Prepared by MERRILL CORPORATION

ISIS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

2292 Faraday Avenue, Carlsbad, CA 92008
(Address of principal executive offices, including zip code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

ISIS PHARMACEUTICALS, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share data)

Note: The balance sheet at December 31, 2000 has been derived
from the audited financial statements at that date.
See accompanying notes.

ISIS PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

(Unaudited)

ISIS PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

The unaudited interim financial statements for the six month periods ended June 30, 2001 and 2000 have been prepared on the same basis as the Company's audited financial statements for the year ended December 31, 2000. The financial statements include all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial position at such dates and the operating results and cash flows for those periods. Results for the interim periods are not necessarily indicative of the results for the entire year. For more complete financial information, these financial statements, and notes thereto, should be read in conjunction with the audited financial statements for the year ended December 31, 2000 included in the Company's Annual Report on Form 10-K/A filed with the Securities and Exchange Commission.

Revenue is generally recognized when all contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. Research and development contract revenues from cost-reimbursement agreements are recorded as the related expenses are incurred, up to the contractual limits. Payments received that are related to future performance are deferred and recorded as revenue as they are earned over specified future performance periods. Research and development payments for which no services are required to be performed in the future are recognized as revenues upon receipt of such payments. Revenues related to nonrefundable, upfront fees are recognized over the period of the contractual arrangements as performance obligations related to the services to be provided have been satisfied. Revenue from product sales is recognized at the time products are shipped.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Isis currently has two joint ventures with Elan Corporation, plc (Elan). In April 1999, Orasense Ltd. (Orasense) was formed to develop technology for the formulation of oral oligonucleotide drugs. In January 2000, the second joint venture, HepaSense Ltd. (HepaSense), was formed to treat patients chronically infected with the Hepatitis C virus. Both affiliates are Bermuda limited companies. Each entity's outstanding common stock is owned 80.1% by Isis and 19.9% by Elan.

Elan and its subsidiaries have retained significant minority investor rights that are considered "participating rights" as defined in EITF 96-16 in each entity. Therefore, Isis does not consolidate the financial statements of Orasense or HepaSense, but instead accounts for the investments in each under the equity method of accounting. For the quarter and six month periods ended June 30, 2001, Isis recognized $2.4 million and $4.1 million, respectively, in revenue for research and development activities performed for these joint ventures. For the three and six month periods ended June 30, 2000,

Isis reported $2.8 million and $3.9 million in revenue, respectively. These amounts are included as research and development revenues from affiliates for the respective periods.

The results of operations of Orasense for the quarter and six month periods ended June 30, 2001 and 2000 are as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2001			2000			2001			2000
Revenue	$	—		$	—		$	—		$	—
Research and development expense		3,173			3,037			5,633			6,151

Net loss	$	(3,173	)	$	(3,037	)	$	(5,663	)	$	(6,151	)

The results of operations of HepaSense for the quarter and six month periods ended June 30, 2001 and 2000 are as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2001			2000			2001			2000
Revenue	$	—		$	—		$	—		$	—
Research and development expense		2,062			2,689			4,216			3,939

Net loss	$	(2,062	)	$	(2,689	)	$	(4,216	)	$	(3,939	)

In May 2001, Ibis Therapeutics™, a division of Isis, earned a $2.5 million research milestone payment from Agouron Pharmaceuticals, Inc., a Pfizer Company (Pfizer), for progress in Ibis' collaboration to discover small molecule drugs that bind to RNA. The payment was included as research and development revenue under collaborative agreements for the three and six month periods ended June 30, 2001.

In May 2001, Isis and Merck & Company, Inc. (Merck) announced that Isis licensed its preclinical Type 2 diabetes antisense drug candidate, ISIS 113715, to Merck. Merck will undertake the future development and commercialization of the compound. Isis received an upfront payment for certain expenses associated with the preclinical development of the drug. In addition, Merck will make a series of milestone payments to Isis on the achievement of development and regulatory milestones for the drug. Merck will also make royalty payments based on sales of the drug. Isis recorded a portion of the payment as research and development revenue during the second quarter of 2001 with the balance to be recognized over the period of Isis' continued involvement with the agreement.

In May 2001, Isis and Hybridon, Inc. entered into an agreement under which Isis acquired an exclusive license to all of Hybridon's antisense chemistry and delivery patents and technology. Hybridon received a license to Isis' suite of RNase H patents. In exchange for the license to Hybridon's antisense patents, Isis paid $15.0 million in cash and will pay Hybridon $19.5 million in Isis common stock over the next two years. In return for access to Isis' patents, Hybridon will pay Isis $6.0 million in Hybridon common stock over the next three years. Isis' balance sheet at June 30, 2001 reflects a licensing asset for the net amount of $28.3 million related to this agreement.

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

	Statements of Comprehensive Loss (Unaudited)
	Three Months Ended June 30,						Six Months Ended June 30,
	2001			2000			2001			2000
Comprehensive loss:
Change in unrealized gains(losses)	$	(30	)	$	(68	)	$	443		$	3
Net loss		(23,366	)		(14,608	)		(46,532	)		(33,216	)

Comprehensive loss	$	(23,396	)	$	(14,676	)	$	(46,089	)	$	(33,213	)

In June 2001, Isis issued 1,986,874 shares of common stock at prices ranging from $11.03 to $11.50 per share.

In July 2001, Isis entered into a collaboration with PE Corporation through the Celera Genomics Group (Celera), in which Celera will employ Isis' GeneTrove division to identify the biological role of more than 200 genes. Isis will recognize the related revenue over the 18 month term of the agreement as the services are performed.

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

This Form 10-Q contains forward-looking statements regarding our business and the therapeutic and commercial potential of our technologies and products in development. Such statements are subject to certain risks and uncertainties, particularly those risks and uncertainties inherent in the process of discovering, developing and commercializing drugs that can be proven to be safe and effective for use as human therapeutics, and the endeavor of building a business around such potential products. Actual results could differ materially from those discussed in this Form 10-Q. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K/A for the year ended December 31, 2000 which is on file with the U.S. Securities and Exchange Commission and those identified in the section of Item 2 entitled "Risk Factors" of this report. As a result, the reader is cautioned not to rely on these forward-looking statements.

Since our inception in January 1989, almost all of our resources have been devoted to research, drug discovery and drug development programs. We are not yet profitable and expect to continue to have operating losses for the next several years. Our revenue comes from collaborative research and development agreements with pharmaceutical companies, the sale and licensing of our intellectual property, research grants and interest income. The revenue from the collaboration agreements increases the amount of research and development activity that we are able to fund and offsets a portion of our research and development costs. In 1998, we received approval from the U.S. Food and Drug Administration, or FDA, to begin marketing our first product, Vitravene™, a drug used to treat CMV retinitis.

Our total revenue for the quarter and six months ended June 30, 2001 was $7.6 million and $12.2 million, respectively, compared to $7.0 million and $11.0 million for the same periods of 2000. The increase in revenue for the quarter and six months ended June 30, 2001 compared to the same periods of 2000, was due primarily to our licensing of ISIS 113715, a preclinical Type 2 diabetes candidate, to Merck and the $2.5 million milestone that our Ibis Therapeutics division earned in its collaboration with Pfizer. The increase was partially offset by the conclusion of research funding from AstraZeneca and certain government grants.

Our research and development expenses were $19.9 million for the three months ended June 30, 2001, and $39.1 million for the six months ended June 30, 2001, compared with $12.7 million and $26.0 million for the same periods of 2000. The increase in expenses in 2001 compared to 2000 was driven by the cost of preclinical and clinical activities to advance the development of our drugs. Currently we have eleven products in development, up from seven in the same period of last year. Additionally, seven of the eleven products are in the more expensive stages of development, Phase 2 or Phase 3 clinical trials.

Our general and administrative expenses increased slightly to $2.8 million for the second quarter and $5.6 million for the six months ended June 30, 2001, from $2.4 million and $4.2 million for the same periods of 2000. The increase was primarily due to additional expense required to support our increasing research and development activities.

Our compensation related to stock options for the quarter and six months ended June 30, 2001 was $1.4 million and $1.3 million, respectively. There was no similar expense recorded for the same periods of 2000. The expense was primarily a result of an exchange we made regarding certain existing options to non-officer employees completed in January 2000. These exchanged options are required to be accounted for as variable stock options in accordance with Financial Accounting Standards Board Interpretation No. 44. Variable stock options can result in significant increases and decreases in compensation expense subject to the variability of our stock price. In addition, we account for stock

options granted to consultants in accordance with EITF 96-18, which also contributed to these expenses.

Our interest expense for the quarter and six months ended June 30, 2001 was $3.5 million and $7.1 million, respectively, compared to $3.1 million and $6.2 million for the same periods of 2000. The increase was due to the increase in debt on the convertible debt facilities available to us from Elan to fund research and development activities for Orasense and HepaSense. During the second quarter we borrowed an additional $3.3 million resulting in a June 30, 2001 balance of $15.6 million, compared to $6.4 million for the same period of 2000. Also contributing to the increase in our interest expense, was the interest accruing on our $40 million debt financing that was completed in the fourth quarter of 1997 and the second quarter of 1998. In this financing, interest accrues for the first five years and no principal payments are due for 10 years.

Interest income decreased to $1.1 million for the second quarter and increased to $3.1 million for the six months ended June 30, 2001, from $1.6 million and $2.5 million for the same periods of 2000. The decrease in interest income for the quarter ended June 30, 2001 compared to the same period of 2000 is related to lower average cash and investment balances for the quarter combined with lower rates of return on investments in 2001 compared to 2000. The increase in interest income for the six months ending June 30, 2001 compared to the same period in 2000 was due to higher average investment balances during the 2001 period offset by lower rates of return in 2001 compared to 2000.

During the quarter and six months ended June 30, 2001 we recorded a net loss applicable to common stock of $23.4 million and $46.5 million, or $0.58 and $1.15 per share, respectively, compared with $14.6 million and $33.2 million, or $0.40 and $0.95 per share, respectively, for the same periods in 2000. Our loss from operations was $16.5 million for the second quarter of 2001, compared to $8.2 million for the same period in 2000. The increases in our net loss applicable to common stock and loss from operations were primarily the result of increased operating expenses related to the eleven products we have in development, including the ongoing Phase 3 trial of Isis 3521 in patients with non small cell lung cancer. This program, the planned Phase 3 trial of Isis 2302 in patients with Crohn's disease, and the continued aggressive development of the remaining drugs in our pipeline, will result in increased expenses and lead to an increase in our net loss from operations for 2001 over our 2000 net loss from operations. Additionally, non-cash compensation related to stock options included in expenses for the quarter and six months ended June 30, 2001 was $1.4 million and $1.3 million, respectively. We expect operating losses to fluctuate from quarter to quarter because of differences in the timing of revenue recognized, and expenses incurred.

We believe that inflation and changing prices have not had a material effect on our operations to date.

We have financed our operations with revenue from contract research and development, revenue from the sale or licensing of our intellectual property, the sale of our equity securities, and the issuance of long-term debt. From our inception through June 30, 2001, we have earned approximately $230 million in revenue from contract research and development and the sale and licensing of our intellectual property. Since we were founded, we have raised net proceeds of approximately $392 million from the sale of equity securities. We have borrowed approximately $86.3 million under long-term debt arrangements to finance a portion of our operations.

As of June 30, 2001, we had cash, cash equivalents and short-term investments totaling $106.3 million and working capital of $85.0 million. In comparison, we had cash, cash equivalents and short-term investments of $127.3 million and working capital of $118.6 million as of December 31, 2000. The decreases in our cash, cash equivalents and short-term investments, and working capital in 2001 from 2000 were due primarily to cash used to fund our operations, and the decision to strengthen

our intellectual property by entering into a licensing agreement with Hybridon, Inc. The decrease was partially offset by the sale of our common stock to an institutional investor in the second quarter of 2001.

In 1997 and 1998, we borrowed a total of $40 million in private transactions. The loans bear interest at 14% per annum and must be repaid on November 1, 2007. The interest accrues during the first five years of the loans. After the first five years, interest must be paid quarterly. No principal payments are required until November 1, 2007. In conjunction with these transactions, we issued warrants to purchase 800,000 shares of common stock at a price of $25 per share. The warrants issued in connection with both of these financings expire on November 1, 2004. Because interest is accrued during the first five years, the balance of these borrowings will accrue to a total of $78 million on November 1, 2002. The debt under these arrangements is carried on our balance sheet, net of the amortized amount allocated to the warrants and including accrued interest. The combined carrying amount of these notes at June 30, 2001 was $64.8 million.

As of June 30, 2001, our long-term obligations totaled $115.7 million, versus $102.3 million at December 31, 2000. The increase was primarily due to the accrual of interest on the ten-year notes described above and our convertible debt facilities. This increase was partially offset by principal repayments on existing obligations. We expect that capital lease obligations will increase over time to fund capital equipment acquisitions required for our growing business. We will continue to use lease financing as long as the terms remain commercially attractive. We believe that our existing cash, cash equivalents and short-term investments at June 30, 2001, combined with contract revenue and interest income should be sufficient to fund our operations for the next 30 to 36 months.

Please consider the following risk factors carefully in addition to the other information contained in this report.

Our business will suffer if we fail to obtain regulatory approval for our products.

We must conduct time-consuming, extensive and costly clinical trials, in compliance with U.S. Food and Drug Administration regulations, and by comparable authorities in other countries, to show the safety and efficacy of each of our drug candidates, as well as the optimum dosage for each, before the FDA can approve a drug candidate for sale. We may not be able to obtain necessary regulatory approvals on a timely basis, if at all, for any of our products under development. Delays in receiving these approvals, failure by us or our partners to receive these approvals at all or failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

Significant additional trials may be required, and we may not be able to demonstrate that our drug candidates are safe or effective. We have only introduced one commercial product, Vitravene. We cannot guarantee that any of our other product candidates will obtain required government approvals or that we can successfully commercialize any products.

Our business will suffer if our products are not used by doctors to treat patients.

We cannot guarantee that any of our products in development, if approved for marketing, will be used by doctors to treat patients. We currently have one product, Vitravene, a treatment for CMV retinitis in AIDS patients, which addresses a small commercial market with significant competition. However, we may not be successful in commercializing additional products.

The degree of market acceptance for any of our products depends upon a number of factors, including: the receipt and scope of regulatory approvals; the establishment and demonstration in the medical and patient community of the clinical efficacy and safety of our product candidates and their potential advantages over competitive products; and reimbursement policies of government and third-party payors. In addition, physicians, patients, patient advocates, payors or the medical community in general may not accept and use any products that we may develop.

Our business will suffer if any of our collaborative partners fail to develop, fund or sell any of our products under development or if we are unable to obtain additional partners.

If any collaborative partner fails to develop or sell any product in which we have rights, our business may be negatively affected. While we believe that our collaborative partners will have sufficient motivation to continue their funding, development and commercialization activities, we cannot be sure that any of these collaborations will be continued or result in commercialized products. The failure of a corporate partner to continue funding any particular program could delay or stop the development or commercialization of any products resulting from such program.

Collaborative partners may be pursuing other technologies or developing other drug candidates either on their own or in collaboration with others, including our competitors, to develop treatments for the same diseases targeted by our own collaborative programs.

We also may wish to rely on additional collaborative arrangements to develop and commercialize our products in the future. However, we may not be able to negotiate acceptable collaborative arrangements in the future, and, even if successfully negotiated, the collaborative arrangements themselves may not be successful.

Our business could suffer if the results of clinical testing indicate that any of our products under development are not suitable for commercial use.

Drug discovery and development involves inherent risks, including the risk that molecular targets prove unsuccessful and the risk that compounds that demonstrate attractive activity in preclinical studies do not demonstrate similar activity in human beings or have undesirable side effects. Most of our resources are dedicated to applying molecular biology and medicinal chemistry to the discovery and development of drug candidates based upon antisense technology, a novel drug discovery tool for designing drugs that work at the genetic level to block the production of disease-causing proteins.

We have incurred losses and our business will suffer if we fail to achieve profitability in the future.

Because of the nature of the business of drug discovery and development, our expenses have exceeded our revenues since we were founded in January 1989. As of June 30, 2001, our accumulated losses were approximately $358 million. Most of the losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our growth and operations. These costs have exceeded our revenues, most of which have come from collaborative arrangements, interest income and research grants. Our product revenues to date have been derived solely from sales of Vitravene. This product has limited sales potential. We expect to incur additional operating losses over the next several years, and we expect losses to increase as our preclinical testing and clinical trial efforts continue to expand. We cannot guarantee that we will successfully develop, receive regulatory approval for, commercialize, manufacture, market or sell any additional products, or achieve or sustain future profitability.

Based on our current operating plan, we believe that our available cash and existing sources of revenue and credit, together with the interest earned on those funds, will be adequate to satisfy our capital needs for the next 30 to 36 months. We expect that we will need substantial additional funding in the future. Our future capital requirements will depend on many factors, such as the following: continued scientific progress in our research, drug discovery and development programs; the size of these programs and progress with preclinical and clinical trials; the time and costs involved in obtaining regulatory approvals; the costs involved in filing, prosecuting and enforcing patent claims; competing technological and market developments, including the introduction of new therapies that address our markets; costs of commercialization of products; and changes in existing collaborative relationships and our ability to establish and maintain additional collaborative arrangements.

Additional funds will need to be raised through public or private financing. Additional financing may not be available, or, if available, may not be available on acceptable terms. If additional funds are raised by issuing equity securities, the shares of existing stockholders will be subject to further dilution and share prices may decline. If adequate funds are not available, we may be required to cut back on one or more of our research, drug discovery or development programs or obtain funds through arrangements with collaborative partners or others if available. These arrangements may require us to give up rights to certain of our technologies, product candidates or products.

Our business will suffer if we cannot manufacture our products or have a third party manufacture our products at low costs so as to enable us to charge competitive prices to buyers.

To establish additional commercial manufacturing capability on a large scale, we must improve our manufacturing processes and reduce our product costs. The manufacture of sufficient quantities of new drugs is typically a time-consuming and complex process. Pharmaceutical products based on chemically modified oligonucleotides have never been manufactured on a large commercial scale. There are a limited number of suppliers for certain capital equipment and raw materials that we use to manufacture

our drugs, and some of these suppliers will need to increase their scale of production to meet our projected needs for commercial manufacturing. We may not be able to manufacture at a cost or in quantities necessary to make commercially successful products.

Our business will suffer if we fail to compete effectively with our competitors.

Our competitors are engaged in all areas of drug discovery in the United States and other countries, are numerous, and include, among others, major pharmaceutical and chemical companies, specialized biopharmaceutical firms, universities and other research institutions. Our competitors may succeed in developing other new therapeutic drug candidates that are more effective than any drug candidates that we are developing. These competitive developments could make our technology and products obsolete or non-competitive before we have had enough time to develop and commercialize our products, or to recover our research, development or commercialization expenses.

Many of our competitors have substantially greater financial, technical and human resources than we do. In addition, many of these competitors have significantly greater experience than we do in conducting preclinical testing and human clinical trials of new pharmaceutical products and in obtaining FDA and other regulatory approvals of products for use in health care. Accordingly, our competitors may succeed in obtaining regulatory approval for products earlier than we do. We will also compete with respect to manufacturing efficiency and marketing capabilities, areas in which we have limited or no experience.

Our business will suffer if we are unable to protect our patents or our proprietary rights.

Our success depends to a significant degree upon our ability to develop proprietary products. However, patents may not be granted on any of our pending patent applications in the United States or in other countries. In addition, the scope of any of our issued patents may not be sufficiently broad to offer meaningful protection. Furthermore, our issued patents or patents licensed to us could potentially be successfully challenged, invalidated or circumvented so that our patent rights would not create an effective competitive barrier.

It is possible that we may have to defend our intellectual property rights in the future. In the event of an intellectual property dispute, we may be forced to litigate or otherwise defend our intellectual property assets. Disputes could involve litigation or proceedings declared by the United States Patent and Trademark Office or the International Trade Commission. Intellectual property litigation can be extremely expensive, and this expense, as well as the consequences should we not prevail, could seriously harm our business.

If a third party claimed an intellectual property right to technology we use, we might be forced to discontinue an important product or product line, alter our products and processes, pay license fees or cease certain activities. We may not be able to obtain a license to such intellectual property on favorable terms, if at all.

The loss of key personnel, or the inability to attract and retain highly skilled personnel, could adversely affect our business.

We are dependent on the principal members of our management and scientific staff. We do not have employment agreements with any of our management. The loss of our management and key scientific employees might slow the achievement of important research and development goals. It is also critical to our success that we recruit and retain qualified scientific personnel to perform research and development work. We may not be able to attract and retain skilled and experienced scientific

personnel on acceptable terms, because of intense competition for experienced scientists among many pharmaceutical and health care companies, universities and non-profit research institutions.

The market price of our common stock, like that of the securities of many other biopharmaceutical companies, has been and is likely to continue to be highly volatile. During the past twelve months, the market price of our common stock has ranged from $7.94 to $15.00 per share. The market price can be affected by many factors, including, for example, fluctuations in our operating results, announcements of clinical trial results, technological innovations or new drug products being developed by us or our competitors, governmental regulation, regulatory approval, developments in patent or other proprietary rights, public concern regarding the safety of our drugs and general market conditions.

Provisions in our Certificate of Incorporation, other agreements and Delaware law may prevent stockholders from receiving a premium for their shares.

Our certificate of incorporation provides for classified terms for the members of our board of directors. Our certificate also includes a provision that requires at least 66²/3% of our voting stockholders to approve a merger or certain other business transactions with, or proposed by, any holder of 15% or more of our voting stock, except in cases where certain directors approve the transaction or certain minimum price criteria and other procedural requirements are met.

Our certificate of incorporation also requires that any action required or permitted to be taken by our stockholders must be taken at a duly called annual or special meeting of stockholders and may not be taken by written consent. In addition, special meetings of our stockholders may be called only by the board of directors, the chairman of the board or the president, or by any holder of 10% or more of our outstanding common stock. These provisions, as well as Delaware law and other of our agreements including our stockholders' Rights Plan, may discourage certain types of transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices, and may limit the ability of our stockholders to approve transactions that they think may be in their best interests. In addition, our board of directors has the authority to fix the rights and preferences of and issue shares of preferred stock, which may have the effect of delaying or preventing a change in control of Isis without action by the stockholders.

We are exposed to changes in interest rates primarily from our long-term debt arrangements and, secondarily, investments in certain short-term investments. We invest our excess cash in highly liquid short-term investments that are typically held for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions to manage exposure to interest rate changes. Accordingly, we believe that, while the securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.

3.1		Bylaws of Isis Pharmaceuticals, Inc.
3.2		Amended and Restated Certificate of Incorporation filed April 9, 2001
10.1		Agreement between the Registrant and Merck & Co., Inc., dated May 22, 2001 (with certain confidential information deleted)
10.2		Master Agreement between the Registrant and Hybridon, Inc., dated May 24, 2001 (with certain confidential information deleted)
10.3		Agreement between the Registrant and PE Corporation through the Celera Genomics Group, dated July 9, 2001 (with certain confidential information deleted)

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Page
PART I	FINANCIAL INFORMATION
ITEM 1:	Financial Statements
	Condensed Balance Sheets as of June 30, 2001 and December 31, 2000	3
	Condensed Statements of Operations for the three and six months ended June 30, 2001 and 2000	4
	Condensed Statements of Cash Flows for the six months ended June 30, 2001 and 2000	5
	Notes to Financial Statements	6
ITEM 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	9
	Results of Operations	9
	Liquidity and Capital Resources	10
	Risk Factors	12
	Quantitative and Qualitative Disclosures About Market Risk	15
PART II	OTHER INFORMATION
ITEM 1:	Legal Proceedings	16
ITEM 2:	Changes in Securities	16
ITEM 3:	Default upon Senior Securities	16
ITEM 4:	Submission of Matters to a Vote of Security Holders	16
ITEM 5:	Other Information	16
ITEM 6:	Exhibits and Reports on Form 8-K	16
SIGNATURES		17

				June 30, 2001			December 31, 2000
				(Unaudited)			(Note)
ASSETS
Current assets:
Cash and cash equivalents				$	12,736		$	39,615
	Short-term investments				93,562			87,647
	Contracts receivable				2,098			3,346
	Prepaids and other current assets				2,545			2,596

		Total current assets			110,941			133,204
Property, plant and equipment, net					23,330			22,625
Licenses, net					29,934			500
Patents, net					15,016			13,815
Investments in affiliates					7,094			12,491
Deposits and other assets					1,213			621

		Total assets		$	187,528		$	183,256

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	2,805		$	2,231
	Accrued compensation				2,744			3,598
	Accrued liabilities				1,742			1,429
	Deferred revenues				5,877			2,771
	Current portion of long term obligations				12,766			4,607

		Total current liabilities			25,934			14,636
Long-term obligations, less current portion					115,666			102,254
Stockholders' equity:
	Series A Convertible Exchangeable 5% Preferred stock, $.001 par value, 120,150 shares authorized, issued and outstanding at June 30, 2001 and December 31, 2000				12,015			12,015
	Accretion of Series A Preferred stock dividends				1,376			1,050
	Series B Convertible Exchangeable 5% Preferred stock, $.001 par value, 16,620 shares authorized, 12,015 shares issued and outstanding at June 30, 2001 and December 31, 2000				12,015			12,015
	Accretion of Series B Preferred Stock dividends				899			584
	Common stock, $.001 par value, 100,000,000 shares authorized, 42,247,956 shares and 40,085,447 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively				42			40
	Additional paid-in capital				377,333			352,854
	Deferred compensation				(329	)		(858	)
	Accumulated other comprehensive income				569			126
	Accumulated deficit				(357,992	)		(311,460	)

		Total stockholders' equity			45,928			66,366

			Total liabilities and stockholders' equity	$	187,528		$	183,256

			Three months ended June 30,						Six months ended June 30,
			2001			2000			2001			2000
Revenue:
	Research and development revenues under collaborative agreements		$	5,114		$	4,139		$	7,903		$	6,888
	Research and development revenues from affiliates			2,432			2,761			4,148			3,929
	Licensing and royalty revenue			46			85			174			222

		Total revenue		7,592			6,985			12,225			11,039

Expenses:
	Research and development			19,924			12,746			39,059			25,985
	General and administrative			2,778			2,414			5,593			4,238
	Compensation related to stock options			1,354			—			1,271			—
	Restructuring activities			—			—			—			1,608

		Total operating expenses		24,056			15,160			45,923			31,831

Loss from operations				(16,464	)		(8,175	)		(33,698	)		(20,792	)
	Equity in loss of affiliates			(4,194	)		(4,594	)		(8,158	)		(8,089	)
	Interest income			1,106			1,596			3,083			2,488
	Interest expense			(3,491	)		(3,129	)		(7,117	)		(6,236	)

Net loss				(23,043	)		(14,302	)		(45,890	)		(32,629	)
	Accretion of dividends on preferred stock			(323	)		(306	)		(642	)		(587	)

Net loss applicable to common stock			$	(23,366	)	$	(14,608	)	$	(46,532	)	$	(33,216	)

Basic and diluted net loss per share			$	(0.58	)	$	(0.40	)	$	(1.15	)	$	(0.95	)

Shares used in computing basic and diluted Net loss per share				40,492			36,979			40,322			35,021

	Six months ended June 30,
	2001			2000
Net cash used in operating activities	$	(24,222	)	$	(19,385	)
Investing activities:
Short-term investments		(5,472	)		(40,745	)
Property and equipment		(3,006	)		(924	)
Licenses and other assets		(17,683	)		(876	)
Investment in affiliates		(3,333	)		(15,865	)

Net cash used in investing activities		(29,494	)		(58,410	)

Financing activities:
Net proceeds from issuance of equity securities		24,379			102,103
Proceeds from long-term borrowings		4,043			3,850
Principal payments on debt and capital lease obligations		(1,585	)		(1,411	)

Net cash provided from financing activities		26,837			104,542

Net (decrease) increase in cash and cash equivalents		(26,879	)		26,747
Cash and cash equivalents at beginning of period		39,615			35,296

Cash and cash equivalents at end of period	$	12,736		$	62,043

Supplemental disclosures of cash flow information:
Interest paid	$	1,524		$	530

Supplemental disclosures of non-cash investing and financing activities:
Conversion of preferred stock dividends into preferred stock	$	—		$	308

Additions to debt for licensing costs	$	13,500		$

Date: August 10, 2001	By:	/s/ STANLEY T. CROOKE Stanley T. Crooke, M.D., Ph.D. Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

Date: August 10, 2001	By:	/s/ B. LYNNE PARSHALL B. Lynne Parshall Executive Vice President and Chief Financial Officer (Principal Financial Officer)