials are conducted with a relatively small
number of subjects to determine the early safety profile of a drug, as well as
the pattern of drug distribution and drug metabolism by the subject. In Phase 2,
trials are conducted with groups of patients afflicted by a specific target
disease to determine preliminary efficacy, dosage tolerance and optimal dosages,
and to gather additional safety data. In Phase 3, large-scale, multicenter
comparative trials are conducted with patients afflicted with a specific target
disease to provide data for the statistical proof of efficacy and safety as
required by the FDA and others. The FDA, the clinical trial sponsor or the
investigator may suspend clinical trials at any time if it believes that
clinical subjects are being exposed to an unacceptable health risk.

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

The Orphan Drug Act of 1983 generally provides incentives to manufacturers
to undertake development and marketing of products to treat relatively rare
diseases or diseases where fewer than 200,000 persons in the United States would
be likely to receive the treatment. A drug that receives Orphan Drug designation
by the FDA and is the first product to receive FDA marketing approval for its
product claim is entitled to a seven-year exclusive marketing period in the
United States for that product claim. A drug that is considered by the FDA to be
different than a particular orphan drug is not barred from sale in the United
States during such seven-year exclusive marketing period. Legislation has
previously been introduced in Congress to limit the marketing exclusivity
provided for certain orphan drugs. Although Congress has not passed such
legislation to date, there remains a possibility that future legislation will
limit the incentives currently afforded to the developers of orphan drugs.

The Company's policy is to conduct its research activities in compliance
with the National Institutes of Health Guidelines for Research Involving
Recombinant DNA Molecules. The Company is also subject to various federal, state
and local laws, regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents, used
in connection with the Company's work. The extent and character of governmental
regulation that might result from future legislation or administrative action
cannot be accurately predicted. See "Risk Factors -- Governmental Regulation; No
Assurance of Product Approval."

PATENTS AND TRADE SECRETS

36
<PAGE> 37

technologies. To date, the Company has filed over 100 U.S. patent applications
on its own behalf or on behalf of its exclusive licensors. The USPTO has issued
either a patent or a notice of allowance as to 16 of these applications.

The enforceability of patents issued to biotechnology and pharmaceutical
firms is highly uncertain. Federal court decisions indicating legal
considerations surrounding the validity of patents in the field are in
transition, and there can be no assurance that the historical legal standards
surrounding questions of validity will continue to be applied or that current
defenses as to issued patents in the field will, in fact, be considered
substantial in the future. In addition, there can be no assurance as to the
degree and range of protection any patents will afford, whether patents will
issue or the extent in which the Company will be successful in not infringing
patents granted to others. If certain patents issued to others are upheld or if
certain patent applications filed by others issue and are upheld, the Company
may be required to obtain certain licenses from others in order to develop and
commercialize certain potential products incorporating the Company's technology.
There can be no assurance that such licenses, if required, will be available on
acceptable terms, if at all.

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

RESEARCH AND DEVELOPMENT EXPENSES

The Company's research and development expenses during 1995, 1994 and 1993
were $24,039,185, $21,272,072 and $18,116,077, respectively.

PROCESS DEVELOPMENT/CLINICAL MANUFACTURING

ICOS is currently using a small-scale production facility to produce
Hu23F2G, rPAF-AH and ICM3 in quantities necessary to support early-stage
clinical trials. To meet future requirements, ICOS is presently completing
construction of a 21,000 square-foot production facility adjacent to its
laboratories and administrative facilities. This facility will be capable of
utilizing both microbial and mammalian-based production processes and was
designed to meet FDA requirements for the production of marketable products. The
facility is suited for the production of purified recombinant protein bulk
product. As such, for the foreseeable future, vialing and other finishing steps
will be completed under contract with other companies. The facility is
anticipated to begin production in late 1996.

Although the Company is completing construction of the production facility,
it does not currently have, and the current expansion is not expected to
provide, sufficient manufacturing capacity to manufacture its potential products
in commercial quantities. Moreover, such capacity may be inadequate to complete
all of the clinical trials contemplated by the Company. Delays could have an
adverse impact on the clinical trials and marketing of these products. Finally,
it is a necessary requirement that ICOS demonstrate to the satisfaction of the
FDA that the processes used to manufacture these products are controllable and
result in safe and efficacious products. The Company does not have facilities
for the manufacture of small molecule products.

HUMAN RESOURCES

As of December 31, 1995, ICOS employed 188 individuals, of whom 71 hold
advanced degrees. Approximately 165 ICOS employees are engaged in research and
development activities and 23 in general and administrative positions.

37
<PAGE> 38

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The Directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- --------------------------------------------------
<S> <C> <C>
George B. Rathmann(1).............. 68 Chairman of the Board, Chief Executive Officer and
President
Gary L. Wilcox..................... 49 Executive Vice President, Operations, Secretary
and Director
W. Michael Gallatin................ 42 Vice President and Scientific Director
Thomas P. St. John................. 43 Vice President, Therapeutic Development
Howard S. Mendelsohn............... 38 Chief Accounting Officer
Frank T. Cary(2)................... 75 Director
James L. Ferguson(2)(3)............ 69 Director
William H. Gates III............... 40 Director
Janice M. LeCocq................... 46 Director
David V. Milligan.................. 55 Director
Robert W. Pangia(2)................ 44 Director
Alexander B. Trowbridge(1)(3)...... 66 Director
Walter B. Wriston(1)(3)............ 76 Director
</TABLE>

- ---------------
(1) Member of the Nominating Committee of the Board of Directors.

(2) Member of the Compensation Committee of the Board of Directors.

(3) Member of the Audit Committee of the Board of Directors.

George B. Rathmann has been the Company's Chairman of the Board since
January 1990 and Chief Executive Officer and President since September 1991. Dr.
Rathmann was previously associated with Abbott Laboratories, a healthcare
products manufacturer, where from 1975 to 1977 he was Director of Research and
Development and from 1977 to 1980, Divisional Vice President. In 1980, he
co-founded Amgen, Inc. ("Amgen"), a biotechnology company. He was a director of
Amgen until 1993 and since 1980 had, at various times, also served as its
Chairman of the Board, President and Chief Executive Officer. He is currently a
director of Somatgen, Inc. Dr. Rathmann received his Ph.D. in physical chemistry
from Princeton University.

Gary L. Wilcox joined the Company in September 1993 as Executive Vice
President, Operations and was elected to the Board of Directors in October 1993
pursuant to his employment agreement with the Company. In April 1995, Dr. Wilcox
was appointed Corporate Secretary of the Company. Previously, Dr. Wilcox served
as Vice Chairman, Executive Vice President and a director of Xoma Corporation, a
biotechnology company. From 1982 to 1989, he was the President and Chief
Executive Officer of International Genetic Engineering, Inc., known as Ingene,
which he co-founded. In 1989, Ingene was acquired by Xoma Corporation. Dr.
Wilcox is currently a director of London Pacific Group Limited, Pepperdine
University and Xoma Corporation. Dr. Wilcox received his Ph.D. in molecular
biology and biochemistry from the University of California.

W. Michael Gallatin is currently Vice President and Scientific Director for
the Company, a position he has held since April 1995. Dr. Gallatin joined the
Company in 1990 as Director of the Cell Adhesion Program and became a Senior
Director, Science, in July 1992. He was appointed Vice President, Biological
Research, in October 1993. Prior to joining the Company, Dr. Gallatin was a
faculty member of the Fred Hutchinson Cancer Research Center in Seattle,
Washington, and an affiliate faculty member of the Department of Microbiology at
the University of Washington. He received his Ph.D. in immunology from the
University of Alberta (Canada) for his research on genetic resistance to
neoplastic disease and mechanisms of tumor cell metastasis. Dr. Gallatin has
been actively researching immunobiology and cell adhesion for 19 years and has
authored numerous scientific articles, including the first description of a cell
adhesion molecule involved in

38
<PAGE> 39

site-specific leukocyte trafficking, which he published in 1983 while a
postdoctoral fellow at Stanford University.

Thomas P. St. John is currently Vice President, Therapeutic Development for
the Company, a position he has held since October 1993. Dr. St. John joined the
Company in September 1990 as Director of the Structural Cell Biology Program and
became a Senior Director, Science, in July 1992. Prior to joining the Company,
Dr. St. John was a faculty member of the Fred Hutchinson Cancer Research Center
in Seattle, Washington, and an affiliate faculty member of the University of
Washington, Department of Medicine and Department of Genetics. He received his
Ph.D. in biochemistry from Stanford University for his research on molecular
mechanisms of gene expression in yeast. Dr. St. John's postdoctoral training was
undertaken at Stanford University in the departments of Medical Microbiology and
Pathology. Dr. St. John's record of publications in the fields of cell adhesion
and immunology reflect a 16-year research focus on molecular identification of
cell adhesion molecules and delineation of their roles in immune cell function
and leukocyte trafficking.

Howard S. Mendelsohn is currently the Chief Accounting Officer of the
Company, a position he has held since March 1994, prior to which he served as
Corporate Controller, beginning in November 1992. From 1989 to 1990, Mr.
Mendelsohn was Chief Financial Officer of Biotope, Inc., a medical products
manufacturer. From 1987 to 1989, he served as Chief Financial Officer of
BioControl Systems, Inc., a diagnostic manufacturing company. Mr. Mendelsohn
received his B.S. in biochemical business management from the University of
California and is a Certified Management Accountant.

Frank T. Cary has been a Director of the Company since January 1990. He was
elected Chairman of the Board of International Business Machines Corporation, a
business equipment manufacturer, in 1973, and served as its Chief Executive
Officer from 1973 to 1981. He is currently a director of Capital Cities/ABC
Inc., Celgene Corporation, Cygnus, Inc., LEXMARK, Lincare, Inc., OncoRx, SPS
Transaction Services, Inc., Seer Technologies and Teltrend, Inc.

James L. Ferguson has been a Director of the Company since January 1990. He
was President of General Foods, a diversified packaged foods company, from 1973
to 1977. In 1974, he assumed additional responsibilities as Chairman of the
Board, a capacity he served in until 1989. He is currently a director of Chase
Manhattan Bank, N.A., DNA Plant Technology Corporation and OncoRx, and a member
of The Business Council and the Council on Foreign Relations. He is past
Chairman of the Grocery Manufacturers of America, Inc., the Council for Aid to
Education and The Conference Board.

William H. Gates III has been a Director of the Company since July 1990.
Mr. Gates is a co-founder of Microsoft Corporation, a software company, and has
been its Chief Executive Officer and Chairman of the Board since its
incorporation in 1981.

Janice M. LeCocq has been a Director of the Company since October 1990.
Since December 1994, she has been President and Chief Executive Officer of
Gryphon Sciences, a biotechnology company. From October 1990 to December 1994,
Dr. LeCocq served as the Executive Vice President, Finance and Administration
and Chief Financial Officer of the Company. From 1986 to 1990, Dr. LeCocq held
positions within the corporate finance group at Montgomery Securities, an
investment banking company. From 1985 to 1986, she was responsible for the
investor relations consulting group at Regis McKenna, a communications company.

David V. Milligan has been a Director of the Company since October 1995.
Dr. Milligan is currently Senior Vice President and Chief Scientific Officer of
Abbott Laboratories, a healthcare products manufacturer. Dr. Milligan joined
Abbott Laboratories in 1979 and headed both the diagnostics and pharmaceutical
research and development organizations there prior to assuming his present
position.

Robert W. Pangia has been a Director of the Company since April 1990. Mr.
Pangia is an Executive Vice President at PaineWebber Incorporated, which is
engaged in investment banking and securities brokerage. From 1986 until joining
PaineWebber in April 1987, he was a Managing Director with Drexel Burnham
Lambert, an investment banking firm. From 1977 to 1986, Mr. Pangia worked in
various positions in the Corporate Finance Department at Kidder Peabody & Co.,
an investment banking and securities brokerage

39
<PAGE> 40

firm, including serving as Director of the Technology Finance Group. He is
currently a director of PaineWebber Incorporated.

Alexander B. Trowbridge has been a Director of the Company since January
1990. He was President of the National Association of Manufacturers, a national
trade association, from 1980 to 1990, and is currently President of Trowbridge
Partners, Inc., a business consulting firm. In 1967 and 1968, Mr. Trowbridge was
Secretary of Commerce in the administration of President Johnson, having served
as Assistant Secretary of Commerce from 1965 through 1967. He was Vice Chairman
of Allied Chemical Corporation (now Allied-Signal) from 1976 through 1980. From
1970 to 1976, he was President of The Conference Board, a management and
economic research organization. He is currently a director of the E.M.
Warburg-Pincus Funds, Gillette Company, Harris Corporation, New England Mutual
Life Insurance Company, PHH Corporation, The Rouse Company, The Sun Company,
SunResorts International and WMX Technologies, Inc.

Walter B. Wriston has been a Director of the Company since January 1990. He
was Chairman of the Board from 1970 through 1984 and Chief Executive Officer
from 1967 through 1984 of Citicorp/Citibank, N.A., a national banking
association. Mr. Wriston is currently a director of Cygnus, Inc., OncoRx, Tandem
Computers, Inc., United Meridian Corporation and York International Corporation.
He is former Chairman of President Reagan's Economic Policy Advisory Board, a
member and former Chairman of The Business Council and a former Co-Chairman and
Policy Committee member of the Business Roundtable.

40
<PAGE> 41

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership, as of March 28, 1996, of Common Stock by (a) each person known by the
Company to beneficially own more than 5% of the outstanding Common Stock, (b)
each Director, (c) each of the Company's executive officers and (d) all
Directors and executive officers as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY
OWNED(1)(2)
SHARES ----------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OWNED(1)(2) OFFERING OFFERING
----------------------------------------------------- ----------- --------- --------
<S> <C> <C> <C>
George B. Rathmann(3)................................ 1,417,995 4.4% 3.7%
Gary L. Wilcox....................................... 218,780 * *
W. Michael Gallatin.................................. 93,211 * *
Thomas P. St. John................................... 90,877 * *
Howard S. Mendelsohn................................. 29,386 * *
Frank T. Cary........................................ 117,488 * *
James L. Ferguson.................................... 101,238 * *
William H. Gates III................................. 4,993,384 15.4% 13.0%
c/o Michael Larson
2365 Carillon Point
Kirkland, WA 98033
Janice M. LeCocq..................................... 253,108 * *
David V. Milligan.................................... 100 * *
Robert W. Pangia..................................... 86,238 * *
Alexander B. Trowbridge.............................. 101,238 * *
Walter B. Wriston.................................... 105,988 * *
All Directors and executive officers as a group(13
persons)........................................... 7,609,031 22.7% 19.2%
</TABLE>

- ---------------
* Less than one percent

(1) Unless otherwise indicated, the persons named have sole voting and
investment power with respect to all shares shown as beneficially owned by
them, subject to applicable community property laws. Amounts shown include
both shares owned and stock options that may be exercised within 60 days.

(2) Includes options that may be exercised for shares within 60 days for each
individual as follows: George B. Rathmann, 165,840 shares; Gary L. Wilcox,
218,780 shares; W. Michael Gallatin, 50,711 shares; Thomas P. St. John,
48,377 shares; Howard S. Mendelsohn, 29,386 shares; Frank T. Cary, 86,238
shares; James L. Ferguson, 86,238 shares; William H. Gates III, 136,238
shares; Janice M. LeCocq, 194,776 shares; Robert W. Pangia, 86,238 shares;
Alexander B. Trowbridge, 86,238 shares; Walter B. Wriston, 86,238 shares;
and all Directors and executive officers as a group, 1,275,298 shares.

(3) Includes 150,000 shares held by the Rathmann Family Revocable Trust.

41
<PAGE> 42

UNDERWRITING

The U.S. Underwriters named below, for whom PaineWebber Incorporated,
Lehman Brothers Inc., Robertson, Stephens & Company LLC, Gerard Klauer Mattison
& Co., LLC and Ragen MacKenzie Incorporated are acting as Representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the U.S. Underwriting Agreement among the Company and the Representatives
(the "U.S. Underwriting Agreement"), to purchase from the Company, and the
Company has agreed to sell to the U.S. Underwriters, the number of shares of
Common Stock set forth opposite their names below:

<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
PaineWebber Incorporated.................................................. 850,000
Lehman Brothers Inc. ..................................................... 850,000
Robertson, Stephens & Company LLC......................................... 850,000
Gerard Klauer Mattison & Co., LLC......................................... 175,000
Ragen MacKenzie Incorporated.............................................. 175,000
Alex. Brown & Sons Incorporated........................................... 100,000
Dillon, Read & Co. Inc. .................................................. 100,000
A. G. Edwards & Sons, Inc. ............................................... 100,000
Hambrecht & Quist LLC..................................................... 100,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated........................ 100,000
Morgan Stanley & Co. Incorporated......................................... 100,000
Oppenheimer & Co., Inc. .................................................. 100,000
Prudential Securities Incorporated........................................ 100,000
Smith Barney Inc. ........................................................ 100,000
UBS Securities LLC........................................................ 100,000
J. C. Bradford & Co. ..................................................... 60,000
Cowen & Co. .............................................................. 60,000
Dain Bosworth Incorporated................................................ 60,000
Doft & Co., Inc. ......................................................... 60,000
Fahnestock & Co. Inc. .................................................... 60,000
First Albany Corporation.................................................. 60,000
Kaufman Bros., L.P. ...................................................... 60,000
Ladenburg, Thalmann & Co., Inc. .......................................... 60,000
Madison Securities, Inc. ................................................. 60,000
Pacific Growth Equities................................................... 60,000
Pennsylvania Merchant Group, Ltd. ........................................ 60,000
Punk, Ziegel & Knoell..................................................... 60,000
Seidler Amdec Securities Inc. ............................................ 60,000
Unterberg Harris.......................................................... 60,000
Vector Securities International, Inc. .................................... 60,000
---------
Total........................................................... 4,800,000
=========
</TABLE>

The Company also has entered into an underwriting agreement (the
"International Underwriting Agreement") with certain underwriters outside the
United States and Canada (the "International Underwriters," and, together with
the U.S. Underwriters, the "Underwriters") for whom PaineWebber International
(U.K.) Ltd., Lehman Brothers International (Europe), Robertson, Stephens &
Company LLC, Gerard Klauer Mattison & Co., LLC and Ragen MacKenzie Incorporated
are acting as Managers (the "Managers"). Subject to the terms and conditions of
the International Underwriting Agreement, and concurrently with the sale of
4,800,000 shares of Common Stock to the U.S. Underwriters, the Company has
agreed to sell to the International Underwriters severally, and the
International Underwriters severally have agreed to purchase, an

42
<PAGE> 43

aggregate of 1,200,000 shares of Common Stock. The initial public offering price
per share and the total underwriting discounts and commissions per share are
identical in the U.S. Underwriting Agreement and the International Underwriting
Agreement with respect to all shares of Common Stock being purchased by the
Underwriters from the Company.

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares to the public at the public offering price set forth
on the cover page of this Prospectus, to certain securities dealers at such
price less a concession not in excess of $0.25 per share and that the
Underwriters and such dealers may reallow to other dealers, including the
Underwriters, a discount not in excess of $0.10 per share. After the
commencement of the public offering, the concessions to selected dealers and the
discounts to other dealers may be changed by the Representatives.

Each U.S. Underwriter has agreed that, as part of the distribution of the
U.S. Shares, (a) it is not purchasing any U.S. Shares for the account of anyone
other than a United States Person and (b) it has not offered or sold, and will
not offer or sell, directly or indirectly, any U.S. Shares or distribute this
Prospectus relating to the United States offering to any person outside the
United States or to anyone other than a United States Person. Each International
Underwriter has agreed that, as part of the distribution of the International
Shares, (a) it is not purchasing any shares of Common Stock for the account of
any United States Person and (b) it has not offered or sold, and will not offer
or sell, directly or indirectly, any U.S. Shares or distribute this Prospectus
to any person within the United States or to any United States Person. The
foregoing limitations do not apply to stabilization transactions or to certain
other transactions specified in the Agreement Between U.S. and International
Underwriters. As used herein, "United States Person" means any individual who is
resident in the United States, or any corporation, pension, profit-sharing or
other trust or other entity organized under or governed by the laws of the
United States or any political subdivision thereof (other than a foreign branch
of any United States Person), and includes any United States branch of a
non-United States Person.

Sales may be made between the U.S. Underwriters and the International
Underwriters of such number of shares of Common Stock as may be mutually agreed.
The per share price of any shares so sold shall be the initial public offering
price less an amount not greater than the per share amount of the concession to
dealers set forth above.

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, under which the
Underwriters may purchase up to an additional 900,000 shares of Common Stock
from the Company at the public offering price set forth on the cover page of
this Prospectus less underwriting discounts and commissions. The Underwriters
may exercise the option only to cover over-allotments, if any. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as it was obligated to purchase pursuant to the U.S.
Underwriting Agreement and the International Underwriting Agreement.

The Company and the Company's directors and executive officers have agreed
not to offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock, or rights to acquire shares of Common Stock, for a period of 90
days after the date of this Prospectus without the prior written consent of
PaineWebber Incorporated.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"), or to contribute to payments the Underwriters may be
required to make in respect thereof.

In connection with this offering, certain Underwriters may engage in
passive market making transactions in the Common Stock on Nasdaq immediately
prior to the commencement of sales in this offering, in accordance with Rule
10b-6A under the Exchange Act. Passive market making consists of displaying bids
on Nasdaq limited by the bid prices of independent market makers for a security
and making purchases of a security which are limited by such prices and effected
in response to order flow. Net purchases by a passive market maker on each day
are limited to a specified percentage of the passive market maker's average
daily

43
<PAGE> 44

trading volume in the Common Stock during a specified prior period and must be
discontinued when such limit is reached. Passive market making may stabilize the
market price of the Common Stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.

Robert W. Pangia, an Executive Vice President at PaineWebber Incorporated,
is a member of the Company's Board of Directors.

LEGAL MATTERS

The validity of the Common Stock being offered hereby has been passed upon
for the Company by Perkins Coie, 1201 Third Avenue, 40th Floor, Seattle,
Washington. Shearman & Sterling, 555 California Street, San Francisco,
California, is acting as counsel for the Underwriters in connection with certain
legal matters relating to the sale of the Common Stock offered hereby.

EXPERTS

The financial statements of the Company as of December 31, 1995 and 1994
and for each of the years in the three-year period ended December 31, 1995, and
the period from September 21, 1989 (incorporation) through December 31, 1995
have been incorporated by reference herein and in the Registration Statement in
reliance on the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein and upon the authority of said
firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP
refers to a change in the method of accounting for investments to adopt the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," effective January 1,
1994.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's
following Regional Offices: Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and New York Regional
Office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at
prescribed rates. The Common Stock is quoted on The Nasdaq Stock Market, and
therefore such reports, proxy statements and other information can also be
inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington,
D.C. 20006.

The Company has filed with the Commission the Registration Statement under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes part of the Registration Statement, omits certain
of the information contained in the Registration Statement and the exhibits
thereto on file with the Commission pursuant to the Securities Act and the rules
and regulations of the Commission thereunder. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement, and such exhibits. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement, including the exhibits thereto,
may be inspected without charge at the Commission's principal office at 450
Fifth Street, N.W., Judiciary Plaza, Washington D.C. 20549 and copies of all or
any part thereof may be obtained from the Commission upon payment of certain
fees prescribed by the Commission.

44
<PAGE> 45

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Incorporation of Certain Documents by
Reference............................ 2
Prospectus Summary..................... 3
Risk Factors........................... 5
Use of Proceeds........................ 11
Price Range of Common Stock............ 11
Dividend Policy........................ 12
Dilution............................... 12
Selected Financial Data................ 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 14
Business............................... 17
Management............................. 38
Principal Stockholders................. 41
Underwriting........................... 42
Legal Matters.......................... 44
Experts................................ 44
Available Information.................. 44
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</TABLE>

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6,000,000 SHARES

LOGO

COMMON STOCK

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PROSPECTUS
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PAINEWEBBER INCORPORATED
LEHMAN BROTHERS
ROBERTSON, STEPHENS & COMPANY
GERARD KLAUER MATTISON & CO., LLC

RAGEN MACKENZIE INCORPORATED
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MAY 7, 1996

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